What was so much better back in 2003 that justified the incredible bull market that lasted four and a half years, from March of 2003 until October of 2007?

A related question that DragonLZ could have asked is what was so great about Zimbabwe in 2007 that caused it to have the best performing stock market in the world?  But we’ll get back to that.

Little does dragonLZ know that he is at the start of journey that leads to Mises, Hayek, and the Austrian School of Economics, for it is that very question that only the Austrian School can answer.  As he pointed out, there isn’t a very good economic reason why the market kept going up and up.  We agree.  So what did happen?  Here is the Austrian School answer, known as the Austrian Business Cycle Theory (ABCT):

Excessively low interest rates exacerbate the boom and bust cycle

These low interest rates cause an increase in the available funds (business capital.)  From these funds, malinvestment occurs as companies take on projects that would not be justifiable under a system of free market interest rates.  (Rates higher than the prevailing rate.)  This expansion can occur because the Fed (or any central bank) holds rates too low for too long, or through unchecked fractional reserve banking.  If it persists long enough, economic activity can BOOM, but it is an illusion.  Many of the projects are unsustainable, excessively risky, and pull resources away from more efficient alternative uses.  In other words, economic activity gets distorted.  The result is a predictable crash.

Do you think the Fed’s rates don’t have an impact on economic activity?  Then why do they bother manipulating them?  Ask Krugman.

From this most recent boom/bust to the dot.com boom/bust all the way back to the late 1920′s boom/bust…. and guess what…. the panic of 1819, the inflationary boom/bust of John Law’s Mississippi System and the Tulip Bubble before them…

Every single one has the same characteristics.  Easy money at the beginning, resources drawn into sectors that wouldn’t normally justify it, unsustainable development due to scarcity, and it all comes crashing down as entrepreneurs miscalculate risk.  The lyrics from the famous Hayek-Keynes Rap Video explain it better than I can:

The place you should study isn’t the bust
It’s the boom that should make you feel leery, that’s the thrust
Of my theory, the capital structure is key.
Malinvestments wreck the economy

The boom gets started with an expansion of credit
The Fed sets rates low, are you starting to get it?
That new money is confused for real loanable funds
But it’s just inflation that’s driving the ones

Who invest in new projects like housing construction
The boom plants the seeds for its future destruction
The savings aren’t real, consumption’s up too
And the grasping for resources reveals there’s too few

So the boom turns to bust as the interest rates rise
With the costs of production, price signals were lies
The boom was a binge that’s a matter of fact
Now its devalued capital that makes up the slack.

Whether it’s the late twenties or two thousand and five
Booming bad investments, seems like they’d thrive
You must save to invest, don’t use the printing press
Or a bust will surely follow, an economy depressed

And that’s how the Austrian School knew that we were headed for trouble.  The Fed had merely reinflated with cheap credit, which Austran scholars knew was unsustainable.  Another bust was sure to follow, worse than the bust which preceded it.

So the story continues, and this is why we urge caution once again.

However, it is foolish to view the Austrian School as anti-stock market.  Nothing could be further from the truth as the following quote shows:

One time, during Mises’s seminar at New York University, I asked him whether, considering the broad spectrum of economies from a purely free market economy to pure totalitarianism, he could single out one criterion according to which he could say that an economy was essentially “socialist” or whether it was a market economy. Somewhat to my surprise, he replied readily: “Yes, the key is whether the economy has a stock market.” That is, if the economy has a full-scale market in titles to land and capital goods. In short: Is the allocation of capital basically determined by government or by private owners? – Murray Rothbard

Now look at this Austrian School examination of the Fed and the stock market in May 2009.  Pretty consistent with what I have been saying all along. This rally is built on cheap money.

This is very dangerous.  Consider that the best performing stock market in the world in 2007 was Zimbabwe.  I’m surprised dragonLZ didn’t ask us why that was justified.  You can see now that it was for the same reason.

While I don’t want to disparage other bloggers that may have libertarian leanings and an affinity for sound money, without an Austrian School perspective on the boom/bust cycle they may sound like PermaBears to the untrained ear.  But just like me, they want economic growth. We all however would just prefer it to be sustainable.

Neither 2003-2007, as dragonLZ pointed out, nor 2009 was sustainable.

The below pictures were from a presentation given at yesterday’s “Towne” Hall on May 24.  I’ve added a few comments with documentation links.  The quote above from the Declaration easily applies to the 22.5 million bureaucrats, America’s second largest job sector, who make nearly twice the average wage of the private sector.

While America is not Greece – or Iceland – there are glaring similarities.

While the Republocrats are not King George… they are far worse.

For Liberty and the Constitution,

Jake Towne

USDA link here.  Note the strong rise in number of SNAP food stamp recipients during the past year.  One would expect to see this number dropping or even flat-lining – along with employment rising – if a recovery were underway.

BLS link here.  Note that while the “newspaper” unemployment rate is still 10%, the U-6 figure – which more accurately describes total unemployment is 17% – a depression statistic.  I’ve described the common sense solutions to end rampant unemployment almost overnight in the campaign’s Jobs plank.

Since the BLS drops off workers from its U-6 figure, the real unemployment rate is most likely slightly greater than 17%.  Shadowstats estimates the rate at about 22%.

The current national debt – which is closely tied to the USTreasury market is now over $13 trillion.  Current government plans include massive deficit spending through 2013, and the government’s optimistic projections of a return to “normalcy” even then should be severely doubted.  Source of budget data.  However, due to the cash-based accounting method government uses, this hides the undeniable fact that the real national debt is much larger when GAAP (Generally Acceptable Accounting Principles) are used to identify future taxation sources and future debts such as Social Security and Medicare (see below).

The above is taken from the Treasury Department’s latest report from April 2010 where government’s inlays – social security and retirement taxes, income taxes (both personal and corporate), and excise taxes can be seen.  The average monthly level is about $170 billion per month.

From the same report, the level of government spending, which averages about $300 billion per month.  (Only the government can run that type of accounting, due to its money-printing!)  While Social Security and Medicare are a major expense, the level of “National Defense” spending appears deceptively low as it is just the DoD budget.  As I wrote about in “Guns or Health Care?” plenty of “Other Non-Defense” spending are in fact related to the military – Homeland Security, the nuclear arsenal under the Dept. of Energy, Veteran’s Affairs, the Treasury’s military retirement program, etc.

As seen in the official USTreasury report on page 178/254, the total unfunded liabilities for Medicare and Social Security is a jaw-dropping $107 trillion over the future of these programs.  While I predict the Democrats may bear the brunt of the blame for the collapse of Medicare, one must not forget that it was the Republican’s massive expansion of Part D’s prescription drug plan that worsened the fiscal situation.  One interesting possible interpretation of the recent health care takeover plan is it may simply be a stop-gap solution to temporarily increase taxes over the next few years.  (On Social Security, I will be delivering a presentation in more detail next Friday.)

The above is built from the Federal Reserve H.4.1 data here.  The red line is the total (reported) balance sheet of the FED, which has more than doubled since the time of the Banker Bailout.  While the original TARP bailout (not shown) accounted for much of the initial sharp increase, most of the debt has been replaced by $1.12 trillion of mortgage-backed securities from Freddie Mac and Fannie Mae (the purple line).   This graph shows the nationalization and propping of America’s entire residential housing industry. The yellow and green lines show the cumulative totals of USTreasury and USAgency debt held by the FED.  While the Federal Reserve has admitted it will take losses on the MBS debt, the question remains as to how much and when.

The purchasing power of the dollar has lost well over 94% since FDR took America off the classical gold standard in 1933 through monetary inflation.  The monetary inflation is caused by the FED.  They debase the dollar by creating more and more irredeemable paper dollars.  Graph provided by Bloomberg Financial, 2009.

The above chart shows the “real interest rate” from 1970 to 2009, formula below.  It is an approximation for the dollar’s purchasing power versus time.  While in 1980 it reached nearly +10% (savings rate of ~19% and inflation of ~10%), in 1990 this rate went negative and continued dropping.  The chart shows the capital and savings of America being ruthlessly destroyed by the FED and the government.  Source.

Real Rate of Interest = (Interest Rate earned by a bank savings account) minus (Inflation Rate)

The rising price of gold over the past decade demonstrates the destruction of the world’s paper currencies.  In the past several weeks, gold reached all-time record highs in dollars, yen, euros, Swiss francs, and British pounds.  As described in this article, the gold price is likely suppressed by governments in order to make their own currencies look good as I wrote about in “The Summers Gold Price Suppression Scheme.”  Gold trades over $20 billion USD per trading day – or over $20 trillion annually – a figure larger than the $15 trillion GDP figure used for the United States.

To cap off the situation with the dollar, the latest quarterly banking profile from the FDIC indicates the deposit insurance fund (DIF) is bankrupt.  While consumers at failed banks still receive “insured” funds, the losses are presumably filled in with dollars from the FED, as reported last here.  The current FDIC “watch list” rose to 775 banks, or almost 10% of all FDIC-insured banks in the US per p. 3/26.

The crux of the Over-the-Counter derivatives problem is its enormous size.  However the $600 trillion figure shown is the derivatives’ contracts notional value – a true market value cannot be assessed.  The primary issue with OTC derivatives is that they trade off of exchanges, so their contents are opaque to the rest of the marketplace.  Note that exchange-traded derivatives (EXD) are much smaller.

BIS data here.  Note the sharp drop following the 2008 financial crisis.  More details on derivatives can be learned in “What the Heck are Derivatives?” and “Bring Light to Dark Derivatives!”

Jake Towne is running for U.S. Congress in eastern Pennsylvania’s 15th district in 2010. Prior to returning home, he had been living in Shanghai as an engineer in the semiconductor industry for over 3 years. As part of defending liberty and championing the Constitution, Towne is offering the citizens in his area a novel form of accountable government called “Our Open Office.”

America’s monetary situation is becoming fairly ridiculous.  This Monday, the Wall Street Journal carried “Will Nickel-Free Nickels Make a Dime’s Worth of Difference?” on its front page.  The article shares the government’s dilemma that minting each $100 box of nickels costs very close to $200, and that the metal content of the coin is worth more than the face value of 5 cents.  The penny, which was already debased from almost 100% copper to 2% copper in 1982 also costs more to mint than its face value.  The pre-1982 pennies are now worth over double their face value.

The nickel’s mass is 5 grams and consists of 25% nickel and 75% copper.  It is the only US coin to never have been devalued by using cheaper metals since it was first minted in 1866.  At that time, both the penny and nickel were worth far, far less than their face value, but were used as placeholders for gold and silver coins.  America’s dimes, quarters, half-dollars were all 90% silver up until 1964 when the silver content became worth more than the face value.  Today’s dimes, quarters, and half-dollars are nickel plating – done on purpose to resemble silver – sandwiched over a cheap copper core.

While the WSJ hems and haws between substituting wood, plastic, aluminum or zinc in the coins, one of the issues with “toy money” or devaluing the coin currency is that it could cause a psychological trigger as citizens realize Congress and the printing operators at the Federal Reserve intends to pursue its permanent monetary policy of inflation, which is a hidden, insidious tax on all Americans who hold dollars.

From my overseas experience in China, one oddity is bank accounts and many restaurants or shops still issue receipts with two decimal places, even though there is no coin in wide circulation that is worth 0.01 yuan.  These coins stopped being used by the public simply because this amount no longer has any practical purchasing power.  A similar situation now exists in the USA today.

The most sensible solution for Congress to pursue is to halt the inflation and stop minting pennies and nickels altogether.

However, Congress is not sensible.  For reasons briefly outlined here, Congress will continue inflation for as long as it can to maintain this charade of “desperado economics.”  Note the gold price rising to all-time record highs yesterday in dollars, British pounds, Swiss Francs, and Euros.  However, gold’s value is not really rising – it is just the devaluation of the dollar becoming more and more visible to the general public as posted recently in “The Haunted House of Fiat Currencies.”

Today’s dollars are mere shadows of what America’s money once was.  Money made with a printing press is nothing new – Thomas Paine and the rest of the founders were aware of the dire dangers – the phrase “worth less than a Continental” refers to script currency Washington issued the troops which quickly became worth nothing. This campaign has specifically about the nickel debasement two weeks ago, again in January, and well before this campaign started way back in August 2008 when I was just beginning to figure out what the government has done to our money.

While the masses will eventually catch on, forewarned is forearmed.  Here is a snippet from Chapter 17 of Human Action written by economist Ludwig Von Mises:

“The course of a progressing inflation is this: At the beginning the inflow of additional money makes the prices of some commodities and services rise; other prices rise later. The price rise affects the various commodities and services, as has been shown, at different dates and to a different extent.

This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.

But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against “real” goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.

It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German Mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last.”

[Suggested further reading: the campaign's Federal Reserve plank, Sound Money and Jobs plank, and "One Step Clower to the End of the Yellow Brick Road"  Towne is one of the few writers brave enough to address the transition to sound money here.  While the end result of the crack-up boom predicted by Mises is as above, during the path towards it anything can happen as the amount of credit could be contracting at a faster rate as I wrote about in "'Credetary' Inflation and Deflation" and "Bring Light to Dark Derivatives!!" last year.]

Jake Towne is running for U.S. Congress in eastern Pennsylvania’s 15th district in 2010. Prior to returning home, he had been living in Shanghai as an engineer in the semiconductor industry for over 3 years. As part of defending liberty and championing the Constitution, Towne is offering the citizens in his area a novel form of accountable government called “Our Open Office.”

Recent events not only with the current healthcare bill, but also on the economic front are waking up more and more Americans to the sad truth that the federal government is out of control. A fascist state is quickly developing in America, one of the few rare places in the history of the planet where “life, liberty, and the pursuit of happiness” was not an unattainable dream but instead a mission statement. I first fully grasped where the misguided actions and ideology of the Republocrats would lead America during the Banker Bailout of 2008, and I returned home to fight against the Establishment by running for United States Congress as soon as I could.

Now when I use the term “fascism” in this piece, I do not mean its typical connotation with physical brutality, murder, and torture – though this is the easily recognizable final product. Fascism by Benito Mussolini’s originally intended economic meaning was symbolized by the “fasces” – bound sticks used as a totem for state power in ancient Rome. Here are my definitions – which by and large agree with most literature – for four socioeconomic systems:

1. Free Enterprise – a social system based on the private ownership of the means of production.
2. Interventionism – a social system where the means of production is privately owned, but the government intervenes by passing regulations and orders.
3. Fascism – a social system where on paper the means of production is still privately owned, but the government has de facto control through the passing of a multitude of regulations and orders, accompanied by corruption.
4. Communism – a social system based on government (or “public”) ownership of the means of production.

The great confusion of today by many is that the evils of government-sponsored corporatism, “crony” capitalism, or “disaster” capitalism are instead somehow free enterprise, when in reality rarely do even local farmers’ markets pass as free enterprise today.

Many examine the current state of rampant interventionism and soft fascism, conclude the free market failed, and incorrectly decide that the solutions must be yet more centralized government control of the economy, as seen in many respects with corporate bailouts of AIG, GM, Citibank, and others. Unfortunately, more fascism will cause a downward spiral as can be predicted by reading my article “The Government’s “War” on Main Street” and the campaign’s Jobs plank.

Case in point is the healthcare takeover where a tax of almost $1 trillion dollars will be levied upon the American people in new taxes over the next several years to provide coverage – not necessarily actually providing healthcare as pointed out in the campaign’s Health Care plank. Congress, via the HMO Act of 1973 and other acts, has created a government-sponsored insurance cartel that does not serve consumers best. A system of free enterprise would deliver the most affordable, best-quality healthcare to consumers with the most features while naturally regulating the upcoming medical worker shortage as baby boomers attempt to retire. (photo)

The solutions to the healthcare situation are to remove state mandates that dictate 15-40% of premiums in Pennsylvania, destroy insurance portability barriers over state lines, pursue tort reform on the state level, enact federal tax relief legislation, remove state restrictions on licensing and seats in the medical school system, and provide a sound currency to stop price inflation. Note that all these solutions call for LESS government intervention, not more. Also note that while Republican politicians may seem at first to support my line of reasoning, at heart they seek control just like the Democrats, as the incumbent in my race, Charlie Dent, demonstrated in his healthcare bill last summer.

Besides the healthcare tax bill, Congress has been hard at work creating new barriers for businesses on the economic front. Senator Dodd introduced legislation markedly similar to HR 4173, the Wall Street Reform and Consumer Protection Act of 2009. I dubbed this bill the Automatic Bailout Bill in November 2009 as the bill grants sweeping new powers to the Federal Reserve and creates more central planning unelected bureaucrats with the Financial Services Oversight Council.  (Photo courtesy Michael Kubel of The Morning Call)

Section 1105 gives this council vast powers to takeover transactions of all financial holding companies that pose a “grave threat to the financial stability or economy of the United States” which of course is let undefined.

Section 1701 gives the Federal Reserve “in unusual and exigent circumstances… that a liquidity event exists that could destabilize the financial system” power to authorize immediate bailouts and assistance to any “individual, partnership, or corporation.” This enables the FED to neatly bypass Congress when the next crisis occurs. The dollar limit on the FED’s new bailout authority? A cool $4 trillion dollars.

Section 1405 is a tragic comedy. It brazenly stipulates that the FDIC deposit insurance fund (DIF) reserve ratio must be higher than 1.15% for bank accounts. Unfortunately, the DIF is ALREADY at negative 0.39% and is completely insolvent by nearly $21 billion. While the government is intent on printing its way to prosperity, down this route only lies madness.

Fascism, communism, and even much of interventionism that violate individual liberties are just varying degrees of central planning, aka socialism. As America installed more interventions in the economy, the great Austrian economist Ludwig von Mises in 1950 delivered a lecture “Middle-of-the-Road Policy Leads to Socialism” which warned that interventionism, over the long run, would still lead to socialism. Mises was correct, and the impending dollar currency crisis which will make the current situation pale in comparison remains unheeded by the money-printers in Congress and the FED.

If America is to have freedom from fascism, the current healthcare and economic takeovers must be firmly rejected. The greatest threats to America’s prosperity, liberties, and way of life do not tread in forsaken deserts but instead infest the halls of Washington, D.C.  The choice between the two socioeconomic systems – the failed status quo or the solution that will create prosperity – is stark, but easy to make once the facts are understood.  America must leave the Road to Serfdom or pay its eventual consequences.

As I pledged on the healthcare bill, so do I pledge on any economic takeover Congress passes to immediately act to revoke it once I take office in January 2011 as an independent private citizen, beholden not to lobbyists and special interests, but to the people in my district who I will faithfully serve by delivering true transparency and real accountability.

Readers should be aware that the incumbent, Congressman Dent, in my congressional race sits on Homeland Security and is a rabid supporter of the Bush and Obama administrations’ War on Terror. While I do not question his motives to protect the American people, I do very much oppose his actions and ineffective solutions. Our country’s leaders have not only plunged our nation into expensive, preemptive, and unjust wars for the past decade, but have embarked on a vast extension of a modern-day police state. It is the duty of every citizen to question whether these new restraints over our lives are, in fact, beneficial. I view the infringement of civil liberties that are protected by our Constitution as not only illegal but unnecessary and immoral.

The original source has been moved to the Morning Call archives here, but a modified version is available on Politico. In quotation marks are quotes from the Congressman, followed by my comments explaining my logic.

____________________________________________________________

Dent:  “I can assure you firsthand that closing the facility is impractical at this time, and, if accomplished, would further weaken the security of our homeland.”

Dent is referring to only closing the prison, and while closing it overnight is obviously impractical, he fails to outline specifically WHY it is impractical, and WHY it would weaken security. During World War II, we kept German prisoners of war on our soil, and the ability of our military police to keep all prisoners secured in secluded location should be unquestioned.  He does refer to the $200 million price tag from the Obama administration for a new prison, but placing this into perspective, this is about the same cost as the oil burned in a single day by the Pentagon (395,000 in 2008) multiplied by the “fully-burdened” price of delivering it to Afghanistan ($400 a gallon).

Dent then wrote, “The government has already spent millions of dollars in state-of-the-art infrastructure and the guards are exceptionally professional. This is no Abu Ghraib and any attempt to characterize it as such is a blatant lie. The facility provides more freedom of movement than US-based maximum-security prisons and while Pennsylvanians struggle to feed their families, detainees get a daily 6,500-calorie diet and most have access to classes, sports, TV, and even video games.”

Many of the prisoners are charged with assisting the Al-Qaeda terrorists who attacked our country on 9/11. While I can understand providing the Koran for their religion and some freedom of movement, why are we providing them with video games and TV? While I find it hard to believe that Guantanamo is a vacation spot compared to Pennsylvania, does Dent not get the supreme irony of freely spending millions upon billions of dollars while some residents in our district struggling to feed their families?  Most of the prisoners left have been detained for over 6 years with no trial whatsoever. If they are guilty of crimes connected with 9/11, they should be tried on the evidence, not left indefinitely to rot in prison.

Dent also neatly tries to avoid mentioning that Guantanamo prisoners have been tortured in the past, and the reasons for holding “enemy combatants” off-shore in Guantanamo and the extraordinary rendition to other CIA bases was mainly so that torture could be used, such as the well-known waterboarding of Khalid Sheikh Mohammed, and the British national Binyam Mohamed who was released and determined to be innocent of any crime after being extradited to a secret CIA prison in Morocco where his jailers mutilated his genitalia among many other forms of torture.

Dent: “We still find our military men and women capturing terrorists on the fields of battle. However, these fields are no longer limited to Iraq and Afghanistan. They include the coastlines of Yemen and Somalia, neighborhoods in Texas and Colorado, and the skies above Michigan. The administration may not want to call it a war on terror, but that’s what it is. Where, then, shall we hold these prisoners of war – these enemy combatants?”

Dent’s blurring of the terms “terrorists” and “prisoners of war” is highly misleading. The truth is that the current wars are being fought against mostly insurgent tribal Muslim rebels, and the United States is allied with their opposing Muslim tribe.  Terrorism is simply a tactic of war.  The United States – or any other nation – cannot ever win a war against a tactic, we can only win wars against defined enemies. For instance, civilians in Pakistan where homes and innocent lives have been mistakenly destroyed by Predator drones could also argue that this is also a form of terrorism instead of America’s unique, inhuman term “collateral damage.”

If the Canadians or Russians ever invaded our country and we fought back, would any resistance on our part still be construed as “terrorism”? Were the French actions of sabotage during WWII against the Nazis or the original Boston Tea Party with its tar-and-feathering also “acts of terrorism”? When the American Revolution against the British first started, the minutemen at Lexington and Concord chose to shoot at the British from the forest rather than formally lining up on a field of battle. The minutemen’s actions could also, in many ways, be viewed as a cowardly acts.

Americans must place themselves in the shoes of those we are attacking. Many who have joined the Taliban or Al-Qaeda have done so not because of a call to jihad by Bin Laden, but because their family members and friends have been killed.  Many are at war against the United States solely because we are over there, occupying their lands. It is highly unlikely that Osama Bin Laden would have been able to convince the 19 hijackers who killed nearly 3,000 Americans on 9/11 to commit suicide if American troops had not been stationed in the Holy Land of Saudi Arabia, Kuwait, Qatar, Bahrain, and many more countries – and presently the US military has over 761 bases in 150 of the world’s 194 countries if you want to be exact.

As Congress has never declared war against any nation, including Afghanistan, Iraq, or Pakistan, as required by the Constitution (Article 1, Section 8), this does place our country into an awkward position.  My personal beliefs are:

• All Al-Qaeda charged with acts related to the 9/11 attacks or acts against American civilians not located in the war zones of Afghanistan, Iraq, or Pakistan, should be given a trial by jury.
• All tribal insurgents, Taliban, Al-Qaeda, etc. who attack American troops on foreign soil in whatever manner should be treated as prisoners of war and humanely detained by the military until the end of the wars’ hostilities. They should never be subjected to torture.
• The Bushian term Dent uses – “enemy combatants” – is childish conniving to thwart the rule of law by inventing new terms in order to torture and unlawfully detain individuals. The creation of military tribunals under the Military Commissions Act of 2006 are unnecessary.

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WHAT TO DO WITH GUANTANAMO’S PRISONERS???

1. I believe that the prisoners at Guantanamo Bay, if charged with an act of aggression, including terrorism, against American civilians in connection with 9/11 or otherwise, should be given a trial by jury. These are criminal acts and should be treated as such. If there is no evidence to place them on trial, they should be released in accordance with our law – we will already have detained most of them for the better part of a decade. There is nothing to fear by giving these individuals constitutional protections since if abiding by the Constitution is good enough for me, it will have to be good enough for an alleged criminal and terrorist, no matter how much I myself hold terrorist acts in utter disdain.

2. I believe all prisoners at Guantanamo Bay, if charged with an act of aggression, including terrorism, against the American military or military contractors following 9/11 on foreign soil should be held as prisoners of war until the end of hostilities. If there is a case where an act of aggression may NOT have been committed against the military, a hearing can be held by the military to determine if there is enough evidence to continue holding the prisoner of war, but sentencing, capital punishment, or additional punishment should NOT be the subject of any such hearings. They should be treated humanely and not subjected to torture under ANY circumstances.

3. As outlined in Part 1, for historical reasons Guantanamo Bay clearly belongs to Cuba so once again, my stance is to support the closure of the entire military base, including the prison.

4. Those detained under #1 can be moved to a secluded location in the United States where they can be imprisoned and given their trial by jury. (Obviously, I do recognize that finding an impartial jury may be difficult, so details surrounding jury selection are a valid point for debate.)

5. Those detained under #2 above can be either be imprisoned by the military police in the United States or moved back into prisons in the occupied countries. Again, the United States is responsible to never torture and safely detain these prisoners of war.

6. To further elucidate the position of the United States’s “war on terror,” Congress should hold an up or down vote on the wars and also clearly specify the enemy and how victory is to be achieved. This is owed to the American people.  While I would vote against either war, I would support issuing letters of marque and reprisal, as outlined in my Afghanistan War plank, to address Al-Qaeda specifically.

America used to believe that individuals were innocent until proven guilty by jury in a court of law, no matter how heinous the crime.

America used to believe that torture is to be condemned as the actions of uncivilized brutes, and is unbecoming the most highly advanced society on earth.

America used to believe that without a warrant and probable cause, the government has no right or ability to search you as stated in the Fourth Amendment. As seen by the recent backdoor re-authorization of the PATRIOT Act, Congress and the President are out of touch with protecting individual rights.

If America does not return to our roots in the rule of law, history teaches dark days are ahead. We must reject the actions of so-called representatives in Congress and replace them with those who believe in the rule of law and will abide by their oaths to protect and defend the Constitution of the United States.

For reference, here are links to my Iraq War and Afghanistan War planks.

For the Republic and the Constitution,

Jake Towne

Jake Towne is running for U.S. Congress in eastern Pennsylvania’s 15th district in 2010. Prior to returning home, he had been living in Shanghai as an engineer in the semiconductor industry for over 3 years. As part of defending liberty and championing the Constitution, Towne is offering the citizens in his area a novel form of accountable government called “Our Open Office.”

Readers should be aware that the incumbent in my congressional race sits on Homeland Security and is a rabid supporter of the Bush and Obama administrations’ War on Terror. While I do not question his motives to protect the American people, I do very much oppose his actions and ineffective solutions. Our country’s leaders have not only plunged our nation into expensive, preemptive, and unjust wars for the past decade, but have embarked on a vast extension of a modern-day police state. It is the duty of every citizen to question whether these new restraints over our lives are, in fact, beneficial. I view the infringement of civil liberties that are protected by our Constitution as not only illegal but unnecessary and immoral.

THE GUANTANAMO PROBLEM

“History… should not be forgotten. History itself, whether bad or good, should not be forgotten.” – Chen Zhiyong

“The detention facilities at Guantanamo for individuals covered under this order shall be closed as soon as practicable, and no later than 1 year from the date of this order.” – President Obama by Executive Order, January 22, 2009.  Time’s up.

I remember the years after 9/11 when the government announced they were stowing away “enemy combatants” at Guantanamo Bay, Cuba. CUBA? I remember thinking. Why Cuba? Aren’t they communist and not exactly on cordial relations with the USA? I never pursued my curiosity further than this for many years until I moved abroad to communist China and completely changed my views on the War of Terror.

The origins of Guantanamo’s long, strange trip under US control began when the U.S.S. Maine exploded on February 15, 1898 in Havana’s harbor while Cuba was revolting against the Spanish empire. While the Maine was certainly not attacked by the Spanish navy, to this day it is uncertain whether stored ammunition exploded or the ship hit a mine. At any rate, the battleship was an unwelcome military presence.  (Photo shown entering Havana harbor three weeks prior to explosion.)

William Randolph Hearst’s New York Journal published fictional drawings of Spanish saboteurs attacking the vessel after famously cabling his journalist, “You furnish the pictures, I’ll furnish the war.” As a result, Congress declared war against Spain in April 1898. The war cry was “Remember the Maine! To hell with Spain!“

Led by future President Teddy Roosevelt’s Rough Riders, the motley army won several quick battles before malaria and dysentery could overwhelm them. While Cuba was technically made independent by the Treaty of Paris in 1898, the US government forced Cuba to add the infamous Platt Amendment to its constitution, stripping away completely its sovereignty and enabling the US to intervene in domestic affairs, making it a de facto satellite of the United States from 1901 until 1934. Marines were sent to quell insurrections in 1906, 1912, 1917, and 1920. (1)

Guantanamo Bay, consisting of 45 square miles, was part of the Platt Amendment, and the US Navy established a refueling station to project power around the Caribbean and Panama Canal. Cuba’s independence had no effect on the base besides changing it’s rental agreement. When former lawyer Fidel Castro took over as dictator of a communist police state in 1959 following the Cuban Revolution, he attempted to remove the naval base and, after cashing the first rental check, has not cashed any additional checks sent by the government through the present day.

A Cuban minefield still borders the base on land – the US removed its minefield under Clinton – and the Cuban government still treats the base as hostile. Perhaps from an American perspective, an equivalent situation would exist if China were to take over part of the coast of Oregon, plunk down a base for its navy complete with Starbucks, Pizza Hut, KFC, and McDonald’s, imprison and torture their criminals, terrorists, and prisoners of war there, and then send checks for a rent that we never cash.

It should be plainly obvious that the proper action to take is to not only close down the prison camp, but also to eventually close down the entire military base and return the property to Cuba. This would go a long way towards restoring peace, commerce, and friendship with the impoverished and isolated country. While the harsh socialist economic policies of the Castro regime certainly has not done Cubans much good, neither have American trade embargoes or the attempted CIA invasion in 1961 helped Americans.

It’s time to let bygones be bygones and simply return the property to Cuba. Now, what to do about the prisoners? Well, I will get to that. Let’s first take a look at the incumbent’s claim that closing Guantanamo Bay would weaken national security in part two.

Jake Towne

(1) Note: The Philippines, Guam, and Puerto Rico were also transferred to US sovereignty following the Treaty of Paris. The Filipinos were not granted self-rule and were consistently patronized as our “little brown brothers” by the President and many others. The Filipinos constantly rebelled against the American occupation, costing over 4,000 US soldiers’ lives and likely several hundred thousand Filipino dead from reprisals. Many Filipinos cooperated with the Japanese when they invaded the day of Pearl Harbor.  Although several details are incorrect, please see also Chalmers Johnson’s The Sorrows of Empire, pages 39-45.

Jake Towne is running for U.S. Congress in eastern Pennsylvania’s 15th district in 2010. Prior to returning home, he had been living in Shanghai as an engineer in the semiconductor industry for over 3 years. As part of defending liberty and championing the Constitution, Towne is offering the citizens in his area a novel form of accountable government called “Our Open Office.”

The world champion athletes at the Winter Olympics receive gold, silver, and bronze medals that contain roughly the same amounts of metal as the last Summer Olympics.

• A gold medal contains 550 grams of silver and is layered with just 6 grams of gold.
• A silver medal has 509 grams of silver and about 41 grams of copper.
• The bronze medals likely contain about 450 grams of copper and 50 grams of mostly tin and zinc.

At current market prices, a gold medal is exchangeable for about $494, a silver for about $260, and a bronze for just $3. If the gold medal was solid gold with the same mass, it would be exchangeable for almost $20,000.

While the Vancouver athletes are receiving the same amount of gold and silver as the Beijing Summer Olympics, world central banks – like the Federal Reserve – have been devaluing their currencies steadily for the past century or so to pay for the wild growth of government, non-stop warfare that have killed well over 170 million civilians, and the redistribution of wealth from those who worked for it to special interest groups. Sound money has been considered such a serious threat to the primacy of the state that virtually all dictators – Hitler, Mussolini, Stalin, and Mao top the list – have banned it so government spending cannot be checked.

FDR, during the midst of the Great Depression caused by the printing presses of the FED, outlawed all gold coins in the United States from 1933 until 1975. Americans still used silver in their coins up until 1970 when the silver became more valuable than its face value and the coins all disappeared from circulation. A 1964 half dollar can now be exchanged for nearly $6.

Unbeknown to most of the American public, the world’s gold market has over $20 TRILLION in annual turnover, a sum much larger than the $15 trillion figure bandied about for US GDP, which is the theoretical sum of all the goods and services exchanged by American firms and individuals.

Unnoticed to most of the American public, while the S&P 500 has actually fallen in dollar terms over the past decade, the price of gold has steadily risen each and every year by an average of 17%. Unfortunately, a rising price of gold does not indicate an asset bubble – like housing – in my opinion. It is the whistling before the kettle blows its lid. It is the silencing of the canary chirping in the coal mine from noxious fumes.  So, back to the question, what is an Olympic gold medal worth?

While one cannot deny the sentimental value* attributed by some athletes to winning a gold medal at these Winter Olympics in Vancouver, Voltaire’s comment will remain as true in the coming years as when he first said it. All one must do is study the ruin of France under John Law, the debasing of the currency of imperial Rome, George Washington’s “worthless-as-a-Continental” script money failure after the Revolutionary War, post-WWI’s Weimar Germany’s hyperinflation – among many other European countries, the 1990 Argentine hyperinflation, and the Zimbabwe fiasco that is finally subsiding.

The gold and silver medals are money. Governments should take a lesson from the last couple Olympics and not devalue their currencies so carelessly.

History doesn’t repeat, but it does rhyme, and it’s best not be trampled when it decides to stampede.

[* Nor, in truth, deny the subjective value of anything.]

Jake Towne is running for U.S. Congress in eastern Pennsylvania’s 15th district in 2010. Prior to returning home, he had been living in Shanghai as an engineer in the semiconductor industry for over 3 years. As part of defending liberty and championing the Constitution, Towne is offering the citizens in his area a novel form of accountable government called “Our Open Office.”

“You can chain me, you can torture me, you can even destroy this body, but you will never imprison my mind.” – Gandhi

These are just two of the many lessons it appears that Joseph Stack, aged 53, never learned. For those unaware, Mr. Stack set fire to his family’s home and crashed a private plane into the IRS Austin branch during the workday, killing one other person, injuring 13, and two of the injured are in critical condition. While full details surrounding this incident are still unclear, the FBI believes that his suicide note is genuine. Accounts from Stack’s friends indicate his acts were completely unexpected.

If Stack’s note proves genuine, it is clear that this was not only premeditated murder but also an act of political terrorism, eerily similar to the hijacked airliners of 9/11. After reading his note, it is plainly obvious that this man was adversely affected and bitterly unsatisfied with the over-taxation practices of the IRS and Congress (a theme of the Taxed Enough Already, aka TEA party movement) and government-sponsored crony capitalism (a theme commonly associated by the media with the political left). In his note:

“It has always been a myth that people have stopped dying for their freedom in this country… I also know that by not adding my body to the count, I insure nothing will change… I can only hope that the numbers quickly get too big to be white washed and ignored that the American zombies wake up and revolt; it will take nothing less. I would only hope that by striking a nerve that stimulates the inevitable double standard, knee-jerk government reaction that results in more stupid draconian restrictions people wake up and begin to see the pompous political thugs and their mindless minions for what they are.”

Truth is often a bitter pill, but the terrorists who died while murdering 2,973 civilians on 9/11 also had a similar goal; to create a “knee-jerk government reaction.” Congress and recent Presidents from both parties have bled our nation of the blood of our bravest by instigating the Afghanistan and Iraq Wars, ruined our economy with bailouts and rampant unemployment, created “draconian restrictions” like the PATRIOT Act which stripped Americans of their civil liberties, enabling warrantless wiretapping of American citizens, revoking habeas corpus, and leading to the torture of defenseless captives. Congress foolishly rushed headlong into this trap of epic proportions, assisted by unwitting saps like my district’s Congressman Charlie Dent, who approved the banker bailouts, accelerated the deficit spending, reauthorized the PATRIOT Act, and voted to increase insane levels of military spending at every opportunity.

I condemn Stack’s cowardly act of murder and political terrorism. While one of my campaign’s planks is the abolition of the Marxian federal income tax and the IRS, the route I have taken – placing my engineering career on hold for 18 months to run for office – is peaceful and logical. As Gandhi taught, messengers for the truth are almost always best served by acting in a non-violent manner.

By erecting a prison in his own mind where Stack’s only recourse became violence and self-destruction, Stack has just created a way for Establishment shills to defame the liberty movement as hailing this terrorist as a “hero” as ABC’s Lee Ferran has done.

Where Stack murdered, many others, myself included, argue the moral case that the government simply should never have any claim whatsoever on the fruit of an individual’s labor.

Where Stack raged about a vague clause in the IRS code that plundered him, I have pointed out that not only is the federal income tax immoral, but fiscally it is completely UNNECESSARY.

Where Stack rants about the injustices of a hopelessly corrupt political process, I have calmly pointed out America’s greatest political secret – that a determined minority can ultimately destroy the ability of Republocrat apparatchiks to control which candidates are selected, especially in party primaries like the Republican party in Pennsylvania just did, which truly does make a mockery of the democratic voting process.

LOOK ACROSS THE LAND! Listen to your families and friends! Plenty of people grumble about politics and say they could do the job better, but many do not have the financial means, drive, or knowledge to mount legit challenges to the Republican and Democrat machines that are destroying our nation. This is despite the fact that nationwide the numbers of independents and third parties are LARGER THAN EITHER MAJOR PARTY.

When I made the decision to run as an independent under no political party in May 2009, I was fully aware of the challenges ahead.  However, my race is certainly winnable – I am already at 8% in a January poll run by a Republocrat opponent, and the vast majority (about 92%) have not even heard the message yet.

Liberty may once again teeter on a knife’s edge in the months and years to come. Whether America eats the bitter, evil apple of socialism, and falls to war, poverty and endless debt for our children is a choice now left to US.

Americans need to hear the truth – a message of prosperity, liberty, love and peace.  The Republocrats can only offer more lies, tyranny, hate and war. This choice is OURS. My choice is to rally at the breach, to defend freedom and restore the rule of law and our constitutional republic.

I have faith that the truth will prove sharper than any sword.

Jake Towne

Jake Towne is running for U.S. Congress in eastern Pennsylvania’s 15th district in 2010. Prior to returning home, he had been living in Shanghai as an engineer in the semiconductor industry for over 3 years. As part of defending liberty and championing the Constitution, Towne is offering the citizens in his area a novel form of accountable government called “Our Open Office.”

The first chart is from the FED’s latest Purposes and Functions from 2005 on page 51 of 146.

As can be seen, “net transaction accounts” have a 10% reserve requirement when over $45 million at a depository institution. Net transaction accounts are checking accounts, demand deposit accounts, NOW (negotiable order of withdrawal) accounts, or credit union share draft accounts (p. 135/146)

“Nonpersonal time deposits” are defined (p 129/146) as a “time deposit held by a depositor other than an individual” such as certificates of deposits, or CDs. These have no reserve requirement.

Now what about savings accounts and certificates of deposits? These are termed “nontransaction accounts” by the FED since they do not meet the requirements of a transaction account (CFR 204.2). See our next chart, taken from page 21/21 in this 1993 article from the Federal Reserve Board’s Division of Monetary Affairs. Personal savings accounts, CDs, or money market accounts are NOT reservable liabilities since December 1990 as stated directly by the FED in 1993 and indirectly by their non-inclusion here. So, there are NO reserve requirements for personal savings accounts and CDs.

The above leave us only with checking/NOW (or “net transaction”) accounts. Here’s the text for the “two sub-accounts” trick done for “accounting purposes” by Citibank.

“For accounting purposes, all Citibank consumer checking accounts (Regular Checking, Citigold Interest Checking, Interest Checking and Basic Banking Account) consist of two sub-accounts; a transaction sub-account to which all financial transactions are posted; and a holding sub-account into which available balances above a pre-set level are transferred daily. Funds will be transferred to your transaction sub-account to meet your transactional needs. For Regular Checking and Basic Banking Account, both sub-accounts are non-interest bearing. For Citigold Interest Checking and Interest Checking, both sub-accounts pay the same interest rate. Transfers can occur on any business day. Transfers to the holding sub-account will be made whenever available balances in the transaction sub-account exceed a preset level. Transfers from the holding subaccount to the transaction sub-account will be made whenever transaction sub-account balances fall below a predetermined level. Because banking regulations limit the number of transfers between these types of subaccounts, all balances in the holding sub-account will be transferred to the transaction sub-account in the sixth transfer in any calendar month. Both sub-accounts are treated as a single account for purposes of the client’s deposits and withdrawals, access and information, tax reporting, fees, etc.” (Citibank Client Manual p. 19-20/33)

First, note that the account holders have no idea these sub-accounts exist unless they read this fine print. I encourage you to check your checking account’s fine print – all of the major banks I have checked use “two sub-accounts,” and several nearby local banks in my area have it too.

Second, note that the holding sub-accounts may fluctuate daily, and there are no rules whatsoever limiting how much of the currency can be diverted to this holding sub-account.

Obviously, the reason for the “two sub-accounts” accounting trick, more politely termed “Deposit Reclassification” by the banking industry (see page 9-10/31 of this agreement from Camden National Bank), is to have the holding sub-account deemed a nontransaction account and no longer subject to reserve requirements. In Eric deCarbonnel’s article “Deposit Reclassification Used To Eliminate All Reserve Requirements,” he refers to additional sources including this easy-to-follow piece from Romney & Associates where the author outlines the benefits and profits from deposit reclassification – by changing reserve requirements at their whims, banks can loan out even more – which is naïve insanity of course in the event of a bank run.

Speaking of bank runs, let’s take a look at the FED monetary base, reserves, and vault cash. Per the latest H3 report from the FED, we have the below data (in millions of USD). Note the massive swings in nonborrowed reserves and the monetary base which took place roughly a year ago.

In the next chart, I took the reported deposits of FDIC depository institutions – which is an approximation I have made of the U.S. banking system from June 30, 2008 (p. 16/21) and the latest March 31, 2009 (p. 18/27) report – and listed the July 2008 and July 2009 results from the H3 report. Provided my calculation of dividing the Total Reserves by the FDIC-reported Domestic Deposits is reasonable (I haven’t been able to find suitable FED numbers, hence my usage of FDIC data), the “Towne reserve ratio” was just a shocking 0.6% in July 2008. While the current “Towne reserve ratio” is 10.6% now, this is likely due to the monetary base change below. While I will be the first to note these percentages are just rough numbers, isn’t it funny how the math is now close to 10%?

Note that in July 2008, the banking system’s vault cash EXCEEDED both required and total reserves. [Vault cash is the physical banknotes that banks keep on hand to meet withdrawals; the vast majority of dollars exists in the form of electrons, and only a tiny sliver is metal coinage.] Now, in July 2009, the required reserves and vault cash have been relatively unchanged.

Over the same period, the monetary base has almost doubled from $847 billion to $1,681 billion while reserves grew by about the same amount, from a scant $45 billion to $803 billion. Where did this money come from? It is likely just FED “liquidity” or newly created currency. We would need to audit the FED to really be sure, but the timing and amount coincides with the Banker Bailout of October 2008. At any rate, the intention of this money is likely just to paper over the collapse of the banking system last year.

CONCLUSION

In plain english, the U.S. banking system is using a sneaky accounting trick listed the fine print of checking account agreements to escape the gravity pull of reserve requirements. The system likely already crashed last year, but the FED pumped in liquidity last year at the same time as the Banker Bailout to avoid the collapse of this Ponzi scheme.

This brings me to an interesting conclusion – at this point in history, our monetary system is really no more than paper ticket printing and excited electrons. [Although technically speaking, dollars are linen with mercury, arsenic, cyanide, titanium dioxide, formaldehyde, lithium, valium, zinc imbedded as I wrote here "The Federal Reserve - A Good Company to Work For?".]

Although our central bank, the FED, can technically NEVER go bankrupt since it has the power to create as many paper tickets as needed, risks over the long-term include psychological events like hyperinflation where the demand to store money goes to zero, and the purchasing power of the currency approaches zero as well.  However, the true responsibility lies with U.S. Congress, which “delegated” its control over the currency to the FED in 1913.

As F.A. Hayek wrote in The Road to Serfdom, delegated autonomy from the legislative body of a socialist state is usually done to escape blame and responsibility for the inevitable mistakes of central planning.  Understand that the next time you see your Congressman or -woman, unless he happens to be Dr. Ron Paul, they ARE responsible for quite literally stealing purchasing power from your pocket as I related in further detail here “Unlocking the Money Matrix – The Real Interest Rate (PART 12/15)“.

The solution? The money power must be returned to We the People. The FED must be abolished, by populating the U.S. House with representatives who will end the FED. I’ve outlined the steps I recommend in slides 26-47 of this presentation, but this certainly requires a national debate.

One last bit of math. $49 Billion in vault cash divided by 307 million Americans works out to a whopping $160 per person. Maybe Bernanke over at the FED should fire up the printing presses!

Note: Thanks to Eric deCarbonnel whose article “US Banks Operating Without Reserve Requirements” clued me in to the above facts. Interested readers are also recommended to read my last update on the banking system from April “Off a Cliff with No Airbags” as the situation has only worsened, and the conclusion section is still quite relevant. Please ask any questions below and I will do my best to answer them clearly.

Jake Towne is running for U.S. Congress in eastern Pennsylvania’s 15th district in 2010. Prior to returning home, he had been living in Shanghai as an engineer in the semiconductor industry for over 3 years. As part of defending liberty and championing the Constitution, Towne is offering the citizens in his area a novel form of accountable government called “Our Open Office.”

- Lord Rothschild, European central banker

The below slides are meant to explain fractional reserve banking as simply as possible using pictures.  The below demonstration assumes a reserve requirement of 10%, which is the figure typically given by the banking industry and financial experts.  However, in Part 2 I will demonstrate there there is effectively NO set reserve requirement though the banking system obviously carry some level of cash reserves.

Jake Towne is running for U.S. Congress in eastern Pennsylvania’s 15th district in 2010. Prior to returning home, he had been living in Shanghai as an engineer in the semiconductor industry for over 3 years. As part of defending liberty and championing the Constitution, Towne is offering the citizens in his area a novel form of accountable government called “Our Open Office.”