Gary North's REALITY CHECK
Issue 386 October 12, 2004
THE LOBSTER TRAP OF CENTRAL BANKING
A lobster trap lures a lobster in. The more he pushes
forward to get at the bait, the less able he is to back out. A
lobster trap is a forward-only device. The lobster thinks he
will get the bait. In fact, the trap gets him. It doesn't kill
him. It immobilizes him. Then the person who set the trap comes
back, hauls the trap out of the water, and extracts the lobster.
Then he re-uses the trap.
Central banking is a gigantic lobster trap. It is set by
the commercial banking industry and the government, which grants
the central bank a monopoly over the control of the monetary
reserves (government debt) that are used by commercial banks to
issue loans.
The trap's bait is a two-part promise: (1) establishing an
economy that does not suffer from economic depressions; (2) the
establishing price stability.
The Federal Reserve Act was passed in 1913 in the aftermath
of the recession of 1907. Its success can be measured by (1) the
recession of 1921, the Great Depression of 1929-39, the
recessions of 1957, 1970, 1975, 1980, 1981, 1990, and 2001; and
(2), the decline in the value of the dollar -- approximately 95%
since 1913. (Inflation Calculator: http://www.bls.gov)
Like any good lobster trap, the lobster is caught, removed,
and consumed. Then the lobsterman replaces the bait. To get a
nice, fresh lobster, you have to replace the bait.
From time to time the central bank suffers a setback: a
recession or a bout of price inflation or both. This is part of
the extraction process. The lobsters that got caught in the trap
are wiped out, or at least suffer losses. The little ones are
tossed back in to fatten up and be lured back in a second time.
Lobsters are stupid. They don't remember. The larger ones are
consumed.
The same promise works over and over. "This time you can
trust us. This time, there won't be another recession. This
time, you can count on us to keep prices stable." And another
batch of trusting lobsters is lured back in.
THE PROBLEM WITH THE BAIT
There are no free lunches in life, not even for lobsters.
Lobstermen are not in the business of feeding lobsters. They are
middlemen for those who eat lobsters. Lobsters, however, are
short-sighted. They don't understand cause and effect.
Neither do voters.
Commercial banking is based on a promise: "Deposit your
money, and we will pay you interest, and you can get your money
back at any time."
Now, if the deposit were gold, you would have doubts. You
would think: "If I put my gold coin into a jar and bury it, there
will be only one coin there when I dig it up. So, if I hand it
over to a banker, he will put it in a vault. It won't multiply
in a vault any more than it will multiply in my jar in the
ground. If I want to get it back on demand, it had better be
there. But if it's there, the bank can't do anything with it.
There is no way a bank can pay me interest, any more than my jar
can pay me interest." This is logical.
But men, like lobsters, rarely think straight. They are
unable to apply the logic of the gold coin to paper money. They
surely can't apply this logic to bank accounts. They don't say
to themselves, "I've seen this one before. He can't pay me
interest and also let me get my money back at any time."
It's the wonderworld of alchemy: the logic of gold no longer
applies. Pieces of paper or digits somehow make the law of
matter go away. The same item can somehow be in two places at
the same time. "It's a miracle!"
The government allows commercial banks to lure in depositors
by making a promise that cannot always be fulfilled: "interest,
plus withdrawal at any time." Banks lend out money that they
take in from depositors, and be paid interest by borrowers, part
of which they share with depositors. The banking system rests on
a premise: not many people will ask for their money back at one
time. When a few people do -- the ATM phenomenon -- money that
is held in reserve can be used to pay them off. A fraction of
the money is held as a reserve, "just in case." This is
fractional reserve banking.
Enter the central bank. It buys a government T-bill. It
writes a check to buy it. The money it just created to buy the
T-bill is spent into circulation by the government. If a non-
authorized private company did this, it would be called
counterfeiting. But because a central bank does it, it is called
enlightened monetary policy. Its money creation is legal because
the government has authorized the central bank to create money
out of nothing in order to buy a T-bill created out of nothing.
It's a wash!
Well, maybe not a wash. It's more like an acid bath. The
new money that the central bank just created is added to the
total money supply. It gets deposited in a commercial bank.
Wonder of wonders: the banker now has more money to lend at
interest.
If there is new money in the hands of consumers, then they
will be able to go into the marketplace and bid up the price of
goods and services. The free market is a gigantic auction in
which buyers (sellers of money) bid against each other, and
sellers (buyers of money) bid against each other. Out of their
competing bids -- buyers vs. buyers, sellers vs. sellers -- comes
an array of prices. But some buyers (sellers of money) now have
more units of money to sell, thanks to the central bank's
purchase of government debt.
Remember lobster bait #2? Price stability. How can the
auction keep prices stable if some sellers of money have more
money to spend as a result of the central bank's purchase of a T-
bill? The answer: sellers of goods must produce more things to
sell for money at a profit. But if sellers can really do that,
then they would have done it without the additional fiat money.
But then prices would have fallen: some of the bidders to buy
money would be out there lowering the prices of whatever they are
trying to sell.
The bait of price stability has to be paid for. There are
no free lunches, not even for lobsters. The bait is paid for by
people with money to spend who would otherwise have been offered
a deal by sellers. "Tell ya what I'm gonna do. For you, this
week and this week only, there's a special discount available."
Prices are stable because there aren't as many discounts.
Lobster bait is paid for by the lobsters.
It's a terrific deal for lobstermen and gourmets. Butter
producers are also in on the deal. (In the central banking game,
the butter producers are called economists.)
PAYING FOR BAIT #1
Bait #1 is the promise of recession-free living. The
central bank promises that it has the ability to avoid recessions
and shorten them when they occasionally sneak through. How? By
buying even more government debt.
"Here's how it works!" The recession is said to be caused
by insufficient demand by sellers of money, who for some reason
hoard their money. So, the central bank buys more debt, and
people have more money to spend. This doesn't raise prices
because sellers are so scared of going out of business that they
offer discounts just to unload their inventory. The new money
pushes prices up, but prices were falling. Now they will merely
stay stable.
There is a word for this system: Japan. The central bank
inflates, but prices are slowly falling.
The problem with bait #1 is that, to the degree that it is
successful -- retail prices stop falling, and companies don't go
bankrupt -- sellers of money (consumers) expect even more money
next month, so that they can pay off new consumer debt, and
sellers of goods (manufacturers) expect consumers to have more
money next month, to buy this month's output.
Where are consumers going to get more money next month?
>From the central bank, which will buy more government debt.
And the month after that, too.
Pretty soon, the system is dependent on new issues of
government debt, or at least new purchases of existing government
debt certificates by the central bank. It's a one-way process:
more money. The only way to go backward is to strip off your
shell. Shell-stripping is called a recession.
Consumer prices in Japan should be falling, due to increased
productivity. They are falling, but very slowly. Everyone is
counting on more fiat money next month.
The Bank of Japan buys U.S. government debt in addition to
its own nation's debt. It creates new fiat money and buys
dollars in the open market, which it then uses to buy T-bills.
That keeps up demand for dollars.
The U.S. government spends these dollars. (Trust me; it
does.) These dollars can then be used by American importers to
buy yen to buy goods from Japan, which increases demand for
exported goods in Japan, which keeps prices higher. Of course,
we Americans get the TV's and Walkmans and such. The Japanese
get a central bank filled with T-bills paying under 2%.
The Japanese are a nation of lobsters. The Bank of Japan is
an organization of lobstermen. You and I are consumers of
lobsters. With respect to the rest of the world's goods, the
United States is a franchise called "Green Lobster."
The trouble is, Americans think this franchise is eternal.
But at some point, the lobstermen in Asia will find that the
local waters have been fished out, so to speak. No more large,
succulent lobsters will be found in the traps. Fat lobsters will
have to lure them in with bait other than Americans' promises to
pay.
At that point, the Green Lobster franchise will be in big
trouble.
LOBSTERS ARE STUPID
People really do want to believe in something for nothing.
This makes them do silly things.
In the middle ages, alchemists sought ways to convert lead
into gold. (The most famous alchemist was Sir Isaac Newton, who
kept secret this side of his scientific career.)
We regard ourselves as sophisticated. We don't believe in
alchemy. Not us! Yet we hand our money over to banks on the
assumption that we can get our money back at any time, and we
will be paid interest for the privilege. ATM really means
"Alchemy: Trustworthy Magic!"
We see the results of central banking around the world. One
result is public's trust in the wisdom supposedly possessed by
salaried employees of a government-created monopoly. Investors
smile when Alan Greenspan talks gibberish to Congressmen and
Senators, who cannot get straight answers from him. "That
Greenspan. He's really something." Yes, he is. He is the chief
lobsterman, and we are the lobsters.
Another result is the creation of a series lobster traps
that lure in fat, succulent lobsters. The U.S. stock market was
one such trap, 1982-2000. The residential real estate market has
been its replacement.
So it was in Japan, 1980-1989. Since then, the Japanese
stock market has been "fished out." Not many juicy specimens
have pushed their way into the traps. Fifteen years after the
Nikkei hit 39,000+ it is in the 12,000 range -- up from 8,000.
Lobsters may be stupid, but they have learned not to trust the
bait. What's a central banker to do?
Today, China is central bank paradise. The waters are
teeming. The central bank is pumping in new money by buying T-
bills like a drunken sailor. Why? So as to run a $100 billion
trade surplus with the United States. Rital Chinese lobsters
have begun to move into the urban waters by the tens of millions.
They must be fed long enough to fatten them up. Their output is
being exchanged for the digital equivalent of green pieces of
paper with Presidents' pictures on them. It's a sweet deal at
the Green Lobster franchise.
China is not experiencing mass inflation. Why not? Because
Communism was a gigantic lobster trap that could barely feed
skinny lobsters. Mao was chubby; nobody else was. By converting
those state-managed traps to a modified trap system based on
private property, the lobstermen are doing a lot better. The
productivity unleashed by the shift to free enterprise, even when
central-bank dominated, is so great that China has become a net
creator of wealth. Central banking operated under Mao, too. The
difference is, the lobsters today are a lot fatter.
The rulers of China, like rulers everywhere, have persuaded
the masses that central banking and government debt are a
marriage made in heaven, or seventh heaven, depending on cultural
traditions. The bait has been inserted into the traps. The only
way to feed the growing supply of urban lobsters is to keep
replacing the bait. That means an ever-growing supply of fiat
money. The day the bait slows or even reverses is the day that
the system collapses: no more lobsters in the traps.
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LOBSTERS MUST RETAIN FAITH IN THE BAIT
In 1946, Congress passed and President Truman signed the
Full Employment Act of 1946. It is still the law of the land.
Congress by this act promised to pursue policies of full
employment. The law established the President's Council of
Economic Advisors and Congress's Joint Economic Committee. These
two bureaucracies, filled with economists, are supposed to
provide advice on how the government can keep the economy
operating at full employment.
This law was the aftermath of the Great Depression, in which
governments around the world could not maintain full employment
without setting up slave labor camps. It was also the aftermath
of World War II, whereby governments solved the unemployment
problem by expanding the military draft in a war that killed
between 40 million and 60 million people: lobster slaughter on a
uniquely scientific scale.
In 1996, economist Murray Weidenbaum wrote a cheerleading
essay, "The Employment Act of 1946: still working after 50
years." He described the Act.
When enacted, the Employment Act declared that "it is
the continuing policy and responsibility of the Federal
Government to use all practical means consistent
with... other essential considerations of national
policy... to coordinate and utilize all its plans,
functions, and resources... to promote maximum
employment, production, and purchasing power."
The idea here was the power to tax is the power to create.
By expanding the government's ability to tax and spend, the
government would be able to make life good for lobsters.
More was needed than the ability of bureaucrats to extract
money from taxpayers. There also had to be a way to get more
money into the hands of taxpayers, so that the state could
extract even more money from them -- for their sake, of course.
Americans need employment, just as China's masses need
employment. It is the task of the economists of the CEA and JEC
to provide scientifically valid advice to politicians as to how
the government can skim off the largest percentage of this output
without hindering the lobster-fattening process. The experts are
agreed: when it comes to lobster-fattening, the Federal Reserve
System plays an important role.
The debates of the 1960s and 1970s on the relative
effectiveness of monetary and fiscal policy changed the
basic focus of U.S. economic policy. The Federal
Reserve Bank now is looked to as the primary mechanism
for achieving short-term economic stability, while tax
and budget policies are viewed in terms of the
longer-run impacts on investment, economic growth, and
income distribution.
Of course, this view is not shared by Milton Friedman and
the monetarists, who want to substitute an automatic money
creation system for the Federal Reserve System, which has too
much discretion, they think. Monetarists want lower taxes. So
do supply-siders, who are happy the have the FED create lots of
money during recessions. So do Austrian School economists, who
don't want the Federal Reserve System or an automatic money-
creation system. But the politicians want more money to skim
off, so they pay very little attention to monetarists, supply-
siders, and Austrians. Weidenbaum surely doesn't.
In an informal, but universal, reinterpretation, the
reference in the Employment Act to "purchasing power"
has been cited as the basis for government concerning
itself with controlling inflation. Subsequently, the
Humphrey-Hawkins Act of 1978 formally added the goal of
eliminating inflation. The original primary emphasis on
"maximum employment"--which was a legislative
compromise to break the deadlock over the more
controversial term "full employment"--generally has
taken a back seat in Federal economic priorities.
Perhaps this is a compliment to the flexible language
of the legislation. More basically, the new emphasis
may reflect changing national priorities resulting from
the country's success in avoiding the massive
unemployment of the 1930s and earlier periods.
Of course, the purchasing power of the dollar has continued
to fall, but that's not a worry for policy-makers who work for
the government. What matters most for them is that the voters
maintain faith in the system that extracts 25% of their output at
the national level, plus another 10% to 15% at the state and
local level. And so they have.
Viewed in the most fundamental light, however, the
legislation has been successful. The two institutions
the 1946 act established remain in operation and the
act's then-controversial statement of policy has become
accepted as part of the Federal government's
bureaucratic fabric. A substantial government
responsibility for the over-all performance of the
American economy now is widely assumed. In fact,
politicians of the opposition party readily hold the
administration in office accountable for whatever
economic short comings occur.
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CONCLUSION
We have seen in Japan that investors who were lured into the
stock market bubble and the real estate bubble have lost large
portions of their wealth. The government keeps spending on
boondoggles, and the central bank still buys U.S. T-bills -- or
did until last March. The politics of mercantilism --
government-run lobster fishing -- are still dominant in Japan.
The same politics are alive and well in China, which is in
the boom phase of the fattening-up process.
The United States is somewhere in between Japan and China,
though closer to Japan. The FED is still pumping in fiat money,
but has not had to pump at double-digit rates because Asian
central banks have bought T-bills and have thereby kept America's
interest rates low. For as long as the lobstermen of Japan and
China are fishing their own waters by persuading the lobsters to
keep walking into the traps, America's Green Lobster franchise
will stay in business.
But at some point, Asian lobstermen will figure out that the
Green Lobster franchise is all debt and no repayment. Americans
are putting the bill on their credit cards. When the bills come
due, what then?
The bills will come due. We just don't know when. Sooner
rather than later, I suspect.
*************
APPENDIX 103
Abraham Case Study #437 offers insights on how to motivate
buyers to spend more money.
First, there was the seller's personal motivation.
Sometimes it takes a crisis to motivate people to change.
Before I started my business I had an income barely
$17,500 a year because I was employed as a garbage man
and a janitor. I was going to college at night and
working full-time in those 2 jobs to make ends meet for
my family of 4. Upon graduation from college I left
those 2 jobs and went to work at a church for double
the money. My wife got seriously ill with heart
problems and we developed a lot of debt paying for her
medical care over the next few years. I started my
company in 1999 as a way to make extra money to pay off
some of those bills. I had no idea I would be earning a
full-time living from my internet business when I left
my job in early 2000. It was at that time I decided to
make it on my own in business.
Here we see a highly motivated man. Garbage man and
janitor: here are occupations close to the bottom of the social
pyramid. He got an education and moved up. Then his wife got
sick, and he incurred debt. He wanted to pay off the debt.
We are dealing with an above-average person. Someone this
motivated is likely to be successful if he can find a way to sell
consumers what they want to buy.
He started out in a small business with no capital. This
is wise. You will pay lower tuition in the learning process. He
started selling low-cost items on eBay -- a great way to get
started in sales.
I sold single cartridges to customers at a fairly
competitive price. I shopped other ink sellers prices
on eBay and got as close to their price as possible
while still allowing myself a profit on the sale. My
average sale was $4.95 for a product that cost me $2.25
to buy. I added $3.95 shipping and handling to add a
little more profit to the sale. To make more sales I
had to list more auctions and hope people would bid on
them.
My profit was around $350.00 a month which was o.k.
considering the fact that I was only trying to earn a
little extra money each month to pay off some bills.
This is the way to get started. You invest time. You
compare your service with the competition's. You get paid to
learn the ropes.
It was about my second year in business when I began
using some of Jay Abraham's Methods of Adding Volume
and Frequency Options & Upselling Customers.
Sell more and sell more expensive. These are simple
concepts, but very few businessmen recognize the and master them.
Anyhow some of the methods I started using were: adding
volume and frequency to sales, along with added
incentives and follow-up strategies. Here is what I
did. I began offering free shipping on 6 or more items
ordered, along with a coupon for another free cartridge
when the customer purchased 6 or more on the next
order. I offered a free cartridge for every new
customer they referred to my company, along with an
additional free cartridge for the New customer when
they bought 6 or more cartridges on their first
purchase.
Offer a deal. Offer freebies for additional sales. People
want deals, especially on items that they know they will buy
anyway. Of course, he had referral tracking problems. But these
can be overcome.
After the sale was made I didn't follow up as well as I
should have and only about 25% of my customers returned
for more cartridges. To help with the return orders I
began printing a coupon for a FREE cartridge on every
invoice I sent out and included a neon sticker in the
package with our toll free number and websites on it.
The sticker had a simple statement that said, "Put on
bottom of Keyboard". At least 30% of my return
customers have told me that they remembered me because
they put that sticker on the bottom of their keyboard
and when it was time to reorder they knew right where
to go. It was surprising to see how many customers used
those coupons for a FREE cartridge when they ordered
six or more on the next order.
If you want someone to do something, tell him exactly what
to do. This is so simple, and so often ignored. The man told
each customer to put the sticker on the bottom of the keyboard.
This became money in his bank.
I also added additional statements to my adds I ran on
e-bay. I added testimonials from happy customers along
with a 100% money back guarantee and an 18 month
product warranty. These methods increased my sales to
over $5000.00 a month and gave me a net profit of
around $2400.00 a month.
Testimonials are important. They break down buyer
resistance. They overcome the readers' response: "Say's you!"
My second year in business I did $245,000.00 in sales
because I followed several of Jay's methods. This gave
me an annual income of around $75,000. Not bad for a
former garbage man!
Not bad, indeed.
-------------
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