About

Human knowledge drifts over time, and it doesn’t always go forward.  The ancient Greeks not only knew the earth was round, they had roughly estimated the diameter.  Hundreds of years later Christopher Columbus had trouble getting his exploration mission funded because by then everyone “knew” the earth was flat.  Were it not for education, people would look at the horizon, and soon the world would be flat again.

In the age of the internet, with the sum of human knowledge seemingly at our finger tips, one would think that this phenomenon would diminish.  But in fact it continues.  Human knowledge is built on layers.  Once a layer has been accepted as being in general true, the next layer is built on top.  The more layers there are, the less scrutiny the layers underlying them get.  The longer an untruth or misunderstanding persists, the harder it is to correct and the more magnified its effect on current human knowledge, sometimes in very unexpected ways.

In the information age, data is not just at our fingertips, it is also easily manipulated.  Knowledge and data are not the same thing.  Knowledge is derived from data.  Computers can manipulate and present data in moments, arranging banks of raw numbers into neat and orderly tables and graphs from which we humans can draw conclusions and improve our knowledge.  But the more layers there are between the data and the conclusions, the greater the potential for error, and the more difficult it becomes to correct them.  Sometimes errors are just errors, and sometimes they are a deliberate attempt to affect our knowledge in a specific manner.

This blog is about drilling through the errors so we can get to the knowledge.

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10 Responses to About

  1. peterhodges says:

    David

    Figured I would drop you note over here rather than annoying willis et al with our off topic discussion.

    Anyway, I tracked down the links at the FED stating who owns the FED, as well as a citation stating the requirement for member banks to be shareholders

    This is the current list of member banks over a certain size, the list from which i stated earlier shareholder statistics:

    http://www.federalreserve.gov/releases/lbr/current/default.htm

    to see shareholder banks look under the “Charter” column:

    NAT=Nationally chartered member bank
    SMB=State-chartered member bank
    SNM=State-chartered nonmember bank

    and the requirement for member banks to hold shares:

    http://www.federalreserve.gov/pf/pdf/pf_complete.pdf

    The FED’s Purposes and Functions reads:

    “As of March 2004, of the nation’s approximately 7,700 commercial banks approximately 2,900 were members of the Federal Reserve System – approximately 2,000 national banks and 900 state banks. Member banks must subscribe to stock in their regional Federal Reserve Bank in an amount equal to 6 percent of their capital and surplus, half of which must be paid in while the other half is subject to call by the Board of Governors. The holding of this stock….Member banks receive a 6 percent dividend annually on their stock

    I believe if we were in a pub you would owe me a beer 😉

    You remain correct, however, that ownership in this case does not mean control. the overall volume of money is determined superficially by the Chairman, the board of governors, and the FOMC

    As to whether the banks control the politicians, or the politicians control the banks:

    i submit that if it were the latter we would not be borrowing our money at interest from private banks, and that our money system is itself prima facie evidence of the supremacy of money power

    and the truth is that the bulk of money creation takes place outside the FED, and the power lies simply in the power to MAKE MONEY. The FED is just a tool in the system.

    you know this would be a good subject for your blog: the myth of the Federal FED 😉

    • davidmhoffer says:

      Peter,
      Ah, but the beer would be mine. The terminology used must be interpreted in its historical and administrative context. If you dig into the details, you will find that the definitions for specific words that you are using are not what they mean in the context of the FED. Membership means just that, membership. By being a member privately held banks get certain benefits from the FED system like inter-bank transfer and settlement. In order to obtain these benefits, they must not only buy a membership, they must submit to the regulatory requirements and authority of the FED. One of these is the requirement that they loan out no more than 94% of what they have in capital. To enforce this, the private banks are required to “purchase” shares in the amount of 3% of their capital, and that the FED can demand an additional 3% at any time, forcing them to raise it to 6% (and hence prevent them from lending more than 94% of that they have). The shares, however, are not shares in the FED itself, they are shares in a capital pool administered by the FED. Adminstratively, they confer no voting rights, and are more like a forced deposit upon which they are paid interest. Memebership gives them voting rights in terms of electing officers to the regional Fed banks, but these are adminsitrative tools of the Fed, the officers of the Fed banks do not have regulatory control over money supply or interest rates etc, they only have administrative over site, and only 1/3 of the officers of any Fed bank can be from the banking industry. Its sort of like joining a union. Membership allows you to vote on membership issues, and you might have to pay in addition to your dues a % of your income into the union managed retirement fund, but that doesn’t mean you “own” the union. If you think about it for a moment, it means the the Union owns YOU. You have to pay to be a member, and they can force you to do things with your money that you might not do voluntarily. In return, you are allowed to work.

      Issues like interest rates, money supply and so on are decisions made entirely by Bernanke and his cohorts, who are appointed by the President. The private banks are beholden to those decisions and have very little influence over them (unless they are one of those “too big to fail” banks). Frankly, the American banking system is cumbersome, convoluted, and unwieldly. So are most central banks by the way, which is a hot topic at the G8 and G20 with Canada’s system being seen as the best combination of authority, regulation and preservation of free markets.

      In managing a currency, there is a balance between long term and short term issues. When a government needs money, it can borrow or print. Government bonds are an instrument for a government to borrow money from its citizens at a given interest rate. Governments can also borrow money from banks, the IMF, or other governments. This incurrs a long term pain in that it must be paid back, and with interest to boot. Just printing it bears a long term cost as well, but the cost is inflation instead, and carries larger long term risks than does borrowing. That is why when the FED injected so much money into the banks during the last crisis, they coordinated this with the central banks of the rest of the G20 who ALSO injected money into THEIR systems on the theory that if they all did it, the inflation would hit all their currencies equally. Of course a lot of countries screwed the US over by injecting less than they promised, and hence the fall in the US dollar since then.

      The Fed isn’t a tool in the system, it IS the system. Money is in fact a fictiscious construct. Lest you get excited about a return to the “gold standard” that is also a fictional construct. Gold has very little actual value. If all the gold in the world disappeared tomorrow, some jewellery would be gone and a few integrated cirquits would have to be replaced with platinum, silver or nickel alloys. If all the iron in the world disappeared, civilization would collapse. Gold is just as much an artificial way of measuring value as is “money”.

  2. peterhodges says:

    Well I should have specified why I felt that I earned a beer, which is I found your “fictitious” shareholders. I mean geeze, at least grant me some credit.

    And I may agree with almost everything you have stated above, except that pertaining to the U.S. anyway, the government does not print money. It borrows it. All of it.

    And that is the salient point.

    So while the FED may not be by your definition “privately owned” or “run for a profit”, i will still contend that the money system is both privately owned and run for profit. Why else would we have debt money? And as you said, the FED is the system.

    It is ironic that you mention the Bank of Canada. It was a copy of the FED, until it was nationalised: the Ministry of Finance is the only shareholder. Although it does not make much difference, since it is still a debt money system.

    And i was not kidding about a blog post: I am curious to see what you would come up with after you seriously researched the U.S. money system.

    Witness:

    Total outstanding U.S. Government debt: $12.8 trillion.

    In 2009 alone the U.S. paid $383,071,060,815.42 in interest on debt, and paid out ~500,000,000,000 for matured debt. So that is $883 billion, minus the FED rebate of $46 billion: We paid out ~$837 billion in 2009. So while the FED might not actually be profiting, someone is.

    An additional 2.1 trillion in new debt was created in 2009.

    And regarding inflation, our debt money necessitates it. debt money + usury = exponentially increasing money supply.

    • davidmhoffer says:

      Peter,
      Most of the G20 including the US “printed” new money to keep the banks from collapsing. Govts do both (print and borrow).

      What I meant by the FED “being” the system is that control of fiscal policy (interest rates, regulation, amount of money in circulation, etc) is in the hands of admins appointed by elected officials. The implementation of course includes privately held banks which engage in commerece with a “for profit” goal based on interest rates.

      I agree of course that the debt the US is racking up is highly risky. When economists go to great lengths to explain to me how the whole thing works and how government debt is a way to manage the economy, I always look them straight in the eye and ask “can you improve the economy by increasing taxation?” They always say “no” and then I can skewer them because debt is nothing more than taxes delayed and inflated by interest.

      Interesting to note that one of the prime causes of the failure of the Roman Empire was a debt load so large that they had to cut government spending, including the military, and were over run by barbarians as a result. This “interest” think layered on top of a fictitious thing called “money” is not new.

  3. peterhodges says:

    davidmhoffer Says: Govts do both (print and borrow).

    This may be true, but in the U.S., the Government only borrows.

    privately held banks which engage in commerce with a “for profit” goal based on interest rates.

    And don’t forget, while you dispute the status of the FED based on definitions, i believe we at least established that in reality it is independent, and has shareholders who do receive 6% profits on their shares. in addition, because of the FED monopoly, the Government must borrow all money not confiscated through taxation. I believe, on the original dispute (we don’t know who owns the FED), a court of law would decide in my favor. Oh ya, one has.

    You may still in my opinion contend that the FED is controlled by political appointees, and not private banks. I just disagree.

    Hence my characterisation of our system as monopoly capitalism, as opposed to the text book free-market version. I would say monopoly capitalism is no different from Communism. Just a matter of definitions. In reality, there is a monopoly on credit by which a minority profits, and an even smaller minority controls. Even if, in your opinion, those controllers are still political appointees.

    Well after all this, at least you know my reasoning and don’t think I’m a total wacko 😉

    It would be enjoyable to discuss the Roman example over a pint! Oh well…

  4. peterhodges says:

    Whoops,

    You hopefully don’t think i’m a wacko

    and corrcted URL:

    http:caselaw.findlaw.com/data2/circs/8th/042357P.pdf

  5. peterhodges says:

    hey david

    here is a discussion on msnbc on exactly what i am complaining about, he calls it ‘corporate communism’

  6. davidmhoffer says:

    Peter,
    Didn’t watch the whole thing. In brief, I agree 100% that bailing out banks or auto manufacturers are anyone else is just a really bad long term strategy. It rewards failure and prevents new, strong, innovative start ups from emerging. That’s what makes the free market so much stronger than a communist command and control economy. When left alone, the free market eliminates bad businesses and good ones thrive. Politicians unfortunately live election to election, so they make short term decisions and yes, they are influenced improperly by wealthy donors, they might get turfed by the backlash in the next election. By bailing companies out, we’re moving incrementaly toward an economy run by the government.

    But that’s a far stretch from from private interests actually “owning” the monetary system.

  7. Hu McCulloch says:

    Hundreds of years later Christopher Columbus had trouble getting his exploration mission funded because by then everyone “knew” the earth was flat.

    Unfortunately, this urban legend, promulgated by the American humorist and BS artist Washington Irving, and then swallowed hook, line and sinker by the “historians of science” Draper and White, is a prime example of what you so aptly call “Knowledge Drift”. See Jeffrey Burton Russell, Inventing the Flat Earth,
    http://www.abc-clio.com/product.aspx?id=2147495768 , probably in your public library.

    Otherwise, your blog looks very interesting — I’m waiting to see what the reaction to your claim of NASA’s biggest error is on the other climate skeptic blogs.

    • davidmhoffer says:

      Hu,
      Glad you like the site, haven’t had much time to attend to it lately.

      The Columbus myth is exactly as you suggest, no argument from me. But it is an easy example to make the point. A better one I suppose would be to use your comment! I remember being on a trip to the middle east and stopping in a spot where there were Greek, Roman, and English ruins. You could easily see the improvements in engineering of arches to support massive weight going forward in time from Greek to Roman. As you continue forward in time to English ruins, the construction skills degrade to pre-Greek. Maybe I should round up some pictures and use that instead?

      I’ve had some additional fact finding opportunities on the math thing since I wrote that stuff up, and the sad news is…most of what I said is known. They have rationalized explanations for doing it the way they do, and when you dig into them you wind up learning even more about the math that is just wrong but rationalized into being reasonable. I could write something up to explain the details, but their rationalization is so entrenched that the only thing that is going to make them back down is time, and continued failure of their math to produce credible long range climate predictions.

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