... the word "tax" is not always bad. ...

... the word "tax" is not always bad.

I suggest you read this opionion piece in the Fort Collins Coloradoan of March 9, 2011
.

Moderates need place at table to resolve impasse

.

.

They are the words of John Knezovich who calls himself a moderate Republican.
I'm not sure if John would agree, but I would call this well-written essay a plea for sanity and responsibility. Nearing the end of his plea Knezovich says simply this:
.

Most urgently, Republicans need to grasp that the word "tax" is not always bad. There are many governmental programs and services which benefit all of society. Where would we be without public safety, roads, schools, libraries, hospitals and social services?

 .
Yes, taxes are integral to civilization, and I dare say: "civility."
Thanks, John. I want to spread your word; then we can fight well over the details!

4. A Crazy Cycle

A Crazy Cycle
Bob Komives
::

In 1984 I had a chance to return with my family to Central America to teach land-use planning and work in watershed management. There, the importance hit me of bridging the gap between my land-use-planning work and my hobby of cogitating economics.

It made no sense to me.
The International Monetary Fund said
Central American governments should
reduce investment in
social
health
and environmental programs
(that were slowly raising quality of life for their citizens)
in order to borrow money
to pay for projects
that would produce exports,
in order to bring in outside money
to spawn development
to trickle down some resources,
in order to bring back
social
health
and environmental programs
to slowly raise the quality of life for their citizens.

A Crazy Cycle

:: Bob Komives, Fort Collins © 2006 :: Plum Local IV :: 4. A Crazy Cycle ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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22. Communal Commitment, Private Flourish

Communal Commitment, Private Flourish
Bob Komives
::

Government organizes group knowledge in ways that individuals cannot or wish not.

Government can create a system of defense that is more effective and occupies fewer people than if everyone were to try to defend himself. Without this system the group might be vulnerable to attack. Productivity could suffer because too much time is spent on defense and fear.

Government can guarantee food and shelter to someone who wishes to experiment with a new system for food production--a system that could benefit the whole group. Government induces a temporary flow of wealth away from the rest of the group to the experimenter. If the experiment succeeds, that wealth that had flowed away from most of the individuals in the group will return to them with dividends.

If in our family
we lack communal decision and commitment,
private life does not flourish.
If in our government,
we lack communal decision and commitment
private enterprise does not flourish.

||

:: Bob Komives, Fort Collins © 2006 :: Plum Local IV :: 22. Communal Commitment, Private Flourish ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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41. A Brief Note on Community Artifacts

A Brief Note on Community Artifacts
Bob Komives
::

We build artifacts: transportation and communications systems, schools, libraries, institutions and machinery. We call them public works, and support them by taxing ourselves to build them. As we move through an information age artifacts change. The library building will be less important than the means of access to its information. Safe and convenient routes to recreation facilities may become more important than routes to office or factory. As entrepreneurs have greater geographic flexibility in choosing locations for their operations, the civic, cultural, and governmental institutions that provide a healthy and stimulating environment for worker and family increase in importance. No matter the changes, we will continue to spend much time and energy to supply ourselves with public works --artifacts that sustain our community.

:: Bob Komives, Fort Collins © 2006 :: Plum Local IV :: 41. A Brief Note on Community Artifacts ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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46. Money and Other Biospheric Taxes

Money and Other Biospheric Taxes
Bob Komives
::

Once in the marketplace, money simplifies the exchange of goods and services. This is the obvious effect that we all see. Less obvious is the tax-effect. Money is a mobile tax. Once government becomes a minter of money it engages in monetary taxation --inducing people with newly minted money to play roles they would not otherwise have played in the provision of goods and services. Light, portable, magical money shifts wealth flexibly from person to person and place to place --reorganizing society as it flows. True taxation occurs whenever a minting government spends its money.

Any country can invest in good projects using its own money. Within the country venders must accept national currency in exchange for their good or service. They will tend to do so voluntarily because good projects create wealth which new money lets them share. Thus, as good investment follows good investment, money becomes the common way to exchange wealth in the marketplace.

Money is a magical invention, but not a freak. It is but one invention by humankind in a chain of magical biospheric inventions that allow a whole to organize itself to be more than the sum of its parts. Whether several micro-organisms exchange energy, a family allocates chores, a culture defines roles and traditions, or a government mints money, the net effect is for the group to tax itself --to allocate resources in ways that individuals cannot or will not.

:: Bob Komives, Fort Collins © 2006 :: Plum Local IV :: 46. Money and Other Biospheric Taxes ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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47. Three Siblings: Loan, Stock and Money

Three Siblings: Loan, Stock and Money
Bob Komives
::

Every time I use my credit card to buy something I issue a piece of real or symbolic paper --paper which embodies a loan secured only by my promise to pay. A bank gladly accepts my new paper. Its accountant calls my paper promise, an asset. With that new asset my lender bank can invest more than it could lend yesterday. Every time a business buys something using its line of credit it issues a piece of real or symbolic paper --paper that embodies a loan secured only by the business's promise to pay. The lender bank gladly accepts the new paper as a new asset. Today's new asset makes the bank worth more to buyer or investor than it was worth yesterday. The paper loan --floated on nothing but a promise-- is an unsecured loan. This unsecured loan is a sibling of money.

Money has another sibling --a fraternal twin adopted by corporations. Common stock floated by corporations is the fraternal twin of money floated by national governments. Both are worthless paper with an initial value in the marketplace based only on speculation that proceeds from sale of the paper will be invested wisely.

Many corporate leaders and investors, and perhaps you, believe a national government should run like a business --claiming that a government is unbusinesslike if it spends more money than it collects. This dogma makes it difficult to see the family resemblance between stock, loans and money. Please prepare to suspend your belief for several paragraphs. If you hold this dogma the most I can ask is that you consider what you are about to read to be science fiction. Try to enjoy reading of a different world. Later, over a cup of your favorite drink, please ponder the possibility that this different world is our real world.

When good-old General Motors and I had good credit ratings we were allowed (often encouraged) to not balance our budgets --to paper the world with more credit than we can pay for immediately. Lender and investor wanted to hold our paper because they believed they would be well repaid for holding it.

Good-old General Motors issued paper called stock. Each new issue reorganized the investing public so that some of us gullible people played our assigned role and gave General Motors our money in exchange for the stock. If Jane had not been so induced she might have put a California hot tub on her back porch. Part of her wealth would have flowed to a small hot-tub company in California. Instead, it flowed to a giant in Michigan. Mary got laid off in California and moved to Michigan where her cousin, Sid, had just been hired for a new General Motors' project.

When good-old General Motors invested Jane's money poorly, it experienced inflation: Sid got laid off; Mary failed to find a job; Cadillac prices went up, or profits went down; the value of General Motors' common stock went down.

Jane and other stockholders took a risk for potential reward. Her risk and potential reward parallel those of a holder of national currency. If government invests well money holders will be well repaid.

Suppose good-old General Motors had required that anyone who wants to buy one share of its stock must pay for it with one share of Ford Motor Company stock. This may seem strange because General Motors normally asks for payment in money. However, if we suppose a time when one share of GM stock was equal to one share of Ford stock the stock-for-stock policy would be reasonable. It is as reasonable as holders of USA dollars exchanging their money for Canadian dollars of equal value. If General Motors had been trying to take over Ford it would have been quite reasonable to give Ford Stockholders new shares in General Motors in exchange for old shares in Ford. The newly issued General Motors stock would have been balanced by new corporate wealth --the assets of Ford. This is an understandable transaction with real balance.

Now, suppose good-old General Motors had been asked by its investors to achieve balance in the way advocates of balanced budgets say national governments should achieve balance. That is, General Motors had to receive one of its own shares before issuing a new one? Here is balance; nothing does balance nothing. Do you not agree that it is ridiculous balance? It would have been ridiculous to require that General Motors take in one share of its common stock for every new share that it issued. Such a requirement would invalidate accepted practice in corporate finance. It is equally ridiculous to ask the national government to take in one dollar for every one it issues.

A corporate stock issue should be balanced by an increase in corporate wealth coming from responsible investment of the proceeds from the stock issue. A national money issue should balance itself in the same way --through good investment. The public and private investment enabled by the expenditure of new money must create wealth to match the increase in money supply.

To review:

Sibling one, Unsecured Loan
We borrowers must invest the wealth of our lenders in productive ways that by choice or impossibility those lenders will not invest directly. We trade unsecured, paper promissory notes for a loan of investment resources. If we do not invest those resources well, we will fail to pay off loans, our credit rating will fall, our loans will lose value (inflation), and our lenders may rise in revolt to take over our remaining assets.

Sibling two, Common Stock
Corporate directors must invest the wealth of their stockholders in productive ways that would be difficult or impossible for individual stockholders to invest. The corporation trades paper stock for investment resources. If it does not invest those resources well its stock will lose value (inflation), and its stockholders may rise in revolt to install new directors for the corporation.

Sibling three, Money
Government must invest the wealth of its citizens in productive ways that by choice or impossibility will not to be private investment. National government trades paper money for investment resources. If it does not invest those resources well its money will lose value (inflation) and its money holders may rise in revolt to take control of the nation and its government.

:: Bob Komives, Fort Collins © 2006 :: Plum Local IV :: 47. Three Siblings: Loan, Stock And Money ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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48. Efficacy Limits

Efficacy Limits
Bob Komives
::

There are limits to sensible, productive paper investment. They are efficacy limits. If some investment works but more investment does not work, then more is too much. At some point resources and society cannot respond efficiently to the competing demands. At that point some investments fail. They are good ideas that prove ineffective because they are poorly timed. Efficacy limits are not dollar limits. Money is sibling to unsecured loans and common stock. Like good borrowers and good corporate stock issuers, our national government will produce better budgets when it seeks to make good investments that are well timed. National government need not concern itself with the amount of money that it has on hand nor the amount expected to come in. It should rather consider what effect investment and non-investment will have on the wealth of the country and the international community of which it is a dependent.

The insidious implication of the balanced budget fantasy is that a national government would seem to never have to apologize for its expenditures if they do not exceed the amount of currency returning to its treasury:

"We ruined the country
and much of the rest of the biosphere,
but we never ran an unbalanced budget."

from: A War Rages

:: Bob Komives, Fort Collins © 2006 :: Plum Local IV :: 48. Efficacy Limits ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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49. Banks Add Money and Investment.

Banks Add Money and Investment.
Bob Komives
::

Would you rather have a thousand dollars worth of stock or a thousand stocks worth of dollars? You might say, "That depends." Would you rather have a thousand potatoes worth of dollars, a thousand potatoes worth of stock, or a thousand stocks worth of other people's promissory notes? I suppose, "It still depends." With some creative logistics you can use any of these assets at the stock exchange to buy stock, at the bank to secure a loan, in your will to endow a university, or, in a pinch, most anywhere to trade for most anything. Why? Because there are secondary markets for potatoes, stock, loans and money. After the first transaction that puts them into the marketplace they can be sold again and again. The secondary markets for potatoes, stock, and loans are giant-but-tiny compared to the fluid markets for money. As the principal means of exchange, money is coveted by one side in most transactions. In modern economies we need a lot of money --so much that even free-spending governments can have trouble keeping up with the demand. They need assistance. While good-old General Motors would never allow anyone else to issue its stock (traders were stuck with the number of stock General Motors chose to issue), the demand for money is so great that most national governments let banks assist them in minting. The economy needs new money as enterprise brings forth new goods and services that the public wants. By choice or by default, governments in countries that emphasize the private marketplace let the banking system issue much of their money. Within the limits imposed on them by government, banks issue new money whenever they borrow from their depositors to issue new loans. If the banking system did not print more money there is no way that most bankers could cover their growing obligations to depositors --to return the deposits, with interest, on demand. Nor could borrowers pay their obligations to the banks.

Bank-printed money is easy to see if we consider the banking system as one bank. One day a man who is known to be reliable and productive takes 100 dollars out of his pocket and deposits them in the bank. A day later he borrows 80 dollars from the bank. The morning of day three he withdraws his initial deposit plus one day of earned interest. Now he has 180-plus real dollars in his pocket and an obligation to pay back his loan. He goes out and spends those dollars at stores that quickly send someone to the bank to deposit their earnings. By close of the business day the bank has assets of more than 180 dollars in deposits and more than $80 in good loans. As the cycle goes on, the amount of money in circulation and deposited in the bank continues to rise. Someone printed money, and, oh yes, during these three days government was on a holiday.

Having once put new money into circulation by lending out money that they have guaranteed to hold for depositors, a bank cannot withdraw that money from the marketplace even when investments turn sour. Borrowers have spent the money. It disappeared into the marketplace --eventually returning to the bank, but with no tag to identify it with the initial loan. Where projects fail borrowers never get enough money back from the marketplace to return what they owe to the bank. New money spent on these bad projects stays out in the marketplace searching for goods and services. Since the projects did not produce their promised economic growth, new money competes with old money for old goods and services --forcing up prices. The value of all money declines. That is inflation. Whether bank or government issues money to finance bad projects the effect is the same: inflation. Whether bank or government issues money to finance good projects the effect is the same: economic growth.

Despite the inflation risk, a banking system can serve its country well. A diverse investment structure that includes banks of various sizes in different locations can develop diverse investment strategies. Local banks can help a nation develop the complex organization at all levels that typifies a robust ecosystem. Because government spending should reflect priorities set by the nation, national government spending is the most direct and understandable way to infuse the private investment market with the money it needs. Centralized investment, however, even if intelligently made, even if made by a giant private bank, tends to over simplify the needs and opportunities of a complex society. A complex system of local and regional banks is a complementary money pump to national investment. It fills investment niches that simpler national strategies cannot find.

:: Bob Komives, Fort Collins © 2006 :: Plum Local IV :: 49 Banks Add Money and Investment ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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51. Against Foreign Loans

Plum Local IV ::: Part IV
National Finance: Debt and Taxes

== chapters 51 - 78 ==

=== look to right column for direct links to chapters ===

51. Against Foreign Loans
Bob Komives
::

Poor countries continue to go into debt to other countries and international banks. They must repay their debt using one of the world's hard currencies --their own, considered too soft. Too often, some lucky citizens in the debtor nations manage to hoard hard currency that comes in through loans, while their governments hoard only the debt. Such problems hobble government and exacerbate the dichotomy between rich and poor in debtor nations, but damage is not restricted to debtors. The world suffers waste. Immense resources, including human effort and intellectual talent, pour into the system that supports international debt. Assume for a moment I can convince you that the system is invalid. Imagine the benefits we would reap if we divert this waste of resources into productive endeavor --endeavor that improves investment within nations and the trading of resources among nations.

As 1987's September turned to October. The members of the International Monetary Fund and World Bank met in Washington D.C. confronted by continuing crises in world finances. They started their meetings with little hope that they would devise a solution to the international debt problem. Their pessimism proved justified. By Christmas, banks in U.S. America had begun to write off large parts of their international loan portfolios as bad debt. If international debt gets less popular attention today than in 1987, perhaps the novelty is gone. International debt is an old problem that still stymies financial leaders.

Certainly some international debt comes from ill-conceived loans on bad projects, but other debt piles up from projects that were good-but-slow-to-prove-it. Money leant to enhance ecological, educational and social systems, for example, may return manifold profit in increased wealth, but the profit may come too slowly to cover the interest on the loan. Other projects may return profits quickly to society in general but too slowly to the marketplace. The market, not reflecting true benefit and detriment, declares the project a failure. Internal, national investment can accept some inflation as tradeoff for long-term and non-market benefits from good-but-slow projects. Instead of paying off the debt directly, the nation lets its money lose a little value --achieving the same end. An international loan, however, requires prompt payment to avoid geometrically escalating debt. Any country that embarks on good-but-slow projects by borrowing foreign money invites default --unnecessary default.

Much in life is unnecessary but quite acceptable, even enjoyable. International debt is unnecessary, but also harmful. I reach the same conclusion if the lender is a private bank or a multinational institution such as the World Bank or the Interamerican Development Bank. I reach the same conclusion even for projects that promise to be good-and-fast. I am against foreign loans.

:: Bob Komives, Fort Collins © 2006 :: Plum Local IV :: 51. Against Foreign Loans ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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52. The Unnecessary Burden of Foreign Debt

The Unnecessary Burden of Foreign Debt
Bob Komives
::

In Guatemala
they have a way to carry heavy loads
—primitive, simple, and efficient—
one or two loops of rope engage the load,
carry it to the forehead
where loop closes with strip of leather or cloth.

Body tilts,
bends forward to balance load:
perhaps a bulging sack
holding a quintal of maiz,
or small table
topped by seeming household of furniture,
or wooden frame
with pottery stacked five feet high by four feet wide.

From the bus windows
I watch men carry such loads
down,
up
steep mountain roads,
distant from past town and last house.

I see small loads
watching boys learn the art
under burdens cut to their size.
I enjoy their smiles spurts of speed.
Paces and decades ahead
I see burdens too-large,
postures too-bent,
leathery foreheads too-creased
under burdens saddled to a man.

In Guatemala,
they have a way to weed corn
—primitive, simple, and efficient—
with machete and stick.
The stick is narrowest where it fits the hand.
A subordinate branch makes a hook at the other end.
Though well-chosen and well-fashioned,
the stick may be left by the field to be recovered tomorrow
or replaced,
fashioned anew from branch of a living fence.
The stick gathers and supports grass and weeds
as the machete cuts them at the ground.
Machete strokes begin high from vertical.
Agile wrist and low body
take them quickly down to horizontal.
This smooth, rhythmic movement
fits and fills both the confines of tall corn
and the muscles of a short body.

I see an old man every day
on the road to El Rosario.
His machete and a boy are constant companions.
I know not where they live.
Seldom do I know in which of the fields they work.
I see them on the road between.

They come early
racing a day's work
against sun's rise to oppressive heat.
Yet, they come later than most.
They may start with others,
but in kilometers of walking
they fall behind.
The old man does not move fast.
The boy is in no hurry—
his walk seems youthful,
but two paces behind the old man.

I cannot know
if it is the years of work with the machete
or the carrying of heavy loads
that has bent that back and humped those shoulders.
But, as the man walks by me now,
his eyes focus on the ground
two paces in front of his feet.
Back is tilted;
head is bent
—as if to carry a load of corn.
I choose to believe he can no longer carry such loads.
The machete in one hand hangs as burden enough.

One, hot mid-day as suffered a long walk
I saw them at work in a field.
Old man and boy
propping unwanted growth with theirs sticks,
severing it from its roots with their machetes.
I wanted to believe that the boy does more than his share,

On their walk home
they look no different than when they came.
Neither requires conversation.

The first time I passed,
the sound of a gringo-ish “a dios!”
caused the old man to startle;
he turned his head to reply.
Now, salutations to me
are as those to other familiar voices
—uttered quietly in the rhythm of the resigned pace.
On occasion, I pass by, say nothing.
Neither old man nor boy give apparent notice.

Am I silent from sympathy or reverent from respect?
Have I passed a humble man who has worked too hard, too long?
Am I watching a great man who has long carried great loads?
I look for cues in the eyes of the boy
and choose to see reflections of a hero two paces ahead.

Every day on their walk to work in El Rosario.
—until yesterday.

Heavy Loads, 08

Good governments finance what they hope will be good projects and services --whatever the source of funds. Good projects and services are successful. They benefit society in excess of the resources that go into them. Even developing countries have experts with sophisticated training to evaluate the likelihood of success. Lenders who make loans to developing countries presumably have people with similar training to make the same evaluation. Experts do not know for certain whether a project will succeed or fail, but success is their goal.

International debt is a burden to the developing countries that carry it. I argue that it is unnecessary; the international lending structure need not exist. To illustrate and simplify my argument, I will name Guatemala as a representative developing country and the United States of America as a representative foreign lender.
Guatemala is a small country with a fairly large international debt. It is a wonderful and troubled country. In 1998 we hope that recent peace will hold. In March of 1986 I held high hopes for a new democratically elected government under president Venicio Cerezo which had launched an Economic and Social Reorganization Plan. Within 18 months, however, Cerezo's government acknowledged that the plan had failed. A key factor in the failure seems to have been under spending. Of the amount that it had budgeted for public investment, the Guatemalan government spent only about one third. The limited spending failed to stimulate the economy. Faced with ever decreasing living standards and continuing civil war, the government abandoned its first plan and began a new effort on August 1, 1987, The National Reorganization Plan. The new plan was less ambitious and at least as unsuccessful. The first Guatemalan plan had borrowed some ideas from the New Deal and U.S. America's recovery from the Great Depression. Public projects would help get things moving. However, national coffers went dry. International loans did not make up the difference.
When we hear of the suffering that afflicts many developing nations that have large foreign debt, we should pause to consider that in accumulating this debt their governments probably tried to follow norms of international finance.

Guatemala followed today's norms for responsible finance when it refused to undertake beneficial projects for which there was no money. The public projects that Guatemala proposed but did not undertake were designed by dedicated and well educated planners. It is reasonable to suppose that some of the projects could have stimulated the economy and reduced poverty. Cerezo's government refused to undertake projects for which it had no money. Under conventional wisdom, in failing to act the Guatemalan government acted responsibly. Did it act correctly? If they were good projects, no. Should international lenders have filled the gap and financed these good projects with loans? No. An international loan is never more economically feasible than is internal financing, and international debt is never less burdensome than internal debt.

:: Bob Komives, Fort Collins © 2006-2008 :: Plum Local IV :: 52. The Unnecessary Burden of Foreign Debt ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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53. Buy Good Projects.

Buy Good Projects.
Bob Komives
::

A good project is a good investment;
a bad project is a bad investment--
whether building life,
species,
family,
association,
or nation.

A good investment pays
yet bears no debt.
What would the biosphere owe
(and to whom?)
for the inter-galactic loans
that financed its development?
Did the Gulf of Mexico
ever repay its debt to the Mississippi River?
Who could tell Mahatma Gandhi
that he had repaid all investments in his life?

Good Projects Are Good Investments

A good project, a good program, raises the value of the nation. It can lead to deflation even if paid for with newly printed money. A bad project or program causes inflation even when paid for with money in hand. If the government of the United States of America happens to have a million excess dollars, to waste them on a failure would damage the economy and the value of the dollar. Even if the Guatemalan government happens to have four million excess quetzales, wasting them on a failure would damage both the value of the quetzal and the Guatemalan economy. A money-in-hand project puts no new money into circulation, it does use and alter resources and produce inflation as the old amount of money chases after reduced resources.

If failure is to be paid for with an international loan it will cause even more inflation. In order to pay off the loan the borrowing nation has to export resources equal in value to those invested in the project plus an additional amount to cover interest. The net reduction or alteration of resources is greater than if the same failure were paid for with money-in-hand; the value of national currency falls more.

Now, consider a good project. The Guatemalan government has plans for a four million quetzal project. All analyses indicate the social, moral, and environmental results will range from acceptable to beneficial. Analyses also show that the project should increase the wealth of the nation well beyond the four million quetzal investment. Unfortunately, the treasury does not have four million quetzales on hand.

This project should proceed. It will be deflationary even if Guatemala prints new money to pay for it. If analyses are close to correct, this good project raises the value of the nation beyond the current market value of the new money to be spent on it. That is deflation. If Guatemala were to borrow foreign money to pay for the project, the result might also be deflationary. However, the interest payments added to the project cost will lower net national worth below that achieved through the issuance of new money for the same project.

:: Bob Komives, Fort Collins © 2006-2008 :: Plum Local IV :: 53. Buy Good Projects. ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::

54. Money Works Better Than Debt.

Money Works Better Than Debt.
Bob Komives
::

Let's look at two graphs of possible outcomes from three hypothetical projects: A, B, and C. Project A is a resounding success. B is marginally successful. Project C is a failure. The graphs show the net national benefit or net national loss from each project. Where there is a net benefit, the wealth of the nation increases and the net-benefit line on the graph ends above the centerline. That is a successful project. Almost all projects will start out creating a net loss because resources are spent before benefits return. The project that never creates a net benefit is a failure.



Graph 1 assumes the three projects are paid for internally. Graph 2 assumes an international loan finances the same projects.



The two projects that bring net benefit without the loan (Graph 1) bring fewer benefits when financed by an international lender. Project B changes from a marginally successful project to a failure --producing a net loss. C is a failure in Graph 1 but worse in Graph 2. Why?

If U.S. America decides to lend U.S. dollars for a Guatemalan project, then Guatemala will have to pay back the principal plus interest (Graph 2). Guatemala will draw upon the project's benefits to pay back the principal --the one-time cost in resources of the project. Any benefits left over, less the amount needed to pay interest, are the project's net benefit or net loss. The interest is the price charged by the USA to Guatemala for the privilege of borrowing. The added charge reduces Guatemala's net benefit.

When, instead of seeking an international loan, Guatemala finances such projects internally (Graph 1), the entire excess of benefit over cost accrues to Guatemala. No extra national wealth is lost or exported.
Under internal financing, good projects are economically successful. Under external borrowing some very good projects are economically successful, but extra wealth must be exported to pay interest on the loan. They are less successful, less profitable, than projects financed internally. Projects that could be marginally beneficial when financed internally will likely become failures when financed with an international loan. For projects destined to fail, an international loan can turn mere failure into disaster.

:: Bob Komives, Fort Collins © 2006-2008 :: Plum Local IV :: 54. Money Works Better Than Debt.
::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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56. Poor Countries Do Not Need Rich Money.

Poor Countries Do Not Need Rich Money.
Bob Komives
::

One said: The Guatemalan government does not seem to have extra quetzales.
Can it lend them to itself
or, for that matter, to anybody else?

said Two: Yes, the government in the United States of
America does not seem to have extra dollars.
(Its accounting sheets seem to show negatives
where extra dollars are supposed to be.)
Yet it lends new dollars to other nations
and invests them in its own.
It also uses them to wage war.

One said: I know such irresponsible practice is long since condemned.
Have not those United States long since prospered?

said Two: Yes. Meanwhile poor countries long since work
to avoid such irresponsible practice,
and those poor countries long since remain poor.

One said: So, if the United States of America
lends and profits,
invests and profits
with money that they are supposed not to have,
might Guatemala try to do the same?

said Two: Yes, and it should.

||

If you can accept that the system for lending to sovereign nations is invalid there is yet another practical question: do not poor countries need dollars or some other strong currency to participate in the international marketplace? Politics, tradition, and organizations such as the World Bank and the International Monetary Fund can prevent countries from using their currency easily in the world marketplace, but there is no economic justification. The beauty of marketplace is that it adjusts prices to allow trading in products of different value. Imagine a farmers' market in which tomatoes from many farmers --varying in quality and kind-- cannot be traded except by using as currency the prized tomatoes of a few powerful farmers. This is unnecessary and unacceptable.

Guatemala, Brazil, Mexico, the USA and any other country can finance good projects with their own currencies. Within the country, venders of goods and services must accept the national currency without question. Such is the history of money. For off-the-shelf international purchases, project managers can buy what they need using local money converted to the foreign seller's preferred money at the current exchange rate. For international orders and long-term contracts, project managers and sellers can agree to a price tied to some standard such as dollars, marks, francs, yen, or a composite index. They can still make payments in national currency in an amount adjusted according to that standard.

Wealthy as well as developing nations will experience setbacks that create prejudice against their currency in world markets. A crisis in Guatemala may cause most of the rest of the world to stop for awhile accepting the quetzal. Guatemala might flood the market with quetzales by making too many international purchases in too little time. The value of the quetzal could drop dramatically. However, trade will resume. The marketplace can establish an efficient exchange rate. If the USA or an international organization wishes to help, it could offer in-kind aid or political support. It should never lend money. A loan will reinforce prejudice against the borrower's currency. Why should we accept a troubled country's money when we know the country has just received more familiar currency from a rich country?

I saw them working in a field one day.
He was swinging his machete.
I only looked for a moment,
probably because I didn't really want to believe it's possible.
He swung his machete all that day and many days since--
his friend working beside him.
I would like to think
that the boy does a little more than his share,
but it's probably just the opposite.

They walk home looking no different than when they came.
The boy does not require conversation of his old companion.

The first time I passed,
the sound of a gringo-ish "a dios!"
caused him to turn his head to reply.
Now, salutations to me
are the same as to the other familiar voices on the road
--uttered quietly in the rhythm of the resigned pace.
On occasion, I have passed without saying anything
--an irrational form of sympathy.
But he passed giving no notice to me,
maybe a little relieved that his attention was not diverted
--his attention on the road just two paces away.
However, why should I walk by him in sympathy
when his companion walks with him in respect.
It takes a great man
to have worked that hard for that long.
Maybe, in reality,
he still can carry a good-sized load on his back.
And the boy too is looking just two paces ahead
--at that man he wants to emulate.

After all, you see him every day
on the road to work in El Rosario.
At least he was there yesterday.

Passing

:: Bob Komives, Fort Collins © 2006 :: Plum Local IV :: 56. Poor Countries Do Not Nee Rich Money ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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70. Consider the Cost of a Holiday.

Consider the Cost of a Holiday.

Bob Komives
::

Consider alternate views of a 4th-of-July holiday. Whether caused by law, by spending money, in-kind contribution, or price manipulation, a 4th-of-July holiday has virtually the same economic impact. The cost to the economy is the same, and the benefits are the same.

Ignoring for a couple of paragraphs the spending alternative, each of the other alternatives can cause its own monetary impact. Whether created by law, in-kind contribution, or price manipulation, the holiday affects the productivity of most businesses in the country and creates new businesses catering to the holiday itself. The marketplace reflects and facilitates these effects.

The net result might be negative --the holiday reduces national production, causes inflation. How? Since our chosen alternatives do not directly change the supply of money, if production of goods and services falls, each dollar could buy less than it could were there no holiday. Prices would rise as the same number of dollars chase fewer goods and services. Perhaps the holiday brings real benefits, such as reaffirmation of democracy and communal effort, but they do not reflect themselves in the marketplace.

The holiday might, however, be deflationary. Workers might respond to the goodwill and relaxation with increased production that more than makes up for the lost day. The 4th-of-July industry that caters to the celebrating public is a bonus. As a result, the marketplace would see an increased supply of goods and services to buy without any reciprocal increase in money to buy them. The market benefits outweigh the market costs; prices fall. 

Now, let's consider the other tax alternative for creating a holiday --government buys the 4th-of-July holiday from employers. The pure economic impact of the holiday would tend to be the same, the costs and benefits the same. However, the financial --monetary-- impacts would differ. In the worst case, if production of goods and services falls the resulting inflation would be greater. Even more money would chase after fewer goods and services. In the best case, the holiday and post-holiday increase in goods and services would be greater than the pre-holiday value of the money invested. That would produce some deflation.

Monetary taxation carries added risk, but it must also carry added potential benefit. Otherwise, only our stupidity could explain our continued fascination with the use of money to finance government. Once a monetary system is in place, monetary taxation may be the simplest, most practical way to achieve a goal. A bit more inflationary pressure might be perfectly acceptable if the non-monetary benefits are high and if it is impractical to set up price taxation, in-kind taxation, or taxation by law.

A tax in money offers potential benefits the other alternatives do not. In our monetized societies, the private economy generates a huge demand for money. As the economy grows money supply must grow. If money supply does not change with economic growth money becomes rare. Prices go down --which is nice for those who hold the money-- until there is so little money that it is not useful as a common means of exchange. To prevent collapse of the monetary system, the caretaker of money must find ways to meet the demand for money. Government spending is an understandable, direct, and valid way to infuse the private investment market with money it needs. Thus, money spent to buy a 4th-of-July holiday can both finance the holiday and help fill a general need for money. Because needed money is demanded money, and because it enters at the 4th-of-July, the economy goes to the 4th-of-July to get it. This "going there to get it" is the essence of monetary taxation.

One way or another, by one tax or another, if we want a 4th-of-July holiday, if we think it is good for us, we will tax ourselves to get it. 

:: Bob Komives, Fort Collins © 2006 :: Plum Local IV :: 70.  Consider the Cost of a Holiday ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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71. Let Us Find Balance.

Let Us Find Balance.
Bob Komives
::

There is a true rule of balance.

An organization,
biological or political,
tends to survive
if self-organized and self-taxed
to be productive and resilient.
It balances its budget
with the wealth
that productive organs return
from the energy spent
to create and maintain them.
So, yes,
a government cannot spend
what it does not have.
However, what it must have
is access to the wealth
in the organs of its economy.
It has such access
whenever it fixes a policy,
or passes a law,
or, even,
when it spends newly printed money.

Let us end monetary recall

and the fantasy that it is a tax
that balances our budgets.

Let us find balance

investing communally
in the growth of knowledge
within ourselves
within our biosphere.

Let us recycle the effort of the intelligent people

trapped in non-production
calculating
collecting
debating
and avoiding payments
under a futile system of monetary recall.

Again, let us remember

that war is the age-old medicine
to counter peacetime fantasies.

from: A War Rages

:: Bob Komives, Fort Collins © 2006 :: Plum Local IV :: 71. Let Us Find Balance. ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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