Why?

The economy is falling.

Why?

Because house prices have fallen.

So?

Bankruptcies are up.

So?

Doom is nigh.

That’s funny, I thought you just told me that house prices are falling? This means the purchasing power of my money in relation to homes has gone up. How is that a disaster?

Silence.

Free market economists tell us that in an economy where the quantity of money is relatively stable, prices will tend to fall downwards. And this is good for the economy. It’s good for everyone.

Prices have been falling, the value of money is going up, and the free marketers are crying “doom is nigh.”

Why aren’t they saying, “Progress is here. Prices are falling. That’s what the economy needs. It is not doom that we are facing. It’s economic recovery.”

Falling prices are only a problem to some people. Those who have too much debt that is not backed by assets, such as a home. And the reason they have debt is because in an economy that is fueled by fractional reserve banking, they’re using debt in an attempt to get ahead. So those who borrowed to buy a house at $250k and now it’ll fetch only $188k, why are they complaining? The value of their money has gone up.

Now the borrowers themselves have contributed to the problem. Why do they now complain? They could have refused to play the fractional reserve game and refused to borrow. They didn’t. Prices went up. They borrowed hoping to get ahead. Now it’s come unstuck.

And the borrowers are the losers. At least, the borrowers who can’t find some cash to get their debt-to-equity ratio where the banks are comfortable.

This is not the way people are encouraged to look at things, however.

If I borrow your money, purchasing power has merely transferred from you to me. But when the current banking system gets involved in that process, on a 20% reserve, they can turn $100 into $500, $400 of which is “non-existent” money. It is credit, the ability to purchase without physical money. “Fiat” money it’s called — money created out of nothing.

To the extent that our economies are fueled by fractional reserves, to that extent debt is a problem.

In a fractional reserve economy, where prices are constantly driven up by the expanding money supply, the only people hurt by falling prices are those who have to sell at lower prices, generally because they cannot meet the mortgage payments or come up with some cash to cover the bank loan that now exceeds prudent lending rules.

Are people hurt in the current economy? Yes there are people who get hurt, and many of them who used to work in automotive plants that had low productivity from their workers and low quality vehicles. The buying public skipped elsewhere, even though the majority of those vehicles were still made in USA or Canada. I’m thinking of Toyota and Honda. Then there’s the Kia plant, the Hyundai or the Subaru plant, all located in the US. But some of the big players located in Michigan suffered. . . . Until they got their act together.

The workers in these plants got laid off, and could no longer meet mortgage and other debt payments. A domino effect started.

The very effect that Austrian economist Ludwig von Mises said was necessary for the boom cycle to come to end, and the economy to return to its “equilibrium” level: Falling prices.

It is, of course, noticeable, that those shouting the doom and gloom loudest are those with subscriptions to sell. “How to avoid disaster.” People buy for one of three reasons: Fear, pain and please.

And too many of the doomers and gloomers are selling fear, not sound economic analysis.

I don’t know about you, but I’ll take lower prices any day. And if that’s doom and gloom, maybe we need more of this type of pessimism.

May God bless you as you serve Him.

From time to time there are news items explaining why some people find it necessary to leave home. Taxes — property taxes to be precise.

In a period of rising house prices, it is easy to forget that with rises in prices come increasing property taxes. And property taxes can mean financial ruin for many whose income cannot rise to meet the increased tax burden.

One resident in Massachusetts some time ago was suffering when her tax bill increased from $2,200 to $3,500, while income remained fixed at $12,000 a year. The result? Sell the family home, with all its sweat and tears (it was built by the current owner and her late husband) and memories.

While the stock market may be on the move up again and there is little evidence that the real estate market is out of the doldrums, the banking fiasco in the US, together with fevered home buying, indicated personal debt was on the increase. So, too, were home prices, since a good portion of the debt went into home buying. Property prices were bound to increase — and property taxes along with them.

There are efforts in some communities to limit tax rises. The unpaid taxes are allowed to accumulate until the current owner sells, or the home becomes part of the estate left to others. The key here, however, is that the taxes will be paid, sometime.

No matter how the taxes are managed at present, what is clear is that future generations are being decapitalized by property taxes. This should not surprise us, since the purpose of all taxation is to confiscate property in the name of the political order.

But taxes are more than that. They are also a mark of sovereignty. This is why foreign embassies do not pay taxes in the host nation. To do so would be to put the foreign nation under the jurisdiction of the host nation, and no sovereign state will admit there exists a higher authority to which it must pay tax. Nations thus see themselves as equals, and equals do not tax one another. Superiors tax inferiors. That’s the way the taxing game is played.

More than that, taxation indicates the god of a society. Taxation is, in essence, religious practice, imposed by those in authority. But authority is either self-claimed or else it is delegated. In the Christian view, authority is delegated, and with that delegated authority goes very limited taxing power.

How a nation constructs its taxing system indicates its source of authority. And taxes that are all embracing, allowing little or no concept of the idea of relief for those who cannot afford them, indicate a sovereign state that will extract its pound of flesh, whatever the cost to the individual.

Everyone is warned about such a political order and accompanying taxes (I Sam. 8ff), and it comes about when God is rejected as King and the true source of all law and authority. Since few people today are willing to accept the idea of God as sole law-maker, and therefore the determiner of what taxes are just and unjust, it seems we get the government — and the taxes — that we deserve.

God bless you as you serve him this week.

Economic categories are no longer what they were. It is now common to hear government officials say that the revenue they did not receive was a “cost” to the government.

Imagine going to the company accounting system and entering an amount in the costs of the company for revenue that was not obtained. “Let me see, we should have had another $10 million this year. Let’s put that in as a cost to the business. Better still, make it $10 billion.”

And you think corporate fiscal accountability is bad. Yet it is government allowing the new definitions

Now, if Bernie Madoff or the executives of WorldCom only knew this, their outcome could have been more favorable for investors.

The same confusion, unfortunately, exists concerning assets and liabilities. Debt, many say, is an asset. Let’s have more debt. The fact that you might enter it into the liabilities section of your Balance Sheet is irrelevant. For debt is the way to wealth in the minds of many. And if you only had more debt then you could turn this economy around — and then some.

So thinks the average American citizen. So think many average citizens around the world. For this reliance on debt as the way to wealth is not restricted to America. It has its counterpart in many, many countries today.
This abuse of language comes from an abuse of logic. By what stretch of the imagination can you call revenue you did not get a cost just because you think you’re entitled to it? By the same imagination it is argued that debt is the way to wealth.

This is nuts . . .

It is also a problem of faulty definitions. At one time, not too long ago, creating spending power by either increases in the money supply or credit, was called inflation. Now it’s called saving the world — or something else. I’m an Australian and we have some unprintable words that describe this kind of silly reasoning.

But the definition — and the understanding that went with it — had to go so these new ideas could replace them.

Debt is a mechanism that brings future production into the present. If you buy now you don’t have to buy later. No waiting. And if you need a 25-year mortgage this year to finance your future purchases in the present, why not take a 45-year mortgage and bring even more purchases into the here and now. Maybe the Japanese had it right after all, when mortgages reached 100 years. But why stop there? Why not just create an obligation for the next 10 generations, about 700 years. Now we could really spend ourselves rich in this generation.

Right thinking is in short supply. So said John Knox to Queen Mary. And you know what happened to that crusty old Scotsman as a result of his audacity, telling the leading political figure of the day, who claimed conscience was her guide: “Conscience needs to governed by right reason. And right reason I see you have none.”

Perhaps you’ve been blinded by a host of bad predictions. The great depression that was to happen in the 1980s did not appear, nor did the promised meltdown of the 1990s. What is to happen in the twenty-first century?

The truth is, you don’t know. You are in unchartered waters. Governments have cut themselves off the reality of the market to put themselves into the position of expanding money and credit as they wish. And they wish a great deal at the moment, for this is the mechanism that will prevent all economic disasters. Or so they hope. Right reason is in short supply in the Congresses and Parliaments of this world. Things haven’t changed much in nearly 500 years.

The situation is clearly screwed up when you get advisers warning us against debt on the one hand, then suggesting you need to get into debt to buy a house, a business or anything else. It’s other people’s debt that’s the problem, never your own. Consumer debt might be out, but at the end of the debt discussions there is still debt. And who really cares whether the debt is for a house or a business vehicle. You need both now – not later.

Can this headlong rush to bring the future into the present continue, and if so, for how long? The pundits got it wrong in the ’80s, the ’90s, now they tell you to trust them a third time. But by now no one is listening. Pity.

It seems the only reliable guide you have is employment – or lack of it. Or more specifically, the number of $100 an hour jobs that are going to India or China where the pay is $20 or less an hour. And if you realize that this difference was caused, in part, by price increases at home, you might just begin to realize what debt has really done to everyone. It has made many people unemployable at $100 an hour. It has caused buyers to look for cheaper prices, and the buyers of labor have looked and found bargain prices.

It seems the lessons of economics remain to be learned. You cannot call missed revenue a cost any more than you can call debt an asset and therefore the way to wealth. You cannot bring future expenditure into the present without causing an increase in present prices, a mis-allocation of resources, and destroy the entrepreneur’s ability to forecast the future. Nor can you call a lie the truth and get it away with it forever.
Kiyosaki is right. If you’re serious about unemployment and the state of your country, you need to be serious about money and debts and make sure you understand the difference between assets and liabilities as well as revenue and costs. Your economic health — and those around you, family relative, friends neighbors and strangers — will depend on it.

There are some, however, who argue that this passage is not referring to financial debt. Commentators are divided on the matter, and when the scholars disagree it is often difficult for the layman to form an opinion. Their position, however, is usually presented as a statement without supporting evidence. Mostly, it comes down to the fact that the commentator thinks it is not referring to financial debt, but rarely offers evidence to show why this is so. Commentators, however helpful, are not our ultimate guide to life. Only God and the Bible can hold that position in our lives. Therefore, we need to turn to the biblical text, and not the commentators, for guidance.

In order for us to understand the text, there are several things we should note about this verse to make sure the words are not taken out of their context and misused.

First, commencing from verse one in the chapter, we have God’s instructions on the nature of the civil authorities. They are God’s servants or deacons (Greek: diakonos). In verse seven, St. Paul argues that it is precisely because they are the servants of God that we should pay taxes to them. We are to “render therefore to all their due: taxes to whom taxes are due, customs to whom customs, fear to whom fear, honor to whom honor” (Rom. 13:7). According to this, we are under obligation to pay whatever is due to another person. Notice that we are not told how much we are to pay at this point: that question is answered elsewhere in Scripture. We are simply instructed to pay what is due. Since the Bible never countenances theft, the amount due here is only that which is legitimately owing. The point being made here for the purposes of our analysis, however, is that this passage is very definitely talking about money matters.

Second, it is clear from verse seven that the things being talked about are far wider than mere money. Note that this verse obliges us to render things such as fear and honor to those to whom it is due. While money is mentioned as one obligation we are to pay, we cannot confine this passage to monetary concerns only. Money cannot be excluded from this portion of Scripture.

Third, that the context includes money and other things is abundantly clear in verse eight. We are to owe no man anything. This is an all-encompassing term that must, at the very least, include the items mentioned in verse seven: taxes, custom, fear and honor. It seems that the great apostle is covering his tracks. He has mentioned four items in verse seven: taxes, fear, honor, and custom. In verse eight St. Paul is making it very clear that what he is saying here cannot be confined only to these four issues. We are to owe no man anything — including money!

Fourth, the Holy Spirit includes an exception in the latter half of verse eight. Debt as a concept cannot be avoided, since there are some things that are obligatory at all times. What is this obligation? We are to owe no man anything “except to love one another.” Debt in some form, we might say, is something that is inescapable, since we have a genuine obligation to love one another. The point here is not whether we are to have any debts at all, but whether we may have financial debts. It is apparent here that the Scriptures are saying we are to have no debts, including financial debts, with this exception: we have an ongoing debt to love one another.

The language of Scripture here is useful. In the modern world, we do not usually regard the idea of loving our fellow man as a debt. God is saying that we have an ongoing obligation to love one another. When we go into financial debt by borrowing money we have an ongoing obligation to meet the repayment schedule. So, too, we have an ongoing obligation to love one another. It is not an option: it is mandatory. It is a debt we owe one another.

Fifth, the Bible here even tells us how we are to fulfil this ongoing debt that we have to one another. In verse nine several of the Ten Commandments are quoted and summarized under the concept of love. Love is, as the Scripture reminds us elsewhere, obeying God. “For this is the love of God, that we keep His commandments. And His commandments are not burdensome” (I John 5:3). I love my neighbor when I don’t murder him or members of his family, when I don’t steal from him or commit adultery with his spouse. I obey this commandment to love my neighbor when I don’t tell lies about him or covet anything that he owns. This is the debt that each of us has, an ongoing obligation to love our neighbor by keeping the commandments as they relate to both God and our neighbor.

For these reasons, there seems no valid case to exclude money matters from this passage in Romans 13:8. The context of the passage itself is very clear that it not only includes money (e.g. taxes), but incorporates everything, since nothing is excluded from the mind of the writer of these words. We are truly to owe no one anything — except love.

I follow this procedure here. There are two verses in the Bible that, when seen together, provide a basic definition and understanding of the word “debt” when used in the context of a financial obligation.

The first of these verses is Proverbs 22:7, “The rich rules over the poor, and the borrower is servant to the lender.” The word here for servant can also be translated slave, and has the meaning of someone who has become a bonded servant to another. In Hebrew it means to become enslaved to, or to be kept in bondage. Taken by itself, the verse says that a borrower becomes a servant, or a bondslave, of the lender.

In a New Testament passage we are told, “you were bought at a price; do not become slaves of men” (1 Cor. 7:23). Since we are purchased by the precious blood of our Savior Jesus Christ, we are His bondservants. We do not have the liberty, therefore, to enslave ourselves voluntarily to any other master, since we are the servants (or bondslaves, if you prefer) of Jesus Christ. The Greek word translated as “slave” is doulos. It denotes the idea of compulsory service. (See Gerhard Kittel and Gerhard Friedrich, eds., Theological Dictionary of the New Testament, Abridged in One Volume by Geoffrey W. Bromily, (Grand Rapids, MI: Wm B. Eerdmans, 1985), p. 182f.) So we are not to voluntarily put ourselves into the compulsory service of others. Rather, we should keep ourselves as free people ready to serve our true Lord and Master, Jesus Christ.

If we take these passages together, we find that in the Proverbs passage we are given a definition of how we can become bondservants. We are informed that the borrower is a bondservant to the lender. In the First Corinthians passage we are instructed that we may not voluntarily enslave ourselves to any man. We have another Master whom we must obey at all times. We cannot be the servant of two masters, as Jesus tells us in a well-known passage from the Sermon on the Mount (Matt. 6:24). It appears we are not capable of split allegiance; we must have one Master, the Lord Jesus Christ.

In Scripture, financial debt is a form of slavery. It is too easy in the current climate of opinion to think of slavery as only a political manifestation. The Bible clearly links slavery to economic matters and debt in particular. We become slaves by borrowing things then promising to repay that which we borrow. Clearly this is not the only kind of slavery spoken of in the Bible, but it is one form of slavery. If this is the case, on what grounds can we exclude financial debt from the meaning of slavery when we come to the New Testament? It is illogical for us to reduce the meaning of the word slavery in the New Testament so that it does not support the concept of financial debt spoken about so clearly in Proverbs. Not only is it wrong, but it is all too easy to do.

Based on the evidence, it is reasonable to conclude that Christians may not enslave themselves to any person. This means we must avoid placing ourselves in debt in any form with one exception: we have a debt to love one another.

There are reasons for this discouragement against being a guarantor for loans. In Psalm 119:122 the psalmist asks God to be His surety. “Be surety for Your servant for good.” It is too easy to seek security from sources other than God. This is what both the borrower and the lender seek to do by having someone as guarantor for the loan. The guarantor is someone who can ultimately get the borrower out of his predicament of meeting his loan obligations, while the same guarantor protects the lender when the borrower defaults. The Bible encourages us to seek our surety in God because we are His bondslaves or servants. Asking others to be surety for us is a rejection of God as our Surety. Acting as a surety for another is an attempt to take the place of God in the life of that person.

Bankers feel fairly safe in doing this, since they can estimate from previous experience what the cash flow from their vaults will be in terms of people demanding the return of their deposits. If they know that on average only 10% of money is needed to satisfy demands for a return of deposits, the bank can make use of the remaining 90% for itself in the interim. (See Mark Skousen, Economics of a Pure Gold Standard (2nd ed., Auburn, AL: Praxeology Press, 1988).)

This is known as fractional reserve banking. But the problem does not stop at this point. It is compounded because the bank further mistreats the loaned-out portion of a deposit when it returns to the bank by again keeping 10% and loaning out the rest. This is how the financial system inflates the money supply, thereby increasing the amount of purchasing power (here in the form of credits). When the ratio is altered between money and goods (money includes credit, since it combines with currency to form purchasing power) by increasing the amount of money, prices tend to rise. Or, to look at it from the other side, the purchasing power of money declines. This is inflation, and you can refer again to chapter six for a fuller explanation of inflation and what effect it has.

If it is accepted, however, that diluting the value of money is morally wrong, then we need to think carefully about the use of bank debt, since it is the primary means whereby the money supply is expanded.

Put this another way: without borrowers, fractional reserve banking methods would fail. If there were no borrowers, there would be no possibility of the bank creating money ex nihilo, out of nothing.

Since lowering the purchasing power of money is defrauding our neighbor of his wealth, we must recognize that each one of us has the means in his power to help prevent this from occurring. Single-handedly we may not be able to stop the practice totally, but we can add our small part to hinder its progress. We can decline to participate in the fractional reserve procedure by refusing to become borrowers. (We could also refuse to participate by insisting that the banks hold our funds in reserve so that their obligations are matched by their reserves. In other words, we need a 100% reserve banking system.)

This argument is an argument against borrowing from banks. Borrowing from friends or relatives does not cause the money supply to rise, so this argument against debt is limited in its scope to only that debt which is used to increase the money supply. Earlier arguments against debt, however, cover non-bank debt, so the limited aspect of this particular argument against debt does not provide any loopholes where a pro-debt position can be taken.

More importantly, however, it was seen that the process of putting aside for future use (savings) was the necessary step for economic advancement. Without savings there can be no process of ongoing economic development.

Debt is the opposite to the idea of saving. Instead of saving, people become borrowers. Instead of storing up wealth for the future, they consume other people’s accumulations of wealth paying for the privilege with the wealth of tomorrow. The God-ordained process of wealth creation, however, is the foregoing of current consumption in order to put aside wealth for use in the future. That is, we must save for the future. We need to take assets we have now and turn them into more assets, better assets, in the future.

The scripture in Proverbs 13:22 says a good man leaves an inheritance to his children’s children. This thought is repeated in the New Testament where parents are instructed to “lay up” wealth for their children (2 Cor. 12:14). This leaves each of us with an obligation to leave our children some kind of inheritance. Our children’s advancement will be directly linked to the inheritance we leave them; and it does not require a degree in economics to understand that the greater the inheritance we leave them, the better off they’ll be (assuming they don’t squander that legacy).

Debt, however, is the very antithesis of this biblical idea. Rather than putting aside wealth to consume in the future, debt is an attempt to use future productivity in the present. People do not like to wait in order to get things. When borrowed funds are so readily available, as they are under the present financial system, it is easy to forget that the biblical pattern is to work and save for the future. To buy now, with borrowed funds, is to say that our future earnings are to be spent in the present.

This contrasts with the New Testament passage mentioned above, where we are instructed to “lay up” wealth for future generations. While there are some people who will argue that debt is a means of laying up wealth for the future, they do not take into consideration the interest that is paid when they borrow. Unfortunately, our calculating ability on this matter is seriously hampered by inflation. We see, for example, house prices going up. We also see our pay packets going up each year. So we borrow to buy something, hoping that the item we buy also increases in price to cover the cost of interest that we must pay. If prices were relatively stable, then we would see the real effect of borrowing: an item that might cost us two or three times its price by the time we paid the interest bill, and if we were to sell it, we’d never recover the amount paid in interest.

Only in an age of inflation can any attempt be made to defend the use of debt. But this is precisely why debt must be avoided. Debt fuels inflation and we can soon get caught on a never ending merry-go-round of price increases that distort our ability to make sound economic judgments.

It is true to say that there can be no borrowing unless there is a saver who has made the funds available. But just because other people save, this is not a reason we might use to excuse ourselves from the same obligation. When everyone saves, the future productive capacity of society is enhanced. This is how we create an inheritance for our children and grandchildren.

Not surprisingly, we are seeing what the low saving’s rate is doing to countries such as America and Australia in the current economic climate. Many of our Asian neighbors have much higher saving’s rates, and their productive capacity is outstripping that of Australia. The opinion of business analysts is divided as to whether productivity in countries in the Pacific Basin is surpassing that in the United States. Increased wealth, though, is flowing to these nations, showing the truthfulness of God’s plan for wealth creation. The United States, once the leading industrial nation in the world, is now staggering under a massive debt load of four trillion dollars. Some suggest that it is no longer the leading economic player in the world. But it is debt and the failure of Americans to follow the Bible’s teaching on this matter, that has brought about its economic decline. In other words, ethics is the cause of declining productivity, and only a return to biblical ethical standards will improve the economic situation.

How many can truly say that their borrowing does not have, at its deepest level, the motivations of greed and avarice? Maybe it is not recognizable as greed, but a serious dose of self-analysis in the light of the glorious revelation God has given to us in the Scriptures might surprise many.

Second, there is another aspect of debt and its relationship to greed that has nothing necessarily to do with borrowers. People who borrow are those who want to buy goods and services. But there is always another person involved when someone makes a purchase. He, too, has an interest in debt. He is the seller of goods and services. If he can get a potential buyer to go into debt, it may become possible for him to get a higher price for his goods than he could if the buyer refused to borrow.

Imagine a person selling his home. He asks $100,000 for it. A potential buyer offers him $92,500 cash. Another buyer, however, says he’ll pay $115,000 by going into debt for five years so he can get the funds to pay the price. A third buyer arrives and is willing to take on a 20-year mortgage and pay the seller $150,000 for the house. What is the seller going to do? Better still, what would you do if you were the seller? Many people would be tempted to accept the higher offer. But is this the morally correct response in this instance?

Martin Luther saw this side of the debt issue clearer than many, and he had some firm words to say about it. He was concerned that business dealings be governed by ethics, not economics. “Because selling is an act performed toward your neighbor, it should rather be so governed by law and conscience that you do it without harm and injury to him, your concern being directed more toward doing him no injury than toward gaining profit for yourself.” (Martin Luther, “Trade and Usury” in Walther I. Brandt, ed., Luther’s Works: The Christian in Society, Vol. 45 (Philadelphia, PA: Fortress Press, 1962) , p. 248.) For Luther, the idea that a seller could, or should, sell for as high a price as possible, was an occasion “given for avarice, and every window and door to hell is opened.” (Ibid., p. 247.) While this does not totally discount the idea of getting the highest possible price, it does mean that sellers must consider their motivation in attempting to get high prices for the sale of their goods. It does mean that money alone should not be the criterion by which we make the judgment. It is better to get a lower price and not see the buyer “injured” than to get a higher price and “hurt” the buyer.

Greed is the issue here. Greed is an attitude that puts the individual and his desires at the forefront of any transaction (Isa. 56:11). The greedy person is only concerned for himself and what he can get. He gives little recognition to the needs of others. Naturally, the Bible warns us against greed. It was one of the charges the Lord Jesus Christ brought against the Pharisees: “Then the Lord said to him, ‘Now you Pharisees make the outside of the cup and dish clean, but your inward part is full of greed and wickedness” (Luke 11:39). According to Psalm 10:3, the wicked person is one who “blesses the greedy and renounces the Lord.” A greedy person is prohibited from being an elder or bishop (I Tim. 3:3), for ultimately greed gets such a hold on a person that it leads to death (Prov. 1:19). Like a cancerous growth it leads to a slow and lingering annihilation.

Temperance in our business and our demeanor concerning wealth is just as important as it is with alcohol or food. While recognizing that there is a place for a just and fair price that must compensate a seller of goods, it becomes a matter of moral concern, and charity towards others, whether those selling prices are determined by the amount of debt that a potential buyer might be willing to take on.

While there are some who argue that we should always get as high a price as possible, it is a fine line between getting a high price and being greedy. It is better to stay on the side of conservatism than to become greedy for an extra dollar or two in a sale. (There is always someone reading an argument like this who will want to know how to tell where to draw the line on prices. Greed, however, is not a dollar amount, it is an attitude. It is caused by letting money rather than the moral concerns of love and compassion towards our fellow man dictate our actions. It is up to each one of us to know ourselves well enough so that we do not cross the line.)

If nothing else, this provides an indication that long-term lending is to be avoided. By long-term is meant longer than seven years. And if long-term lending is to be avoided, this naturally abolishes any notion of long-term debt.