Lux Lucet

A prudent man foresees evil and hides himself; The simple pass on and are punished.

    – Proverbs 27:12

In light of the recent upheavals in the financial markets, it seemed good to me to take this occasion to update my comments on ongoing financial crisis. I say ongoing, because it is my contention that the crisis that first manifested itself in 2008 has never really gone away.

In Ezekiel we read God’s complaint against the prophets of Israel. At one point he says, “Because, indeed, because they [the prophets] have seduced My people, saying, ‘Peace!’ when there is no peace – and one builds a wall, and they plaster it with untempered mortar – say to those who plaster it with untempered mortar, that it will fall. There will be flooding rain, and you, O great hailstones, shall fall; and a stormy wind shall tear it down. Surely, when the wall has fallen, will it not be said to you, ‘Where is the mortar with which you plastered it?’ ”

Such a wall, one built with untempered mortar, may appear sound. But when faced with the elements, it’s shoddy construction becomes evident to all.

In his Sermon on the Mount, Jesus expressed a similar idea when he compared the man who built his house on sand with the man who built upon the rock. For all we know, the house built on sand may have been beautiful in appearance, but it lacked a firm foundation and it fell. The house built on the rock took the beating and stood strong.

It is the contention of this author that the relative prosperity that the West has enjoyed since 2008 is rapidly coming to an end for the same reason that both Ezekiel and Jesus described: The real causes of the 2008 crisis have never been addressed, only papered over with fake solutions. Fakery, it would appear, is coming to an end.

In the following post, and perhaps posts, I’d like to explore at least some of the factors that are driving the West to bankruptcy. I’d also like to discuss what Christians can do to prepare themselves for the difficult financial times that lie ahead. Finally, I’d like to discuss what Christians can do once the collapse occurs to begin to rebuild our civilization on a sounder footing than we have today.

The Causes of the Crisis – Central Banking

Surely there are few evils in the world today like to evil of central banking. In America, the era of central banking really got its start with the Federal Reserve Act of 1913, which is the charter of America’s central bank, The Federal Reserve System (henceforth, The Fed). That Americans at the time were skeptical of central banking can be seen by the name chosen for the central bank. It wasn’t called “The United States Central Bank.” No, it was called the Federal Reserve.

Since the establishment of the privately owned Fed and it’s control over the currency, the US dollar has lost over 96% of its value. This is no accident. Rather, the destruction of the dollar is a baked-in-the-pie feature of the new monetary system introduced by the Federal Reserve Act.

Whereas the old monetary system used gold and silver as money as required by the Constitution, the new system under the control of the Fed slowly did away with the monetary metals, replacing them with paper currency. Franklin Roosevelt confiscated Americans’ gold in 1933. Silver coinage lingered through 1964. But for the last 55 years, and especially beginning in 1971, America has been drowning in debt-based paper currency and easy credit, all of it unbacked by gold and silver.

From 1944 through 1971, the Fed was limited in its ability to “print money” – I put print money in quotation marks, because the Fed does not actually print paper dollar bills; rather, it creates electronic dollars out of nothing and pushes these dollars into the financial system by purchasing US Treasury Bonds from banks – by what was known as the Bretton Woods Agreement.

Bretton Woods was an agreement reached by the Allies new the end of WWII, in which it was decided that the US dollar would be the world’s reserve currency and that the currencies of all other nations would be pegged to the dollar. See this article on Investopedia for more details. As Investopedia explains, once the system was fully up and running, which didn’t happen until 1958, “countries settled their international balances in dollars, while the U.S. dollars were fully convertible to gold. The exchange rate applied at the time set the price of gold at $35 an ounce. Keeping the price of gold fixed and adjusting the supply of dollars as needed was the responsibility of the United States.”

In short, the US did a poor job as steward of the Bretton Woods agreement. In the 1960’s, President Johnson’s Great Society socialism and military adventurism in Vietnam created federal deficits that could not be supported except by large-scale debt, which ultimately was financed by the Fed. To pull the off, the Fed had to create massive amounts of new dollars to purchase the Treasury Bonds issued by the government. Some leaders became concerned that the massive flood of new dollars would make it impossible for the US to maintain $35 dollar per ounce gold.

Charles de Gaul of France was one of these leaders. De Gaul began to aggressively take dollars, bring them to the US and demand gold in exchange. This went on for a while until the drawdown of the US gold stockpile became too great and President Nixon refused any further exchanges of dollars for gold in August 1971.

Not only was this the end of Bretton Woods, but it also was the beginning of the modern era of central banking. There were some complaints about this change to be sure, but ultimately world leaders found the new system to their liking.

You see, under the Bretton Woods agreement, there were limits to how much money central banks, including the Fed, could create, since the system ultimately was tied to gold. Once the gold backing to the system was removed, there was theoretically no limit to the amount of money central banks could issue. From a practical standpoint, there were some limits. But the freedom to print as never before was there. And as politicians understood, freedom to print meant freedom for them to spend. “Who cares how big our deficits are,” they said in effect. “The Fed can just print up the money and buy up all the bonds we issue.”

The odd thing is, the politicians were right. At least up to a point. Back in the days before the Fed, if Congress wanted to spend more money, they had to raise taxes. Politicians, at least those who want to keep their jobs, generally avoid doing this. But with the advent of the Fed, came the advent of the “elastic currency.” Under the gold standard, the supply of dollars was limited by the amount of gold and silver held by the Treasury. If the Treasury wanted to issue more dollar bills, it first had to acquire more gold and silver. You see, pre-Fed, paper bills were simply receipts for gold and silver held in storage at the banks.

Once the Fed came along and with it the Federal Reserve Note, the supply of dollars easily could be increased to meet whatever financial demands happened to arise. There was no need to acquire more gold and silver. All that needed to be done was for the Treasury to issue more Bonds and for the Fed to create the dollars out of thin air to purchase those bonds.

The dirty little secret, though, is that in the process of the Fed creating new dollars out of thin air to purchase T-Bonds, the supply of dollars went up dramatically. As the law of supply and demand tells us, all things being equal, the more of something there is, the lower its price.

As the Fed’s creation of new dollars to purchase T-Bonds over the last 106 years has vastly outpaced the ability of the economy to absorb those new dollars, the value of each unit of currency has tended to go down year over year. Although the destruction of the value of the dollar is slow and at times almost imperceptible, it is nevertheless a relentless process such that, since the time the Fed was established in 1913 to the present day, the value of each US dollar has dropped by around 96%. For example, according to this website, in 2018 it took $2,529 to purchase the same amount of goods and services as $100 bought in 1913.

But most people don’t think of their dollars going down in value. Instead, they perceive the loss in dollar purchasing power as a rise in prices, or what is commonly called inflation.

The Causes of the Crisis – Excursus Money Creation

Have you ever thought about where money comes from? Just how where does the Fed get all those billions, or today, trillions of dollars it uses to buy all those Treasury Bonds? In our modern economy, you may suppose that there’s some scientific method for creating money and credit. But what if I were to tell you that the dollar creation process is more like medieval alchemy. More accurately, what if I were to tell you that the Fed’s gets its dollars by what is essentially a process of legalized counterfeiting?

If you or I were to run a printer in our basement that ran off twenty dollar bills, we’d never have to worry about running out of money. Credit card bill due and you’re a little short this month? Just print off a stack and its all good. Of course, were we to do that, at some point we’d likely be caught and spend some time behind bars. But this process is really no different from what the Fed does when it creates money.

The best explanation I’ve see of the Fed’s money creation process is found in a series put out by Chris Martenson called The Crash Course. In Chapter 8, Martenson quoting a publication by the Fed itself called “Putting it Simply,” writes,

When you or I write a check there must be sufficient funds in our account to cover the check, but when the Federal Reserve writes a check there is no bank deposit on which that check is drawn. When the Federal Reserve writes a check, it is creating money.

As Martenson notes, this is extraordinary power. For you and me to get money in our checking accounts, we have to work for it, but the Fed can create billion out of thin air with a few mouse clicks.

End to end, the process of money creation looks like this. The US government deficit spends. Deficit spending is simply when the federal government spends more money than it takes in in tax receipts. In order to cover the shortfall, the federal government issues Treasury Bonds. These T-Bonds are sold at auction to large banks known as Primary Dealers. When the Fed wants to purchase T-Bonds, either to maintain current interest rates or to lower them, it credits the account of the Primary Dealer at the Fed with the funds to purchase the T-Bond. The Fed gets this money, not by hard work or by savings, but simply by conjuring it up out of thin air – “when the Federal Reserve writes a check there is no bank deposit on which that check is drawn. When the Federal Reserve writes a check, it is creating money”

In the end, the Fed owns the Bond, and the Primary Dealer gets the dollars the Fed created out of thin air as a credit in its account, which it can then spend as it likes.

The principle distinction between the process the Fed uses to create currency and what counterfeiters do is that the Fed’s process is legal, whereas what the counterfeiter does is illegal.

But legalities aside, from a Biblical perspective, they are no different. Both are variations on the “differing weights and measures” that God calls an “abomination” on more than one occasion in his Word.

Put another way, the Fed’s money creation process is a fraud which God despises.

Economist John Maynard Keynes

The Causes of the Crisis – Keynesian Economics

If one had to name the most influential economist in the last 100 years, that title must without question go to Britain’s John Maynard Keynes. Both brilliant and immoral, Keynes developed the blueprint for what is sometimes known as demand-side economics in his 1936 book The General Theory of Employment, Interest and Money.

In short, demand-side economics says that economic slowdowns, such as the Great Depression which was going full blast at the time Keynes wrote his General Theory, are the result of insufficient private sector demand. In Keynesian economics, if the private sector – households and private businesses – won’t spend money, the government will have to do the spending for them.

Keynes believed that government spending would stimulate the economy and that, once the economic ball got rolling again, the government could cut back, let the private sector take over, and pay down its debt with the increasing tax receipts from the strong economy.

For a real life example of Keynesianism in action, think of Franklin Roosevelt’s New Deal in the 1930’s. For a more recent example, think of Obama’s “Shovel Ready Projects” in the wake of the 2008 crisis.

If you follow former Congressman Ron Paul’s work, sometimes you’ll hear him speak of military Keynesianism. Military Keynesianism is just what it sounds like. It is Keynesianism, because it is deficit spending. It is military Keynesianism, because the stimulation is done by spending on the military, generally for items that are of questionable value if national defense is actually the goal in mind.

Now Keynes’ argument that, in times of economic slow-downs, the government should spend, and in times of economic prosperity, the government should save up for the next crisis, may sound nice in theory. But there are some significant problems with it in practice.

First, Keynes seems to assume that it’s the government’s job to stimulate the economy. But where does he get this idea? Certainly not from the pages of Scripture. In the Bible, Paul gives the civil magistrate two functions: 1) punishing those who practice evil and 2) praising the good. Absent entirely is any notion that the government has the job of stimulating the economy through deficit spending.

Christians can know that Keynes was wrong, not by appealing to economic statistics, but by comparing what Keynes said to the Word of God. This is an example of the application of Luther’s Schriftprinzip, or writing principle. Luther stated his writing principle in several different ways. Here’s one example, “I have learned to hold only the Holy Scripture inerrant. All other writing I so read that, however learned or holy they may be, I do not hold what they teach to be true unless they prove by Scripture or reason that it must be so” (Luther quoted in John W. Robbins, “Christ and Civilization“). Luther again wrote that Scripture, “is itself the most certain, most easily understood, most plain, is its own interpreter, approving, judging, and illuminating all the statements of all men…. Therefore, nothing except the divine words are to be the first principles for Christians; all human words are conclusions drawn from them and must be bought back to them and approved by them” (Luther quoted in John W. Robbins, “Forgotten Principles of the Reformation“).

But it gets worse for Keynes. Keynes not only rejected the Bible’s teaching on limited government, but he also rejected what the Scriptures have to say about financial prudence, savings and investment.

In Proverbs we read, “A good man leaves an inheritance to his children’s children.” A wise man saves, not just for himself, but for future generations. But Keynesianism is very present oriented. Keynes despised “puritanical” thrift, emphasizing instead spending in the present. For example, writing about the capitalists in the 19th century, Keynes satirically commented,

The duty of ‘saving’ became nine-tenths of virtue and the growth of the cake the object of true religion. There grew round the non-consumption of the cake all those instincts of puritanism which in other ages has withdrawn itself from the world and has neglected the arts of production as well as those of enjoyment. And so the cake increased; but to what end was not clearly contemplated. Individuals would be exhorted not so much to abstain as to defer, and to cultivate the pleasures of security and anticipation. Saving was for old age or for your children; but this was only in theory, – the virtue of the cake was that it was never to be consumed, neither by you nor by your children after you (Keynes, The Economic Consequences of the Peace in Henry Hazlitt, The Failure of the New Economics, 86).

The contempt for savings is one of the major themes of Keynes writing. In this he shows himself hostile to the Protestant Ethic and the Spirit of Capitalism that Max Weber described in his famous 1905 treatise of the same name.

“In the long run we are all dead,” is another famous quote from Keynes. In context, Keynes is complaining about what he viewed as the tendency of economists to offer solutions to problems in the here and now, while intoning the need to consider the long run.

Favoring short-tem thinking over long-term thinking is another problem in Keynes. Christians are to consider the future – “The prophets prophesy falsely, and the priests rule by their own power; and My people love to have it so. But what will you do in the end?” These are the words of the prophet Jeremiah.

Jesus asked a similar question, “For what does it profit a man if he gains the world, and loses his own soul?” Even the quote from Proverbs are the top of this post encourages readers to consider the future, ” A prudent man foresees evil and hides himself; The simple pass on and are punished.

In all three cases, readers hearers are encouraged to consider the future consequences of their actions. But in Keynesian thought, this is foolishness, since “in the end we’re all dead.” Keynesianism is the philosophy of “Let us eat and drink, for tomorrow we die!” This is not the Spirit of Christ, but the spirit of the world.

For Christians, in the end it is impossible to reconcile Keynes and the Scriptures. Keynesian thought has been weighed in the balance and is found wanting.

In Closing

The massive indebtedness of the West in the early 21st century can largely be laid at the feet of both central banking and Keynesian economics. The Christian West became rich by seeking first the kingdom of God, which Christ honored by bestowing upon the citizens of those nations such wealth as likely never had been seen before.

The post-Christian West is sinking into financial ruin, because it has rejected Christ in favor of secular philosophy of the sort typified by the theories that undergird central banking and Keynesian economics.

Unless we in the West repent of our foolishness and seek God’s face in repentance, there is no hope of every returning to sound economic theory and practice.

Next week, Lord willing, we shall take a closer look at one of the major consequences of central banking and Keynesianism, and one of the major factors that has led to the ongoing financial crisis: Big Government.