Monthly Archives: April 2013

Do we have Constitutional Rights?

The idea that we have constitutional rights relies upon faulty logic and makes a mockery of unalienable rights and other rights antecedent to the Constitution.   It is common to hear someone utter the term “constitutional rights”.  The term is nothing more than a colloquialism just as states’ rights is a colloquialism for states’ powers.

The formative thoughts and ideas to develop a written Constitution are encompassed in the Declaration of Independence.  The reason for government is to better secure our unalienable rights.  People exercise their unalienable right of association to form political societies.  The transition from a state of nature to a civil society creates what we know as government.  This transition requires that people give up some rights to better secure the remainder that they retain.  Typically, the rights relinquished relate to interpersonal adjudication.

The founders were studious guardians of their unalienable rights as well as their rights as Englishmen.  Over the period of several centuries Englishmen had secured certain rights under the Anglo-Saxon legal system known as common law and they had an unwritten constitution.  It is important to note that Britain did not have a written constitution but used a common law system that was supplemented by equity law over time.  Rights to due process, rights to property, rights to bear arms, rights to a trial by jury in the vicinage of the crime are a few examples of the rights of Englishmen.

As a point of distinction, common law is essentially judge-made law.  The two functions performed by a judge under a common law system are; 1) judge the facts of the case and 2) to make the law.  Common law relies upon the principle or doctrine of stare decisis – which is that a decision in one case will be followed in the next case.  In other words it is based upon precedence and precedence must be adhered to.  All thirteen colonies adopted common law as the basis of their legal system when they declared independence from Britain.  Today, every state except Louisiana has common law (as well as equity law).

The Constitution is based upon a civil law system which means that laws are written and codified.  There wasn’t a concept or idea that there was one federal or national common law system.  Those involved in writing, debating, and ratifying the Constitution understood this distinction.  Moreover, in structuring the federal government and distributing the power amongst the three branches the power to make law was placed with the legislative branch, whereas the power to judge was placed in the judiciary.  In Federalist 47 Madison said “Were the power of judging joined with the legislative, the life and liberty of the subject would be exposed to arbitrary control, for the judge would then be the legislator.”  The main point to take away from this – there is no such thing as common law in the federal government.

In examining the Constitution there is not a single so-called constitutional right granted to the people.  I challenge anyone to point out where the Constitution has created a right and granted that right to the people.  If the Constitution did create and grant a right, it is fair to assume that a textual analysis of the Constitution and the Bill of Rights would lead to the discovery of words, clauses, sentences, or paragraphs that, indeed, do grant some sort of right.  However, in my textual analysis of the Constitution I fail to find a single right “created and granted” by the Constitution.

Article 1 defines the Legislative branch, the powers delegated to it, prohibitions against certain laws, and prohibitions placed on the States.  Nowhere within Article 1 is any right granted to the people.

In Article 1, Section 9, Clause 2 says the privilege of the writ of habeas corpus shall not be suspended.  Did the Constitution grant the privilege of habeas corpus?  No.  Habeas corpus was established long before the Constitution and was a privilege that was recognized through common law.  The framers and the ratifiers of the Constitution thought it was such an important privilege that it was called out within the Constitution itself to ensure the federal government could not infringe upon it.  By no means did the Constitution create or grant the privilege of habeas corpus.  To the contrary, they prohibited suspending it except under the provisions stipulated in the Constitution itself.

Article 2 defines the powers of the Executive branch.  No rights are granted in this Article.

Article 3 defines the powers of the Judicial branch.  No rights are granted in this Article.

Article 4 generally deals with issues regarding federalism.  Section 2, clause 1 is the privileges and immunities clause (a.k.a. the Comity Clause).  This clause is only saying that if a citizen of one state is in another state that the state they are in must grant them the same privileges and immunities that their own citizens receive.  For instance, if a citizen from Virginia goes to Maryland, while in Maryland the Virginia citizen must be extended the same privileges and immunities as a Maryland citizen.  This is not a grant of rights for there is no such thing as a “federal” set of privileges and immunities.  Instead, privileges and immunities are a state power and varied from state to state.

Article 5 defines the process to amend the Constitution.  No rights are granted in this Article.

Article 6 deals with the debt under the Articles of Confederation, includes the Supremacy clause, and oaths of office.  No rights are granted in this Article.

Article 7 defines how the Constitution would be ratified.  No rights are granted in this Article.

The Bill of Rights are declaratory laws (statements) and restrictions placed upon the federal government.  Certain unalienable rights and other rights of Englishmen were further protected by the Bill of Rights.  The rights of the people are stated through these declaratory laws as they do not give to the people something they did not have before, rather they assert and assure the rights they already possess.

The preamble to the Bill of Rights says, “THE Conventions of a number of the States having at the time of their adopting the Constitution, expressed a desire, in order to prevent misconstruction or abuse of its powers, that further declaratory and restrictive clauses should be added: And as extending the ground of public confidence in the Government, will best insure the beneficent ends of its institution.”

1st Amendment – Protects certain unalienable rights and restricts Congress from establish a religion or prohibiting anyone from exercising their religious beliefs, from abridging freedom of speech or assembly, and protecting the right to petition for a redress of grievances.  None of these can be construed as rights being granted.  Demonstrably, these are rights being protected from government interference.

2nd Amendment – Protects a person’s unalienable right to self-defense and to bear arms.  It is a complete prohibition on the federal government from “infringing” upon those rights.   The right to self-defense is unalienable and to bear arms is an extension of that.  That is not a right granted by government, rather it restricts government.

3rd Amendment – Prohibits the government from quartering troops in a person’s home.  No right is granted in this amendment.

4th Amendment – Protects certain rights of Englishmen that were secured over several centuries through common law, Magna Carta, or the English Bill of Rights.  These were not “new” under the Constitution as Englishmen already had these things.   No rights are granted in this amendment.

5th Amendment – Protects certain rights of Englishmen that were secured over several centuries through common law, Magna Carta, or the English Bill of Rights.  These were not “new” under the Constitution as Englishmen already had these things.   No rights are granted in this amendment.

6th Amendment – Protects certain rights of Englishmen that were secured over several centuries through common law, Magna Carta, or the English Bill of Rights.  These were not “new” under the Constitution as Englishmen already had these things.   No rights are granted in this amendment.

7th Amendment – Protects certain rights of Englishmen that were secured over several centuries through common law, Magna Carta, or the English Bill of Rights.  These were not “new” under the Constitution as Englishmen already had these things.   No rights are granted in this amendment.

8th Amendment – Prohibits the government from imposing certain “cruel or unusual” punishments on citizens.  No rights are granted in this amendment.

9th and 10th amendments – Both are amendments of construction.  In other words, both are meant to guide and instruct a person on how to read and understand the Constitution in regards to both powers delegated and reserved, and rights (enumerated or not) reserved.

Future amendments to the constitution do not grant rights either.  For instance, nowhere in the Constitution is there a political right to suffrage.  Suffrage is a power reserved to the States.  Amendments 15, 19, and 26 do not grant a right to vote for blacks, women, or those over the age of 18.  Those amendments prohibit discrimination on account of race, gender, or age, respectively.  States retain the power to define the qualifications for voters.  Today, a state could enact a law that says only those citizens of the State that own real property and have a net worth greater than $1 million can vote.  Assuming that law doesn’t violate the State’s Constitution only those people meeting that criterion can vote.  Since the law does not discriminate based on race, gender, or age the law is valid.

In conclusion, the Constitution doesn’t grant rights.  The very idea is a fallacy and a dangerous assertion.  If the Constitution granted rights to people it implies that either the people of the States or the government is granting those rights.  The people aren’t granting themselves rights as they already possessed those rights and declared them so through the Bill of Rights.  Likewise, if the government grants rights to men then government can abridge, deny, infringe or revoke those rights.  To believe or concede that government grants rights means government decides what rights you have and do not have, which rights you can and cannot exercise and under what circumstances, and that government can rescind or revoke those rights at any time.  At best it is wrong-headed and makes a mockery of unalienable rights and the long history of the rights of Englishmen.  At worst it endangers the very lives, liberty, and property of all members of society to concede government has this power of the people.

The Constitution protects rights  that already existed before the document was even drafted.  The right to trial by jury, the right to due process, the right to bear arms, the right of conscience to worship as one desires (or not), etc.   People should refrain from using the term constitutional rights and supplant it with the term rights protected (or secured) by the Constitution.

Advertisements

Leave a comment

Filed under Constitution

Do we Need a Bill of Rights?

The Bill of Rights is often misconstrued by many people claiming to understand rights and the Constitution.  On numerous occasions I’ve discussed and debated the BOR with people that believe either the Bill of Rights was intended to apply to the States or that the 14th amendment was originally intended to incorporate the Bill of Rights on the States.  Both views are demonstrably wrong.  Unfortunately, nearly everyone that argues one or both of those points basis their argument on Supreme Court rulings.  Rulings that were made decades or even centuries after the Bill of Rights or the 14th amendment were ratified.

More importantly, do we even need a Bill of Rights and why is there a Bill of Rights?  According to advocates in favor of ratification the answer was emphatically, NO!  That is correct.  The proponents did not feel it was necessary to include a Bill of Rights and this article explains why that was the case and why there is a Bill of Rights.  I agree with the Federalists on this issue with one caveat.  That caveat is, if the Constitution was constructed precisely how the Federalists represented it to the state ratification conventions then there would be no need for a Bill of Rights as future generations would follow the identical understanding and know the federal government is very limited in its powers.

The Constitution was drafted by delegates at the Philadelphia convention in 1787.  They produced a document that was merely a proposal.  The document had no force and no authority in the United States. 

How was the Constitution ratified?  It was ratified by State ratifying conventions.  Delegates were selected by the people to represent them at these conventions.  Each state considered and assessed the Constitution independent of all other States.  One state could not bind another state or the people of another state to their decision.  The debate over We, the people of the United States, rages on because of the word people in the preamble.  The term “the people of the United States” means the people of the state of Virginia, the people of the state of New York, the people of the state of Maryland, etc.  In other words, there wasn’t a national vote that transcended state boundaries nor was there a majority vote of the people of the thirteen states.  It was an act of the people of each free, independent, and sovereign state to decide on assenting to the Constitution. 

This point is essential to any original understanding of the Constitution.  Since the people of each state independently assented to and ratified the Constitution, they are the bodies that put the instrument into effect.  To properly understand what the Constitution meant, we must look to the understanding of those that ratified the document.  Those are the delegates at the State ratifying conventions.  At those conventions there were proponents and opponents to ratification.  The former called The Federalists and the latter called The Anti-Federalists.  In a very general sense, The Anti-Federalists believed certain Articles, Sections, or Clauses of the Constitution were deficient because:

 

1)      The delegation of powers could be construed to be vast and beyond the enumeration.

2)      The new Constitution would consolidate the States into one national government rather than confederate the States into a federal government.  In other words the Constitution would annihilate the State governments and State constitutions.

3)      That essential rights and liberties of freemen were not protected under the Constitution by a Bill or Declaration of Rights.

The focus of our examination will be on the third item; the essential rights and liberties of freeman were not protected under the Constitution by a Bill or Declaration of Rights. To do so also brings into explanations regarding the first two items.  In totality, these three items provide an original understanding of the powers of the general government as opposed to those powers retained by the States or the people.

Massachusetts, Virginia, New York, North Carolina, New Hampshire, South Carolina, and Rhode Island all submitted amendments to the Constitution as part of their ratification document.  Maryland proposed amendments but they were not submitted as part of their ratification.  The other states, all early ratifiers of the Constitution, did not submit amendments. 

Of this list the largest and more important states were Massachusetts, Virginia, and New York.  These three states represented 40% of the population.  If Pennsylvania were included, those four states represented 54% of the population.  The focus of the arguments will come from those states that insisted upon a Bill of Rights, as well as writings from the Federalist Papers and additional commentary from the 1st Congress that proposed and debated amendments to the Constitution. 

Proponents for ratification of the Constitution insisted a Bill of Rights was unnecessary.  Some commented that the inclusion of a Bill of Rights was actually dangerous.  On what grounds did they make these assertions?  The prevailing arguments set forth by the Federalists were:

1)      The powers delegated by the Constitution to the federal government were expressly defined.  What was not given was retained; therefore the federal government cannot abridge or deny your unalienable rights such as your right to speech, to associate, to contract, to self-defense, to conscience, etc.  Likewise, certain civil rights such as trial by jury in the vicinage of the crime, due process, etc. could not be denied or infringed.

2)      The rights retained by the people are so expansive that an attempt to enumerate rights that are protected implies those not listed are implied to be given to government. 

Below are numerous excerpts made at State Ratification Conventions:

North Carolina Ratification Convention:

Mr. Maclaine:  The gentleman has wandered out of his way to tell us — what has so often been said out of doors — that there is no declaration of rights; that consequently all our rights are taken away. It would be very extraordinary to have a bill of rights, because the powers of Congress are expressly defined; and the very definition of them is as valid and efficacious a check as a bill of rights could be, without the dangerous implication of a bill of rights. The powers of Congress are limited and enumerated. We say we have given them those powers, but we do not say we have given them more. We retain all those rights which we have not given away to the general government… ? If they can assume powers not enumerated, there was no occasion for enumerating any powers. The gentleman is learned. Without recurring to his learning, he may only appeal to his common sense; it will inform him that, if we had all power before, and give away but a part, we still retain the rest.

Governor Johnston:  But the gentleman says that a bill of rights was necessary. It appears to me, sir, that it would have been the highest absurdity to undertake to define what rights the people of the United States were entitled to; for that would be as much as to say they were entitled to nothing else. A bill of rights may be necessary in a monarchical government, whose powers are undefined. Were we in the situation of a monarchical country? No, sir. Every right could not be enumerated, and the omitted rights would be sacrificed, if security arose from an enumeration. The Congress cannot assume any other powers than those expressly given them, without a palpable violation of the Constitution… The rights of the people, in my opinion, cannot be affected by the federal courts. I do not know how inferior courts will be regulated.

Mr. Iredell:  Of what use, therefore, can a bill of rights be in this Constitution, where the people expressly declare how much power they do give, and consequently retain all they do not? It is a declaration of particular powers by the people to their representatives, for particular purposes… A bill of rights, as I conceive, would not only be incongruous, but dangerous. No man, let his ingenuity be what it will, could enumerate all the individual rights not relinquished by this Constitution. Suppose, therefore, an enumeration of a great many, but an omission of some, and that, long after all traces of our present disputes were at an end, any of the omitted rights should be invaded, and the invasion be complained of; what would be the plausible answer of the government to such a complaint? Would they not naturally say, “We live at a great distance from the time when this Constitution was established. We can judge of it much better by the ideas of it entertained at the time, than by any ideas of our own. The bill of rights, passed at that time, showed that the people did not think every power retained which was not given, else this bill of rights was not only useless, but absurd. But we are not at liberty to charge an absurdity upon our ancestors, who have given such strong proofs of their good sense, as well as their attachment to liberty. So long as the rights enumerated in the bill of rights remain unviolated, you have no reason to complain. This is not one of them.” Thus a bill of rights might operate as a snare rather than a protection. If we had formed a general legislature, with undefined powers, a bill of rights would not only have been proper, but necessary; and it would have then operated as an exception to the legislative authority in such particulars. It has this effect in respect to some of the American constitutions, where the powers of legislation are general. But where they are powers of a particular nature, and expressly defined, as in the case of the Constitution before us, I think, for the reasons I have given, a bill of rights is not only unnecessary, but would be absurd and dangerous.

Mr. Maclaine:  The gentleman surely must know that, if there be certain rights which never can, nor ought to, be given up, these rights cannot be said to be given away, merely because we have omitted to say that we have not given them up. Can any security arise from declaring that we have a right to what belongs to us? Where is the necessity of such a declaration? If we have this inherent, this unalienable, this indefeasible title to those rights, if they are not given up, are they not retained? If Congress should make a law beyond the powers and the spirit of the Constitution, should we not say to Congress, “You have no authority to make this law. There are limits beyond which you cannot go. You cannot exceed the power prescribed by the Constitution. You are amenable to us for your conduct. This act is unconstitutional. We will disregard it, and punish you for the attempt… Shall we give up any hing hut what is positively granted by that instrument? It would be the greatest absurdity for any man to pretend that, when a legislature is formed for a particular purpose, it can have any authority but what is so expressly given to it, any more than a man acting under a power of attorney could depart from the authority it conveyed to him, according to an instance which I stated when speaking on the subject before.  As for example: — if I had three tracts of land, one in Orange, another in Caswell, and another in Chatham, and I gave a power of attorney to a man to sell the two tracts in Orange and Caswell, and he should attempt to sell my land in Chatham, would any man of common sense suppose he had authority to do so? In like manner, I say, the future Congress can have no right to exercise any power but what is contained in that paper. Negative words, in my opinion, could make the matter no plainer than it was before. The gentleman says that unalienable rights ought not to be given up. Those rights which are unalienable {167} are not alienated. They still remain with the great body of the people. If any right be given up that ought not to be, let it be shown. Say it is a thing which affects your country, and that it ought not to be surrendered: this would be reasonable. But when it is evident that the exercise of any power not given up would be a usurpation, it would be not only useless, but dangerous, to enumerate a number of rights which are not intended to be given up; because it would be implying, in the strongest manner, that every right not included in the exception might be impaired by the government without usurpation; and it would be impossible to enumerate every one. Let any one make what collection or enumeration of rights he pleases, I will immediately mention twenty or thirty more rights not contained in it. In my opinion, there is no man, of any reason at all, but must be satisfied with so clear and plain a definition. If the Congress should claim any power not given them, it would be as bare a usurpation as making a king in America. If this Constitution be adopted, it must be presumed the instrument will be in the hands of every man in America, to see whether authority be usurped; and any person by inspecting it may see if the power claimed be enumerated. If it be not, he will know it to be a usurpation.

Governor Johnston:  When Congress makes a law in virtue of their constitutional authority, it will be an actual law. I do not know a more expressive or a better way of representing the idea by words. Every law consistent with the Constitution will have been made in pursuance of the powers granted by it. Every usurpation or law repugnant to it cannot have been made in pursuance of its powers. The latter will be nugatory and void. I am at a loss to know what he means by saying the laws of the Union will be unalterable.

South Carolina Ratification Convention

Gen. CHARLES COTESWORTH PINCKNEY:   With regard to the liberty of the press, the discussion of that matter was not forgotten by the members of the Convention. It was fully debated, and the impropriety of saying anything about it in the Constitution clearly evinced. The general government has no powers but what are expressly granted to it; it therefore has no power to take away the liberty of the press. That invaluable blessing, which deserves all the encomiums the gentleman has justly bestowed upon its is secured by all our state constitutions; and to have mentioned it in our general Constitution would perhaps furnish an argument, hereafter, that the general government had a right to exercise powers not expressly delegated to it. For the same reason, we had no bill of rights inserted in our Constitution; for, as we might perhaps have omitted the enumeration of some of our rights, it might hereafter be said we had delegated to the general government a power to take away such of our rights as we had not enumerated: but by delegating express powers, we certainly reserve to ourselves every power and right not mentioned in the Constitution.

Charles Pinckney:  No powers could be executed or assumed [by the federal government], but such as were expressly delegated.

Charles Pinckney address to the South Carolina House of Representatives defending the proposed Constitution said, “The distinction which has often been taken between the nature of a federal and state government appeared to be conclusive:  that in the former no powers could be executed or assumed, but such as were expressly delegated; that in the latter, the indefinite power was given to the government, except upon points that were, by express compact, reserved to the people.”  In Massachusetts, newspapers published Pinckney’s “Observations on the new federal Constitution” where he said “The powers vested in the federal government are particularly defined, so that each state still retains its sovereignty in what concerns its own internal government, and a right to exercise every power of a sovereign state not expressly delegated to the government of the United States.”

Virginia Ratifying Convention

James Madison:  In some respects it is a government of a federal nature; in others, it is of a consolidated nature. Even if we attend to the manner in which the Constitution is investigated, ratified, and made the act of the people of America, I can say, notwithstanding what the honorable gentleman has alleged, that this government is not completely consolidated, nor is it entirely federal. Who are parties to it? The people — but not the people as composing one great body; but the people as composing thirteen sovereignties. Were it, as the gentleman asserts, a consolidated government, the assent of a majority of the people would be sufficient for its establishment; and, as a majority have adopted it already, the remaining states would be bound by the act of the majority, even if they unanimously reprobated it. Were it such a government as is suggested, it would be now binding on the people of this state, without having had the privilege of deliberating upon it.

If Virginia was separated from all the states, her power and authority would extend to all cases: in like manner, were all powers vested in the general government, it would be a consolidated government; but the powers of the federal government are enumerated; it can only operate in certain cases; it has legislative powers on defined and limited objects, beyond which it cannot extend its jurisdiction.

Mr. Lee of Westmoreland:  I say that this new system shows, in stronger terms than words could declare, that the liberties of the people are secure. It goes on the principle that all power is in the people, and that rulers have no powers but what are enumerated in that paper. When a question arises with respect to the legality of any power, exercised or assumed by Congress, it is plain on the side of the governed: Is it enumerated in the Constitution? If it be, it is legal and just. It is otherwise arbitrary and unconstitutional. Candor must confess that it is infinitely more attentive to the liberties of the people than any state government… [b]ut that, in the federal government, the rulers of the people were vested with certain defined powers, and that what were not delegated to those rulers were retained by the people. The consequence of this, he said, was, that the limited powers were only an exception to those which rested in the people, and that they knew what they had given up, and could be in no danger. He exemplified the proposition in a familiar manner. He observed, that, if a man delegated certain powers to an agent, it would be an insult upon common sense to suppose that the agent could legally transact any business for his principal which was not contained in the commission whereby the powers were delegated; but that, if a man empowered his representative or agent to transact all his business except certain enumerated parts, the clear result was, that the agent could lawfully transact every possible part of his principal’s business except the enumerated parts; and added, that these plain propositions were sufficient to demonstrate the inutility and folly (were he permitted to use the expression) of bills of rights.

Mr. George Nichols:  But it is objected to for want of a bill of rights. It is a principle universally agreed upon, that all powers not given are retained. Where, by the Constitution, the general government has general powers for any purpose, its powers are absolute. Where it has powers with some exceptions, they are absolute only as to those exceptions. In either case, the people retain what is not conferred on the general government, as it is by their positive grant that it has any of its powers… In disputes between Congress and the people, the reverse of the proposition holds. Is the disputed right enumerated? If not, Congress cannot meddle with it… Which is the most safe? The people of America know what they have relinquished for certain purposes. They also know that they retain every thing else, and have a right to resume what they have given up, if it be perverted from its intended object.

It is agreed upon by all that the people have all power. If they part with any of it, is it necessary to declare that they retain the rest? Liken it to any similar case. If I have one thousand acres of land, and I grant five hundred acres of it, must I declare that I retain the other five hundred? Do I grant the whole thousand acres, when I grant five hundred, unless I declare that the five hundred I do not give belong to me still? It is so in this case. After granting some powers, the rest must remain with the people.

But the gentleman says that, by this Constitution, they have power to make laws to define crimes and prescribe punishments; and that, consequently, we are not free from torture. Treason against the United States is defined in the Constitution, and the forfeiture limited to the life of the person attainted. Congress have power to define and punish piracies and felonies committed on the high seas, and offences against the laws of nations; but they cannot define or prescribe the punishment of any other crime whatever, without violating the Constitution.

James Madison:  [w]as surprised that any gentleman should return to the clauses which had already been discussed. He begged the gentleman to read the clauses which gave the power of exclusive legislation, and he might see that nothing could be done without the consent of the states. With respect to the supposed operation of what was denominated the sweeping clause, the gentleman, he said, was mistaken; for it only extended to the enumerated powers. Should Congress attempt to extend it to any power not enumerated, it would not be warranted by the clause. As to the restriction in the clause under consideration, it was a restraint on the exercise of a power expressly delegated to Congress; namely, that of regulating commerce with foreign nations.

Governor Randolph:  Let me say that, in my opinion, the adversaries of the Constitution wander equally from the true meaning. If it would not fatigue the house too far, I would go back to the question of reserved rights. The gentleman supposes that complete and unlimited legislation is vested in the Congress of the United States. This supposition is founded on false reasoning. What is the present situation of this state? She has possession of all rights of sovereignty, except those given to the Confederation. She must delegate powers to the confederate government. It is necessary for her public happiness. Her weakness compels her to confederate with the twelve other governments. She trusts certain powers to the general government, in order to support, protect, and defend the Union. Now, is there not a demonstrable difference between the principle of the state government and of the general government? There is not a word said, in the state government, of the powers given to it, because they are general. But in the general Constitution, its powers are enumerated. Is it not, then, fairly deducible, that it has no power but what is expressly given it? — for if its powers were to be general, an enumeration would be needless.

But the insertion of the negative restrictions has given cause of triumph, it seems, to gentlemen. They suppose that it demonstrates that Congress are to have powers by implication. I will meet them on that ground. I persuade myself that every exception here mentioned is an exception, not from general powers, but from the particular powers therein vested. To what power in the general government is the exception made respecting the importation of negroes? Not from a general power, but from a particular power expressly enumerated. This is an exception from the power given them of regulating commerce. He asks, Where is the power to which the prohibition of suspending the habeas corpus is an exception? I contend that, by virtue of the power given to Congress to regulate courts, they could suspend the writ of habeas corpus. This is therefore an exception to that power.

But the rhetoric of the gentleman has highly colored the dangers of giving the general government an indefinite power of providing for the general welfare. I contend that no such power is given. They have power “to lay and collect taxes, duties, imposts, and excises, to pay the debts and provide for the common defence and general welfare of the United States.” Is this an independent, separate, substantive power, to provide for the general welfare of the United States? No, sir. They can lay and collect taxes, &c. For what? To pay the debts and provide for the general welfare. Were not this the case, the following part of the clause would be absurd. It would have been treason against common language. Take it altogether, and let me ask if the plain interpretation be not this — a power to lay and collect taxes, &c., in order to provide for the general welfare and pay debts.

The honorable gentleman has praised the bill of rights of Virginia, and called it his guardian angel, and vilified this Constitution for not having it. Give me leave to make a distinction between the representatives of the people of a particular country, who are appointed as the ordinary legislature, having no limitation to their powers, and another body arising from a compact, and with certain delineated powers. Were a bill of rights necessary in the former, it would not be in the latter; for the best security that can be in the latter is the express enumeration of its powers.

Virginia went on to propose amendments to the Constitution that encompassed representations made by The Federalists that the general government is limited to powers expressly delegated.  The 1st amendment read  “1st. That each state in the Union shall respectively retain every power, jurisdiction, and right, which is not by this Constitution delegated to the Congress of the United States, or to the departments of the federal government.”

Connecticut

Roger Sherman – Member of the Philadelphia Convention in a letter published December 25, 1788 in the New Haven Gazette written under the title “A Citizen of New Haven II”.  Sherman said, “The powers vested in the federal government are clearly defined, so that each state still retain its sovereignty in what concerns its own internal government, and a right to exercise every power of a sovereign state not particularly delegated to the government of the United States.”

The Federalist Papers

Federalist 39 – But it was not sufficient,” say the adversaries of the proposed Constitution, “for the convention to adhere to the republican form. They ought, with equal care, to have preserved the FEDERAL form, which regards the Union as a CONFEDERACY of sovereign states; instead of which, they have framed a NATIONAL government, which regards the Union as a CONSOLIDATION of the States.” And it is asked by what authority this bold and radical innovation was undertaken? The handle which has been made of this objection requires that it should be examined with some precision.

On examining the first relation, it appears, on one hand, that the Constitution is to be founded on the assent and ratification of the people of America, given by deputies elected for the special purpose; but, on the other, that this assent and ratification is to be given by the people, not as individuals composing one entire nation, but as composing the distinct and independent States to which they respectively belong. It is to be the assent and ratification of the several States, derived from the supreme authority in each State, the authority of the people themselves. The act, therefore, establishing the Constitution, will not be a NATIONAL, but a FEDERAL act.

That it will be a federal and not a national act, as these terms are understood by the objectors; the act of the people, as forming so many independent States, not as forming one aggregate nation, is obvious from this single consideration, that it is to result neither from the decision of a MAJORITY of the people of the Union, nor from that of a MAJORITY of the States. It must result from the UNANIMOUS assent of the several States that are parties to it, differing no otherwise from their ordinary assent than in its being expressed, not by the legislative authority, but by that of the people themselves. Were the people regarded in this transaction as forming one nation, the will of the majority of the whole people of the United States would bind the minority, in the same manner as the majority in each State must bind the minority; and the will of the majority must be determined either by a comparison of the individual votes, or by considering the will of the majority of the States as evidence of the will of a majority of the people of the United States. Neither of these rules have been adopted. Each State, in ratifying the Constitution, is considered as a sovereign body, independent of all others, and only to be bound by its own voluntary act. In this relation, then, the new Constitution will, if established, be a FEDERAL, and not a NATIONAL constitution.

Federalist 41 – Some, who have not denied the necessity of the power of taxation, have grounded a very fierce attack against the Constitution, on the language in which it is defined. It has been urged and echoed, that the power “to lay and collect taxes, duties, imposts, and excises, to pay the debts, and provide for the common defense and general welfare of the United States,” amounts to an unlimited commission to exercise every power which may be alleged to be necessary for the common defense or general welfare. No stronger proof could be given of the distress under which these writers labor for objections, than their stooping to such a misconstruction.

Had no other enumeration or definition of the powers of the Congress been found in the Constitution, than the general expressions just cited, the authors of the objection might have had some color for it; though it would have been difficult to find a reason for so awkward a form of describing an authority to legislate in all possible cases. A power to destroy the freedom of the press, the trial by jury, or even to regulate the course of descents, or the forms of conveyances, must be very singularly expressed by the terms “to raise money for the general welfare.

For what purpose could the enumeration of particular powers be inserted, if these and all others were meant to be included in the preceding general power? Nothing is more natural nor common than first to use a general phrase, and then to explain and qualify it by a recital of particulars.

Federalist 45 – The powers delegated by the proposed Constitution to the federal government are few and defined. Those which are to remain in the State governments are numerous and indefinite. The former will be exercised principally on external objects, as war, peace, negotiation, and foreign commerce; with which last the power of taxation will, for the most part, be connected. The powers reserved to the several States will extend to all the objects which, in the ordinary course of affairs, concern the lives, liberties, and properties of the people, and the internal order, improvement, and prosperity of the State.

The operations of the federal government will be most extensive and important in times of war and danger; those of the State governments, in times of peace and security. As the former periods will probably bear a small proportion to the latter, the State governments will here enjoy another advantage over the federal government. The more adequate, indeed, the federal powers may be rendered to the national defense, the less frequent will be those scenes of danger which might favor their ascendancy over the governments of the particular States.

June 8, 1789 – Madison proposes amendments to the Constitution

But whatever may be form which the several states have adopted in making declarations in favor of particular rights, the great object in view is to limit and qualify the powers of government, by excepting out of the grant of power those cases in which the government ought not to act, or to act only in a particular mode.

It has been said that in the federal government they are unnecessary, because the powers are enumerated, and it follows that all that are not granted by the constitution are retained: that the constitution is a bill of powers, the great residuum being the rights of the people; and therefore a bill of rights cannot be so necessary as if the residuum was thrown into the hands of the government. I admit that these arguments are not entirely without foundation; but they are not conclusive to the extent which has been supposed.

It has been objected also against a bill of rights, that, by enumerating particular exceptions to the grant of power, it would disparage those rights which were not placed in that enumeration, and it might follow by implication, that those rights which were not singled out, were intended to be assigned into the hands of the general government, and were consequently insecure. This is one of the most plausible arguments I have ever heard urged against the admission of a bill of rights into this system; but, I conceive, that may be guarded against. I have attempted it, as gentlemen may see by turning to the last clause of the 4th resolution.

I wish also, in revising the constitution, we may throw into that section, which interdicts the abuse of certain powers in the state legislatures, some other provisions of equal if not greater importance than those already made. The words, “No state shall pass any bill of attainder, ex post facto law, &c.” were wise and proper restrictions in the constitution. I think there is more danger of those powers being abused by the state governments than by the government of the United States. The same may be said of other powers which they possess, if not controlled by the general principle, that laws are unconstitutional which infringe the rights of the community. I should therefore wish to extend this interdiction, and add, as I have stated in the 5th resolution, that no state shall violate the equal right of conscience, freedom of the press, or trial by jury in criminal cases; because it is proper that every government should be disarmed of powers which trench upon those particular rights.

Conclusions

The Federalists made numerous representations emphatically declaring that the powers delegated to the general government were limited and enumerated at the State Ratifying Conventions, in writings in the New York Papers that eventually became known as The Federalist Papers, during the debates in Congress when amendments were proposed and debated, and even after the Bill of Rights were adopted.  Those Federalists that opposed a Bill of Rights argued that because the powers were enumerated that no others could be assumed without resulting in a usurpation of power.   According to The Federalists the maxim “what was not given was retained” governed construction of the Constitution.  It was The Federalists that insisted the Constitution would be constructed strictly and in accordance with the understandings provided at the State Ratifying Conventions. 

Likewise, the Bill of Rights was seen as a dangerous and unnecessary proposition.  The Federalists argued that because the powers delegated were limited and enumerated, and the Constitution would be constructed strictly according to the understandings they provided, any attempt to enumerate a vast number of rights retained by the people would be dangerous.  The danger perceived by The Federalists was those rights not explicitly protected under a Bill of Rights would be assumed to be given up to the general government.  The challenge facing Madison and others in Congress when proposing amendments was to further restrict the powers delegated or to protect the rights.  The Bill of Rights is a blended solution where powers over certain rights and objects were further restricted and rights were enumerated to ensure their protection.

Demonstrably, the amendments that became known as the Bill of Rights applied to the federal government.  The style of the document and the amendments is consistent.  When prohibitions were made against the states such as those in Article I Section X, those prohibitions say “No state shall”.  In cases where Madison proposed amendments to Congress he also proposed some that restricted states and in all cases the style was “No state shall”.  In future amendments the same style, or one nearly identical, to “No state shall” was used. 

Finally, the two most important amendments in the Bill of Rights are arguably the only two that are necessary.  They are the ninth and tenth amendments.  Both are amendments of construction and go hand in glove with each other.  The ninth amendment is meant to protect the vast number of rights not otherwise enumerated in the Bill of Rights.  Future generations would not be able to use sophistry or construction to abridge or deny other rights not enumerated.  The amendment addressed the concerns of those that feared any rights not included in the enumeration would be given.   This amendment protects those rights and acts as a further restriction on enumerated and delegated powers to ensure laws are not passed that violate all rights – enumerated or not.  For instance, if there was no second amendment restricting the federal government from infringing upon the right to bear arms, that right would still be protected under the ninth amendment.

The tenth amendment was meant to ensure that future generations did not use sophistry or construction to enlarge the powers enumerated in the Constitution.  In other words, if the power was not delegated or the Constitution remained silent on a power – delegated or reserved – that the power was reserved to the States or the people.  Given the Federalists representations that the powers delegated were enumerated, few and defined, and that was reason enough to not require a Bill of Rights, then anyone attempting to understand the constitutional powers delegated should easily determine what was delegated and in the multitude of cases where power wasn’t delegated or the Constitution remains silent, the powers are reserved to the people or the States.

 

Leave a comment

Filed under Constitution

Can Cyprus Happen Here?

Cyprus is a small island in far eastern part of the Mediterranean Sea many people know nothing about.  But the recent banking crisis in Cyprus has raised many eyebrows; not only in the Euro Zone but also in Russia and the United States.

The question is not so much what happened in Cyprus, but could what happen in Cyprus occur in the United States?  The answer will come, but first some background on the U.S. current monetary regime that started in 1971.

Global banking systems, whether in Europe, Japan, China, or the United States, are debt-based systems using fiat currencies.  In every case Central Banks control two critical money components; the printing of money and the cost of money.  Most Central Banks can simply print money at will and control the cost of money because they set the interest rates.  Based on current monetary policy across major Central Banks the major beneficiaries are governments and the banking sector.

The entire banking system creates an inherent conflict with those that created the system and the people.  Money (as we use the term today) is used as deposits by savers (asset to the saver and a liability to the bank) and debt is created when banks extend credit to borrowers (debts by the borrowers and assets to the banks).  This is how real people interact with the traditional banking system.

On the other hand, our Government borrows the difference between its expenses and its revenues.  In budgetary terms this is a deficit and deficits add to the national debt.  When government borrows it sell securities to buyers such as foreign governments, primary dealers, and direct and indirect bidders.

Once debt is incurred it becomes nominal because the price is reflected at the time of the transaction.  The debt isn’t adjusted for inflation.  In other words, if you incur a dollar of debt twenty years ago you only need a dollar to pay the debt, regardless of what that dollar may purchase today.  In real terms, for purchases made today, the dollar’s purchasing power is adjusted for inflation.  In real terms (purchasing power) the dollar buys fewer goods.  In nominal terms, a dollar pays off a dollar of debt.

This is an important distinction for many reasons.  Government funds its deficits by borrowing money through the sale of securities.  Those securities have different lengths of maturity (2 year, 7 year, 10 year, 30 year, etc.), and pay interest when redeemed.  If the government wants to run bigger deficits it simply sells more securities.  The result is a larger debt and an increase in interest payments.

The Federal Reserve receives dollars from the buyers of the Government’s securities, deposits those funds, and transfers them to the U.S. Treasury for the government to pay for its profligate spending.  As the U.S. debt increases and annual deficits expand into the trillions of dollars, buyers become concerned as the repayment risk increases.  Buyers may demand higher interest rates to continue buying our debt.  But if the Fed increases interest rates it also means the interest payments on the outstanding debt increase requiring a larger percentage of total government payments to service that debt.

This is where the Fed steps in and monetizes the debt.  The Federal Reserve is also a buyer of the securities it sells.  The Fed holds many auctions of different securities every month.  If one auction is $30 billion of 7 year notes at x % interest and the total buyers (excluding the Fed) only buy $20 billion of the debt, the Fed steps in and buys the $10 billion not otherwise sold.  The Federal Reserve buys it as a direct bidder (who is anonymous). And makes digital entries to transfer $10 billion to the U.S. Treasury and adds $10 billion onto the Federal Reserve’s balance sheet.  Ten billion dollars is now with the U.S. Treasury for the Government to “spend”.  This is how debt is monetized.

Interest rates have both advantages and disadvantages depending on your perspective.  If you are a net producer (a saver), someone living on fixed income like Social Security, etc. low interest rates are inimical to your interests.  After your expenses if you have excess earnings you are a net producer.  If you deposit your excess earnings into a savings account and earn < 1% interest there is no incentive to save (especially when inflation exceeds the interest rate you have real negative interest rates and lose money by depositing it in a savings account).

When Governments run deficits and accrue large national debts high interest rates are inimical to its interest because higher interest rates result in more debt service.  For a net producer, higher interest rates are good.  So, the interests of the government and the interests of a net producer are, for the most part, diametrically opposite.

Likewise, there are net consumers that spend more than they earn.  These people are borrowers who take on debt through credit expansion.  For these people, low interest rates are good.  In fact, we can be a net producer and take on debt (like a mortgage) where we’d prefer a low interest rate on our mortgage but a high interest rate on our savings.  The issue with low interest rates is they are often kept low not only because of government debt but because the Fed is trying to encourage economic activity through consumerism.  In other words, the Fed wants to discourage savings and encourage spending; including taking on more debt through credit expansion.

The Gross Domestic Product (GDP) is a nominal measurement of economic activity.  GDP can grow through real production of goods and services desired by people.  More importantly, GDP can grow through the expansion of the credit market and through inflation.  In other words, GDP can be manipulated higher by printing money even though real production of goods and services are stagnant or falling.

Likewise, increasing credit market debt also drives up GDP.  Credit is nothing more than making a future purchase today.  If you buy a good for $500 you can pay for it today with cash or you can pay for it later through credit.  Credit merely brings future purchases forward to today.  Likewise, for people it is future earnings that pay off this past purchases.  That’s not the case for government as you’ll see.

Below is a chart that overlays the total credit market debt outstanding, Gross Domestic Product, and the National Debt from 1971 through 2012.  I purposely picked 1971 as the starting point because that is when President Nixon broke the 1944 Bretton Woods agreement and removed the United States from the international gold standard which is the starting point of our current monetary regime.

TCMDO-GDP

On the Total Credit Market Debt Outstanding (TCMDO) series I’ve ticked off every doubling of the TCMDO.  From 1970 through 2007 the TCMDO has doubled 5 times which, on average, is roughly once every seven years.  Compare the rate of growth in the TCMDO to the growth rate of the GDP series where it is substantially lower.  So, by 2014-2015 we are due for another doubling of the TCMDO to achieve the same anemic GDP growth rates.  According to the TCMDO growth from 2008 to 2012 it has essentially flat-lined as credit market debt isn’t expanding anywhere near its historical rate.  This presents the Government and the Fed with a major dilemma.

On a side note, many people remember the late 1970s as a troubled economic time with high interest rates, high unemployment, and high inflation.  By 1980, the price of gold reached $200 an ounce.  In inflation adjusted dollars this would be $2400 today.  So, in 1980 gold was at an all-time high.  Private gold ownership became legal again in the 1970s and as inflation and other economic events were destroying the purchasing power of the currency people were buying gold.  But, something happened in 1980 to change that (no, not Reagan’s electoral victory).  Fiat currencies require confidence or else they implode.  By 1980, confidence in the dollar continued to erode and people were buying gold instead.  To stem the tide the Government created a new program called the 401K.  In my opinion, it was created precisely to restore confidence in the dollar and to ensure people would keep their savings denominated in the currency.  In return for contributing your excess savings into 401Ks (instead of gold or other non-dollar denominated assets) you didn’t have to pay taxes at that time.  It was sheer brilliance by the Government to restore confidence in the dollar.    But I digress.

Furthermore, from 1971 forward the trade imbalances began to widen.  If you look at the net balance of payments (net of imports and exports) the U.S. imports between $400 and $700 billion more then it exports.  This has widened ever since Nixon took us off the gold standard.  The primary reason is that gold acts as both a brake and spur when it comes to imports and exports.  Gold always flows in the opposite direction of goods.

Since, the U.S. was the de facto gold supplier under the Bretton Woods gold-exchange standard foreign banks that wanted gold had to exchange dollars for it.  Under that system if the import-export balance got out of kilter (more imports) then gold flowed out of the country.  In the U.S. gold peaked in the mid to late 1950s and then the supply began to shrink as the country imported more and more gold was exported.  By the late 1960s, it was apparent the U.S. wasn’t able to stop the outflow of gold and eventually would not be able to redeem dollars for gold.

If a country wanted to retain its gold it would change the balance of imports and exports or even reverse it so they exported more and imported gold in return.  Gold can act as a “brake” to stop the flow of gold out of the country and also act as a “spur” to start the flow of gold into the country.  Generally, as you increase your exports it is a result of productive growth of goods desired by others.  However, once the gold backing is removed there is nothing to stop or reverse the trade imbalance.  Thus, it follows that jobs get exported as well.  Because the imported manufactured goods were “cheap” it also resulted in a reduction of our domestic production capacity.  Therefore, jobs were lost to overseas manufacturers.  Most people fail to connect the current monetary regime (complete fiat currency without any gold backing) to the loss of productive jobs in the U.S.

It is no coincidence that government deficits ballooned starting in late 2008 through present day.  Deficit expansion allows government to borrow more money in an attempt to boost the economy because the credit market debt is failing to expand at its historical rate.  The Keynesian aggregate demand crowd at the Fed is attempting to stimulate the economy using low interest rates to fund government deficits and private sector credit market expansion.  The next set of bubbles are being inflated whether through sub-prime auto loans, government student loans, or the financial bubble being created in the traditional and shadow banking systems.  The Fed is hoping you will buy the latest gadget, finance a new car purchase, take on a student loan, or simply just use more credit to live beyond your means.

In the past five years the Government has bailed out banks through the Troubled Asset Relief Program (TARP), bailed out private companies like General Motors, passed a stimulus bill in 2009 which failed miserably and only stimulated the pockets of favored constituency groups, increased the annual federal deficit to over $1 trillion per year.

Meanwhile, the Federal Reserve has expanded its balance sheet to over $3 trillion, is purchasing $85 billion a month in mortgage backed securities, and expanded the monetary base (m0) from $800 billion in 2008 to $2.9 trillion today.  The Fed is providing Federal Reserve Notes to foreign central banks – especially Europe – to provide liquidity in their failed banking system.  The Fed also engages in repurchasing agreements with the primary dealers (i.e. Goldman Sachs, J.P. Morgan, etc.) where the primary dealer buys U.S. Securities from the Fed and then “repos” them back to the Fed for cash at a near zero interest rate.  The Fed holds the securities as collateral and the primary dealers use the cash for their own hedge fund and proprietary trading desks.

The government and the banking system are dependent upon one another.  The banking system needs the system to remain intact to continue to reap huge profits through the traditional banking system and fractional reserve banking while the government needs the Fed to set monetary policy in accordance with the Government’s best interest.  Their interests are inimical to the interest of Americans.  Naturally, politicians tell you otherwise, and claim to be against Wall Street and are looking out for all of us on Main Street.  Nothing could be further from the truth.

The traditional banking system is where net producers (savers) deposit their excess earnings and earn a “reasonable” rate of interest on those deposits.  Banks make loans using depositors’ funds to businesses and individuals.  Recall, the reserve requirement of 10% of deposits.  This allows the bank to lend out 90% of its deposits.  Not only once, but multiple times over under our system of fractional reserve banking.  One million dollars of deposits with a 10% reserve ratio can be re-lent up to $10 million.  If a bank has a $1 million dollar deposit it must reserve $100,000 and can loan $900,000.  The bank loans the $900,000 to someone else who then deposits that in the bank.  That $900,000 requires $90,000 to be held in reserve and now $810,000 can be loaned.  This process continues up to a maximum of the total deposits divided by the reserve ratio.

This is financial utopia to the bankers as they charge borrowers interest on the same money lent multiple times over creating a valid claim on money or the underlying asset for which the money was used (i.e. a mortgage is backed by the house itself).  Meanwhile, the bankers aren’t risking their own money they are risking the depositors’ money.

Too often people mistake fractional reserve banking for printing money out of thin air.  That is a misconception.  What this does is create valid claims on money.  The TCDMO of roughly $55 trillion are all valid claims on money.  This is in addition to the initial deposits made by the net producer (saver).  So, there is nearly $70 trillion of claims on $2.9 trillion of base money.

The process of contracting the fractional reserve system works the same way.  As contraction occurs debts come due (claims on money) and must be paid.  They are either paid and the system contracts or people default on their loans.  So, if you don’t pay your loan the bank seizes your asset (i.e. default on your mortgage and the bank now owns your home).  Bankers earn interest on loans or the underlying asset without risking a penny of their own money.

Why does this matter in relation to the question, can Cyprus happen here?

Two weeks before the Cyprus crisis European regulators gave a thumbs up to Cyprus banks.  Yet, in two short weeks the banking situation went from normal to a crisis.  Do you believe anyone in our Government would tell us if the banking system were to collapse?  Of course they would not.  Because, if they told you the system would collapse and your deposits were not secure it would cause mayhem and panic across the country.  Neither the Government nor the Fed can tell you the truth.

We know there are nearly $70 trillion of outstanding debt and only $2.9 trillion of base money.  All debts are valid claims on base money.  Let’s consider deposits at FDIC insured banks in the United States.  Today, there is roughly $8.9 trillion on deposit as FDIC insured banks.  The top 50 banks and bank holding companies account for roughly $5.5 trillion of that, with Bank of America as the largest with just over $1.2 trillion in deposits.

According to regulations all FDIC banks must keep a minimum reserve of 10% of deposits.  Therefore, there are $890 billion of reserves across all the FDIC banks with Bank of America having $120 billion of reserves.

Hypothetically, what if half the people wanted to withdraw their deposits from the Bank of America?  Half the deposits equate to $600 billion and Bank of America has only $120 billion in reserve.  Enter the Federal Deposit Insurance Corporation.  Most people believe their deposits are insured up to a specific limit under the FDIC.  As of 2011 the FDIC had $11 billion of deposit insurance on hand in the Combined Deposit Insurance Fund.  If Bank of America depositors asked for $600 billion of their deposits the FDIC couldn’t cover that.  In fact, if any major bank failed or there was a bank run, the FDIC couldn’t cover 1/100th of the demand.

The entire purpose of the FDIC was to create confidence in the banking system.  The FDIC Act became law in 1934.  In the preceding five years there were thousands of bank failures across the United States.  In 1933, Franklin Roosevelt removed the U.S. from the domestic gold standard, made gold ownership illegal, and debased the currency by forty percent.  The challenge facing the Government was how to create confidence in the banking system so people would leave their deposits in the banks.  The Government gave us the FDIC.

As you read this are you pondering whether your deposits are truly insured?  If not, you should be.  Under the law, once the FDIC uses its reserves ($11 billion) to cover a bank failure they can request no more than $30 billion from the U.S. Treasury.  Anything beyond $30 billion would require an act of Congress.  The other detail most people don’t know about the FDIC Act is it is the Government’s discretion on when you would receive your deposit money back.  That could be a week, a year, ten years, or fifty years.  Below is the applicable section of the FDIC Act governing the repayment of deposits:

(1)    IN GENERAL.–In case of the liquidation of, or other closing or  winding up of the affairs of, any insured depository institution, payment of the insured deposits in such institution shall be made by the Corporation as soon as possible [emphasis added], subject to the provisions of subsection (g), either by cash or by making available to each depositor a transferred deposit in a new insured depository institution in the same community or in another insured depository institution in an amount equal to the insured deposit of such depositor

So, are you deposits truly insured?  Not really.  The FDIC can absorb minor bank failures, but big bank failures would be cataclysmic.  This is why the Government coined the term Too Big To Fail (TBTF) and bailed out the banking system in 2008.

The moral hazard is no longer on the bank or the debt and equity holders of a large bank.  The TARP bailout shifted the burden onto the backs of hardworking American taxpayers.  The risk was socialized amongst the taxpayers while the rewards are privatized within the banking sector.  Financial institutions recognize they have little to no moral hazard incentivizes them to take more risk.  Once government removes moral hazard these financial institutions are free to operate however they please.  Ultimately, this has become Too Big Too Jail as financial institutions receive minor penalties for regulatory infractions and lawlessness.

Of course, the politicians claim they are doing this for the middle class and to save Main Street.  But the politicians are dependent upon these institutions for campaign donations and to keep the banking system going to ensure the politician is re-elected and retains power.  This is true of both Democrats and Republicans.

If a large bank were to fail the options are 1) taxpayers bail it out.  2)  the debt and equity holders bail it out.  3)  the depositors bail it out.   Number three was tried in Cyprus.  While depositors were rightfully outraged by the idea, a complete bank failure means a total loss of deposits.  In the U.S., through bank reserves and the FDIC perhaps 15% of all total deposits would be insured.

To reiterate, do you believe anyone in our government would tell us if the financial system was collapsing?  If the Government explained there is no way to repay the national debt and the only choices are to repudiate the debt or inflate it away would the Government tell us?   If Government was debasing the currency would they tell us?

The answer is a resounding no!

If the Government repudiated the debt it would result in immediate austerity.  Once the debt is repudiated, nobody would buy our debt and Government couldn’t fund its $1.2 trillion per year deficit.  All Government spending would be limited to revenues raised through taxation.  Government is deficit spending to help prop up the economy and that would be withdrawn immediately.  I do not believe the Government will repudiate the debt.

The other option is inflation.  Many people cannot grasp the idea that the outstanding debt will not be paid off with future earnings and revenues.  That’s mathematically impossible as future earnings/revenues are needed to pay for future spending – at least as much as possible.  Clearly, borrowing more money doesn’t pay off past debts.

Wrap your head around this concept.  The debt will be paid off by past earnings.  People pay off debts with future earnings.  Because Government deficit spends it can’t pay off past debts with future earnings/revenues it must use past earnings/revenues.  Those past earnings that net producers have saved/invested will be used to pay off the debt.  The decision comes down to whether the Government wants to tax/confiscate your deposits and/or 401Ks or whether they inflate it away.  One way or the other, or a combination of the two, Government will confiscate your wealth/property.  In Cyprus they talked about taxing depositors.  That could happen here.  More likely, 401Ks will be used in some fashion to pay the debt.  There’s been talk of this for years.

In lieu of or in addition to going after 401Ks that leaves inflation as the only means to retire the outstanding national debt.  In other words print more money and devalue the currency.  Inflation is not an economic event, it is a political event.  It is politically expedient for those in power to inflate away the debt to save the system then to make the difficult choices facing our country.  In the process the currency will be destroyed and everyone with any savings (traditional or in 401Ks) will witness their money become worthless.   Inflation will destroy deposits, 401Ks, money markets, and anything else denominated in the dollar.

But, a third possibility arises.  One that the people themselves will demand and will most likely ensure the politicians are revered as saviors.  An event such as a major bank failure, the threat of taxing deposits or 401Ks, etc. can cause enough panic that a bank run starts.  People will be unable to withdraw their deposits.  Hardships will ensue.   Those people receiving Government payments for food stamps, housing, social security, disability, etc. will also suffer as Government payments will stop flowing.  The people will scream, if not beg the government to ensure they receive their deposits and their Government checks.  This is all the motivation needed to print tens of trillions of dollars of paper money.  Many more “cheaper” dollars used to pay off the debt (remember debt is nominal) and the destruction of the currency in the process.  Of course, the $100,000 you have in a 401K might by ten loaves of bread.

The decisions will be whether to save the system and sacrifice the currency (or vice versa) and to save the government and sacrifice the individual.  Government will choose to save the system and save themselves.

In his farewell address President Andrew Jackson said, “We are not left to conjecture how the moneyed power, thus organized and with such a weapon in its hands, would be likely to use it. The distress and alarm which pervaded and agitated the whole country when the Bank of the United States waged war upon the people in order to compel them to submit to its demands can not yet be forgotten. The ruthless and unsparing temper with which whole cities and communities were oppressed, individuals impoverished and ruined, and a scene of cheerful prosperity suddenly changed into one of gloom and despondency ought to be indelibly impressed on the memory of the people of the United States.

If such was its power in a time of peace, what would it not have been in a season of war, with an enemy at your doors? No nation but the freemen of the United States could have come out victorious from such a contest; yet, if you had not conquered, the Government would have passed from the hands of the many to the hands of the few, and this organized money power from its secret conclave would have dictated the choice of your highest officers and compelled you to make peace or war, as best suited their own wishes.”

The outcome is inevitable.  In fact, it’s a mathematical certainty.

In my opinion, the Government and the Federal Reserve have known for several decades that the current monetary regime that started in 1971 under Nixon was doomed to fail.  It was never a question of if it would fail, just a question of when it would fail.  I believe they are managing the collapse of the monetary regime to avoid the social unrest that will come along with a collapse.  At some point in the future a new monetary system will begin.  What triggers the beginning of that final step and how long the transition takes is unknown.  What is on the other side is unknown.

Hopefully this provides some perspective around recent events and those events starting nearly forty years ago.  I believe it explains many actions our Government and the Fed have taken over the years.  I believe the Government and the Fed know the dollar is in the winter of its demise and a new monetary regime is forthcoming.  I believe they know the current system is unsustainable, and by its very definition what is unsustainable must end.  The only question is when.

Leave a comment

Filed under Economy