Eliminate Federal Taxes to Save the Economy?
By Rod Van Mechelen
Posted March 29, 2015; Updated June 22, 2015
Can we give the middle class a 10 percent to 20 percent raise, eliminate all federal taxes, liquidate the federal debt, prohibit federal borrowing, eliminate all political contributions and save the economies of the United States and the world? Yes, says Martin Armstrong.
A Radical Solution to a Dire Threat to Our Economy
2015 Olympia, WA - In the United States we have a problem. The current federal budget is equal to about 25 percent of GDP. About 6 percent of the federal budget for 2015 is to cover interest on the debt. The Treasury continues to go deeper into debt with no real intention of ever paying it off. The Federal Reserve (Fed) is keeping interest rates artificially low to prevent an implosion, this has been going on since 2008 and the entire bond market is rapidly approaching the point of collapse.
Is there anything we can do to restore the economy?
Martin Armstrong thinks we can if we eliminate federal taxes altogether, and finance the federal government on an annual basis through creating new money in lieu of taxes, which would be limited to a percentage of GDP. Not the phony GDP reported by the Bureau of Economic Analysis (BEA), but the GDP as reported by, say, John Williams of Shadow Government Statistics, and that out of this new money would come the funds to run the federal government.
During his Solution Conference on March 28, 2015, Martin Armstrong, of Armstrong Economics, outlined his proposal and explained why this will work.
Armstrong said that there is no reason for any federal government to impose taxes of any kind. Not anymore. His explanation is a little complicated, but it makes sense because in the modern economies taxes pay for little beyond interest on the debt. In some countries the interest on their debt alone accounts for 70 percent of their budget. In the US, the federal debt equals an amount equivalent to 74 percent of the nation’s total GDP and the debt continues to grow while most of it is never paid back because, since 2008 the Fed has been buying it through Quantitative Easing.
- Eliminate all federal taxes. That would have the effect of giving the middle class an immediate pay raise.
- Convert the federal debt to equity. Essentially, all holders of treasuries would receive coupons that could be used to buy things like stocks, municipal bonds, and to invest in startup businesses.
- Prohibit the federal government from borrowing.
- Eliminate all mandatory retirement taxes (like Social Security).
- Eliminate all political contributions.
- Authorize the Federal Reserve to issue money to the Treasury in the amount of 10 percent of the GDP.
You've heard of Quantitative Easing, or QE? The Federal Reserve (Fed) buys Treasury Bonds, essentially creating money out of thin air and giving it to the Treasury to cover the federal budget. They can do this because, as Armstrong emphasizes, money is no longer based on commodities but is representative of the productive output of the economy.
Quantitative Easing began in 2008. First, there was the Troubled Asset Relief Program, or TARP, to save "too big to fail" banks and pay for bankster bonuses. TARP did nothing to save the economy. It was a big payoff to Wall Street at the expense of Main Street. And because it did not help the economy, which continued to founder, the Fed started QE.
Since the first round of QE in 2008, the Fed has created around $5 trillion. In October 2014 the Fed officially ended QE, but many believe it has continued because, while the Fed continues to roll over and renew the treasury bonds they already bought, a mystery buyer in Belgium has stepped in to continue buying new debt in amounts that far exceed anything the Belgian economy could support, so a lot of people think this mystery buyer is really a proxy for the US Federal Reserve and that QE never ended.
All they are doing is creating money out of thin air. Or, more precisely, ones and zeroes, as it's all done by computer because money is no longer based on a commodity, like gold, but is representative.
The Gold Standard
What about gold and silver? A few years ago Ron Paul held up a one ounce silver bullion coin and challenged then-Fed Chairman Ben Bernanke as to whether it was real money. Congressman Paul said it was, Chairman Bernanke said it was not.
In 2012 I supported Ron Paul for president and watched with dismay as John Boehner and the establishment Republicans ran roughshod over his candidacy, sometimes assaulting Ron Paul supporters at Republican conventions and, finally, flagrantly breaking their own rules at the national convention to ensure that their Obama-lite candidate, Mitt Romney, secured the nomination. Now, Boehner and the Republicans hold both houses of the Congress and yet we see virtually no difference between this Republican Congress and and the previous Democratic Congress.
Generally I agree with Ron, I've got my I Stand With Rand hoodie, and I like gold and silver. But Armstrong makes an interesting argument based on reality, not how we wish things worked.
He points out that you can't peg the dollar to gold at a set price when you keep printing dollars. He's right. The Fed can print dollars faster than gold can be mined, which leads to distortions in the price. The only way it could work would be if the dollar floated against gold. We could do that, and the idea of allowing currencies and commodities, like gold, to compete in the market place by allowing us to use whatever form of money we want would allow for that. But as currencies, today, are representative of the productive output of their respective economies, why bother?
What about inflation?
Inflation and the Velocity of Money
Austrian Economics says that the trillions of dollars created by the Fed should turn into massive price inflation. Except, it hasn't happened. Not yet, anyway. Why?
The number of dollars in circulation is not the only thing that causes inflation. In very simplistic terms (and I do mean simplistic, not simplest), there are two key factors to inflation: the "number of dollars," and "in circulation". If you have a quadrillion dollars more than what's currently in circulation but don't spend any of it, there's no inflation. That's what we have right now: a high number of dollars have been added to the pool, but not very many of them are circulating.
There is some inflation, and it is higher than the Bureau of Labor Statistics (BLS) is reporting, but it's not massive: on a 1980 basis it's running at about 8 percent, according to John Williams. Why is it still relatively low? Because the Velocity of Money is so low.
The velocity of money (also called the velocity of circulation of money) refers to how fast money passes from one holder to the next. It can refer to the income velocity of money, which is the frequency at which the average unit of currency is used to purchase newly domestically-produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. - Velocity of money, Wikipedia
So the Velocity of Money measures how quickly a dollar is spent. You work, you get paid, you cash your check and go spend it on stuff. But today people are earning relatively less, paying bills, paying down debt and spending their dollars on less stuff, so the Velocity of Money is lower, which means that the rate of inflation remains relatively low.
Inflation and Confidence
The number of dollars in circulation can be broken down further but I'm not going to get into that, except to look at one aspect of the "in circulation" part of the equation: confidence.
In addition to the millions of Americans who are buying less stuff, there are also millions of Americans who are concerned about their future. They lack confidence in their economic security but still have confidence in the value of the dollar, so they are holding onto their dollars by saving. Buying less stuff lowers demand which leads to lower prices, or deflation. Money printing alone will not change that.
Confidence is what Armstrong focuses on when he talks about inflation. When people lose confidence in the money, they get rid of it as fast as they can, and you have inflation. When they lose confidence in their financial security but still feel confident about the dollar, they hang onto it, and that leads to deflation.
So at the present time we have a very high number of dollars that are circulating very slowly, with the result that inflation is relatively low. More than this, however, as confidence in the currencies of other countries falters, institutions and investors are converting to the US dollar--hence, the talk about the "strong dollar"--and, again, this is a matter of confidence. But that confidence will not endure.
Sovereign Debt Default
With the federal debt in the US equal to 74 percent of GDP, something's gotta give. Armstrong agrees. In his presentation he said we have three choices:
Default in some countries is a common occurrence. Argentina does it on a routine basis. But Argentina, once a world power, is a bit player today. Few people care what they do. If the US defaults, however, this would have devastating consequences for the entire world, and in the US it could lead to blood in the streets as those pension plans that are heavily invested in government bonds are suddenly unable to pay their members. And according to Armstrong, this is precisely what will begin to happen in October 2015. He calls it the Big Bang.
- Default through deflation
- Default through inflation
- Restructure the debt.
The Big Bang
Armstrong calls this coming crisis the Big Bang. His computer models indicate that the US Bond Market will crash starting in October 2015. If it does, then that will be a pretty good indicator that he knows what he's talking about.
If institutions and investors flee the bond market, where will the money go? Here is what Armstrong wrote about that in February:
Everything depends upon what we get going into the end of September. We could see important highs in some markets outside the USA. However, if we achieve a high (in the Dow) at that time, then there should be a fake-out decline BEFORE we turn back up. If we peak early in the June/July period and bottom at that time. then we should see a rally thereafter. This will all become clear as we approach the summer. - Martin Armstrong, The Dow as we Approach 2015.75
So he expects the money to flee from bonds into stocks. Other analysts agree, and believe that after stocks the money will go into commodities, like gold and silver. Regardless of what happens, we face an economic upheaval unprecedented in history, and it will have dire consequences.
What is the solution?
In addition to issuing money without issuing debt, Armstrong proposes to eliminate all federal taxes, eliminate all forced retirement taxes such as social security, prohibit the federal government from borrowing at all, eliminate all political contributions, and to eliminate the existing federal debt by doing a debt-equity swap. This last, he describes as, "coupons," which would be "redeemed for local currency to be invested in the domestic economy debt or equity."
That sounds weird. Why not just say cash them out? The idea is not simply to hand out cash, but to provide a vehicle for converting the federal debt into equity, like stocks, but also to invest in new businesses.
The current federal budget is equal to about 25 percent of GDP in the US. As about 6 percent of the federal budget for 2015 is to cover interest on the debt, eliminating the debt would result in an automatic reduction by 6 percent down to 19 percent of GDP. Armstrong's proposal to finance government spending by mandating that the Fed create money equal to between 5 percent and 10 percent of GDP and issuing it to the federal government would require more cuts in government spending to meet that goal, which could be phased in over several years.
Principle vs. Pragmatism
From an ideological point of view, I don't like this. For one thing, Armstrong's proposal does not replace the dollar, which is a currency, with real money.
Currencies are not money. Real money is a store of value, and currencies have no intrinsic value. But, with people using Bitcoin as money, now, it has become obvious that money, as most people understand it and as most of us use it, is just a medium of exchange that is not a store of value.
Second, the US Constitution clearly defines lawful money as gold and silver, and imposes a penalty of death on any government official who defies that. While I wouldn't go so far as to impose the death penalty on the officials of the Federal Reserve, it is clear that the Fed has done tremendous harm to the American people by facilitating a massive transfer of wealth to the banksters.
But Armstrong's proposal would solve a myriad of problems: stabilize and revitalize the US economy, lead to a rapid but phased reduction in the federal government, eliminate the IRS and several other oppressive government bureaucracies, unleash the creative capacity of the American people, and give everybody, but especially the middle class, a raise in the form of a huge tax cut. For these reasons, I think it's worth serious consideration.
Somebody--a candidate or president or member of Congress--is going to get behind Armstrong's proposal, and whoever they are will make history. I would like that to be a person who has a strong track record of supporting our freedom and liberty. Somebody like Rand Paul.
Armstrong has posted comments about his Solution Conference here:
Martin Armstrong: The Solution – the ONLY Solution
Martin Armstrong: The Right to Even Trade
Martin Armstrong: Thinking Outside the Box – Yes there is a Whole Lot More Than Meets the Eye
Martin Armstrong: Debt-Equity Swaps
Rod Van Mechelen
Rod Van Mechelen is the publisher of The Backlash! @ Backlash.com and Cowlitz Country News. He is a member of the Cowlitz Indian Tribe and served on the Cowlitz Indian Tribal Council from 2002 to 2012.