Economic Dependence vs. Independence, Part 2

* Continued from Part 1 *

School #2 – Higher Income Tax Rates

Within the second school of thought, Barack H. Obama speaks as though something most of us believe in no longer exists, or is at threat of extinction. According to Obama, ‘the idea that if you work hard, you can do well enough to raise a family, own a home, and put a little away for retirement’ is at risk, and that ‘this is the defining issue of our time’. But what he doesn’t understand is that like God, natural rights and divinely inspired ideals never change. The basic ideal Obama is referring to is called freedom. So is our freedom suddenly at risk of extinction? If it were, could it possibly be restored by raising taxes on the most productive members of our society?

“What’s at stake is the very survival of the basic American promise that if you work hard, you can do well enough to raise a family, own a home, and put a little away for retirement. The defining issue of our time is how to keep that promise alive. No challenge is more urgent; no debate is more important. We can either settle for a country where a shrinking number of people do really well, while more Americans barely get by. Or we can build a nation where everyone gets a fair shot, everyone does their fair share, and everyone plays by the same rules. At stake right now are not Democratic or Republican values, but American values – and for the sake of our future, we have to reclaim them.” ~ Barack Obama, January 24, 2012. Blueprint for an America Built to Last.

Newsflash: We are still free. The American Dream has been in existence ever since our Founding Fathers penned the Declaration of Independence. There’s a reason it wasn’t named the ‘Declaration of Dependence’, for that is what we were delivered from. The Declaration of Independence in itself is the only blueprint America will ever need. It doesn’t guarantee anyone success, but it does allow us the freedom to succeed by any means we deem necessary. For those who want to do well enough to raise a family, own a home and put a little away for retirement, lower across the board tax rates are the way to go. But entrusting more of what money one is able to garner to a wicked and lazy servant, such as our current bloated federal government, is of no use towards that end.

Big government is like the servant who was given one talent, except instead of burying and returning it to his master; he spent it, then borrowed another in his master’s name, and spent that as well, returning to his master a bill for two additional talents. Under the second school of thought, we’re taught to take from those who are productive, to throw it away, and then borrow more in their name, eventually turning them from free men into indentured servants. So although no man can take our freedom from us, we can voluntarily give it away. How is an economy supposed to grow when resources are taken away from its most productive members, and squandered?

For this lazy and wicked government, one dollar is too many and a thousand is never enough, so why is it deserving of anything at all? We entrusted the federal government with a $2,600,000,000,000 surplus of Social Security savings, yet where is it today? It’s now part of the $16,000,000,000,000 national debt, the portion of which the government claims to have borrowed from itself. And who will the government get the money from to pay back what it has borrowed from itself? The government will return to those same productive members of the private sector and demand even more. How dare you! It’s time to identify those who are responsible and throw those worthless servants outside, into the darkness!

U.S. taxpayers will have given the current administration over $10,000,000,000,000 during its recent four-year term, and where is that? Did the government return it two-fold? Did we even get back the flaunted $1.79 we were promised for each dollar spent on unemployment benefits and food stamps? No. Not only has the government squandered every dime, but it has handed us a bill for an additional $6,000,000,000,000 in accumulated debt. You know we’re gonna identify and throw each and every irresponsible, lazy and wicked government servant out into the darkness, from the top down.


Under the morally correct theory, tax cuts lead to a smaller government and more private sector freedom, allowing productive men and women of all races and backgrounds to create wealth, by leveraging their own resources. But under the morally bankrupt theory, wealth is never created with resources handed out through redistributive schemes, as redistribution merely keeps its recipients poor and dependent, while robbing society’s most productive members of their capital.

Put another way, every man and woman is endowed by their Creator with certain talents, but not everyone achieves equal results – some produce thirty fold, some sixty, and some one hundred fold. This has been true since the beginning of creation. But then there are those rare birds, who not only squander the talents entrusted to them, but incur huge deficits along the way, some thirty, some sixty and some one hundred fold. Because these wicked and lazy servants seek to drag as many as they can latch onto down with them, they must be cast out.

The radical left thought it could rewrite American history, within a couple of years, by conning us into believing that we had lost something which, in reality, has always been in our possession. But radical left-wingers are severely misguided. Our freedom will not be taken away without a fight. America didn’t need a new blueprint. What we needed four years ago is the same thing we need today, someone to execute the blueprint written by our Founding Fathers 236 years ago. Therefore, the radical left-wing must be expelled. In conclusion, the centre-right philosophy is more in line with what America needs today: lower taxes, less government, and more economic freedom.

“In the last times there will be scoffers who will follow their own ungodly desires. These are the men who divide you, who follow mere natural instincts and do not have the Spirit.” ~ Jude 1:18-19

“He who has ears, let him hear.” ~ Matthew 13:9

Photo Credit: Baruch College Blogs – Remembering What Was Meant To Be Forgotten

Economic Dependence vs. Independence, Part 1

Two Schools of Thought

* By: Larry Walker, Jr. *

“Again, it will be like a man going on a journey, who called his servants and entrusted his property to them. To one he gave five talents of money, to another two talents, and to another one talent, each according to his ability. Then he went on his journey. The man who had received the five talents went at once and put his money to work and gained five more. So also, the one with the two talents gained two more. But the man who had received the one talent went off, dug a hole in the ground and hid his master’s money.” ~Matthew 25:14-18

One interpretation of the Parable of the Talents is that the master is an employer who hired three workers and paid them different amounts according to their ability. The first two workers were productive, doubling their employer’s investment. The third didn’t like the employers pay structure, and chose not to work, giving up a potential paycheck. In the age we live in today, the era of big government, government is the new master. An oversized government takes the eight talents from the employer in taxes, before it can employ anyone, redistributes one talent to each of the unemployed, and then squanders the rest on worthless thingamajigs. In the following year, bloated government returns, and demands of the employer another eight talents to do it all over again. Eventually the employer moves to Costa Rica to get away from its oppressive master, and big government goes bust.

School #1 – Lower Income Tax Rates

In the first school of thought, the words of former President’s John ‘Calvin’ Coolidge, Jr., John F. Kennedy, Ronald W. Reagan, and George W. Bush forever live, reminding us that high income taxes are the single largest barrier to job creation and economic growth. And if we don’t lack job creation and economic growth today, then what do we lack – higher taxes and more social welfare benefits? Perhaps we should listen more to reasoned voices from America’s past, and pay less attention to the failed Western European influenced bloviating of the present.

“There is a limit to the taxing power of a State beyond which increased rates produce decreased revenue. If that be exceeded intangible securities and other personal property become driven out of its jurisdiction, industry cannot meet its less burdened competitors, and no capital will be found for enlarging old or starting new enterprises. Such a condition means first stagnation, then decay and dissolution. There is before us a danger that our resources may be taxed out of existence and our prosperity destroyed.” ~ Calvin Coolidge, January 8, 1920. Address to the General Court beginning the 2nd year as Governor of Massachusetts.

“The largest single barrier to full employment of our manpower and resources and to a higher rate of economic growth is the unrealistically heavy drag of federal income taxes on private purchasing power, initiative and incentive.” ~ John F. Kennedy, Jan. 24, 1963. Special message to Congress on tax reduction and reform.

“We don’t have a trillion-dollar debt because we haven’t taxed enough; we have a trillion-dollar debt because we spend too much” ~ Ronald Reagan – 40th US President (1981-1989)

“He said, tax the rich. You’ve heard that before haven’t you? You know what that means. The rich dodge and you pay.” ~ George W. Bush – 2004

Across the board income tax cuts always deliver results, as they allow productive members of society, from all races and social classes, from the least to the most productive, to earn and keep more of their own money. As this phenomenon occurs, those affected are incentivized to produce, consume, save and invest more. The resultant growth spills over into the broader economy allowing nonparticipants to reenter the workforce, or enter for the first time. This concept was good enough for Coolidge, JFK, Reagan and G.W. Bush, whose across the board tax cuts delivered for each an era of relative growth and prosperity for millions of Americans. So what’s the excuse today? For answers, we return to the Parable of the Talents:

“Then the man who had received the one talent came. ‘Master,’ he said, ‘I knew that you are a hard man, harvesting where you have not sown and gathering where you have not scattered seed. So I was afraid and went out and hid your talent in the ground. See, here is what belongs to you.’ His master replied, ‘You wicked, lazy servant! So you knew that I harvest where I have not sown and gather where I have not scattered seed? Well then, you should have put my money on deposit with the bankers, so that when I returned I would have received it back with interest. Take the talent from him and give it to the one who has the ten talents. For everyone who has will be given more, and he will have an abundance. Whoever does not have, even what he has will be taken from him. And throw that worthless servant outside, into the darkness, where there will be weeping and gnashing of teeth.’” ~ Matthew 25:24-30

The radical left believes that if the servant who was given one talent had instead been given two or five, he might have been as productive as the others. Although some would think this a possibility, it wasn’t likely, for in the parable, each was given an amount according to his ability. The worthless servant simply proved himself to be lazy and wicked. But instead of casting him out into the darkness, the radical left, which has become a bastion of the lazy and wicked itself, believes it is the responsibility of the productive to provide sustenance for those unwilling to work.

The moral of this story is that when the free market is given liberty to place money into the hands of the fruitful, it benefits all who are willing to participate. So politicians who constantly clamor for higher taxes on more productive persons, including corporations, have it backwards. The lesson teaches us that when resource allocators are allowed to direct their own capital at will, jobs are created and the economy grows. It also teaches us that when wicked and lazy people are given an opportunity to succeed, they instead run and hide.

Taxes are too high!

The point is not that we are a nation of wicked and lazy people, but rather that income taxes are still, after all the lessons learned throughout American history, way too high. Yet the government demands more. Today, the minimum income tax rate in the United States is 10%. But add to that 13.3% in mandatory Social Security and Medicare taxes, and lowest rate is really 23.3% (25.3% in normal years) for most Americans. Even the poorest working person in America has 13.3% of their income confiscated from each paycheck (7.65% of which is paid by their employer). Compare this with Coolidge’s bottom tax bracket rate of 1.5% in the mid 1920’s, an era which predated the imposition of Social Security and Medicare taxes, and you begin to understand the dilemma. In fact, the top tax rate in the 1920’s was 25.0%, which is less than the 28.3% paid by most in the middle class today (a 15% income tax, plus 13.3% in Social Security and Medicare taxes).

These days, the American middle class muddles along after handing around 30.0% of its income over to the government, while those who are more productive are forced to give up as much as 45.0%. Yet the government demands more. If you take a moment to contrast the minimum income tax rate of 1.5% in the mid-1920’s with today’s minimum rates of 13.3% to 23.3%, you will understand the real disparity. Looking back through American history, it is clear that we suffer not so much from income disparity, as from an income tax disparity. In other words, we are much poorer than our ancestors.

In the mid-1920’s, our great grandparents worried about paying income tax rates ranging from 1.5% to 25.0%, while today we are forced to contend with taxes ranging from 13.3% to 45.0%. We worry about how much the government will confiscate beyond a virtually guaranteed minimum rate of 13.3% of the first $106,800 in earnings, which is 886.7% higher than our ancestors lowest tier. As things stand today, the government isn’t giving us anything; instead it is taking our talents and burying them under a pile of debt. So by lowering income tax rates across the board, the government won’t be giving anything to anyone, but rather proportionally reducing the amount it already takes from everyone.

The Exxon Mobil Fallacy

For example, many on the radical left routinely spout off, that since Exxon Mobil Corp made $42 billion in profits last year, more should be taken away from it and given to the government. While it’s true that Exxon Mobil earned net after-tax profits of $42.2 billion in 2011, the company actually made a profit of $146.7 billion before taxes. That is to say, once you deduct out $33.5 billion in sales based taxes, $40 billion in other taxes and duties, and $31 billion in income taxes, it was left with $42.2 billion (see income statement below).

In effect, Exxon Mobil paid 71.2% of its pretax profits, or $104.5 billion, in sales based taxes, other taxes and duties, and income taxes, before it was able to take home 28.8%, or $42.2 billion. If 71.2% isn’t enough for left-wing radicals, then how much is enough? Is profit a dirty word? Exxon Mobil is a producer, and the more leeway granted to the productive, the more wealth is created. If the government takes even more capital away from producers like Exxon, who would radical left-wingers propose it be given to? Is there another entity around that can turn higher profits than Exxon Mobil? Left-wingers have it all backwards.

The radical left surmises that we should take more away from Exxon and give it to the government, so that the government may in turn give a small penance to nonworking, nonproducing members of society, and squander the rest. They propose to take away more of Exxon Mobil’s resources and incentives because the company and its industry return large profits. But the morally correct thing to do is to take more away from the nonproductive, like our debtor-government in Washington, DC, and let companies like Exxon Mobil go gangbusters. Would you rather invest your money in Exxon Mobil’s stock, which is paying a better than $8 per share dividend, or in the U.S. Government, which is currently running a debt per U.S. taxpayer of $139,000 (subject to increase each second)? This should be a no-brainer.

Continued … Economic Dependence vs. Independence, Part 2

Photo Credit: Baruch College Blogs – Remembering What Was Meant To Be Forgotten

Obama’s Economic Reduction Plan

Private Equity vs. Government Redistribution

– By: Larry Walker, Jr. –

“A farmer went out to sow his seed. As he was scattering the seed, some fell along the path, and the birds came and ate it up. Some fell on rocky places, where it did not have much soil. It sprang up quickly, because the soil was shallow. But when the sun came up, the plants were scorched, and they withered because they had no root. Other seed fell among thorns, which grew up and choked the plants. Still other seed fell on good soil, where it produced a crop—a hundred, sixty or thirty times what was sown. He who has ears, let him hear.” ~ Matthew 13:3-9

For many, the American Dream consists of the hope of freeloading off of the good fortune of others for their entire lives. Yet for some, the dream is comprised of one day saving enough capital to invest in a business of their own. And for a few, the dream is to one day save enough to invest through a private equity group. For those aspiring towards business ownership, sometimes a little help is needed, and that help, in many instances comes though private equity firms.

So why would anyone dream of investing in a private equity firm? Well one big reason is that under current law, around 58% of the profits realized by private equity firms are taxed as long-term capital gains rather than as ordinary income. Long-term capital gains are currently taxed at the maximum rate of 15%, while ordinary income is taxed as high as 35%. The lower tax rate on long-term capital gains helps to compensate for the opportunity cost of investing for the long haul, and also enables a greater portion of the profits to be reinvested into the next venture, which can ultimately lead to the accumulation of a great deal of wealth.

Another reason many dream of investing in private equity groups is because they feel a calling to help fellow Americans reach their dreams. Unlike bloated, deficit-financed, short-sighted, big government wealth redistribution schemes, private equity is good for America. However, if the carried interest (the long-term capital gains earned through investing in private equity) were to suddenly be taxed at the same rates as ordinary income, then there would no longer be an incentive to invest in long-term private business endeavors.

Private equity firms fund and co-manage thousands of private businesses in the United States, employing millions of American workers, and these businesses are dependent upon stable long-term investments. If big government takes away the incentive to save and invest in long-term endeavors, then there will be no long-term investment. It simply won’t be worth the risk. And without long-term private equity investment, thousands of businesses, millions of jobs and the American Dream will be choked out of existence.

Carried Interest vs. Ordinary Income

Ordinary income is mostly comprised of net business income, fixed compensation, interest, dividends, rents, royalties, and short-term (less than a year) capital gains. Unlike ordinary income, there is greater risk involved with long-term (more than a year) capital investments. Private equity firms typically make investments over a 3 to 7 year term. The risk of tying up capital savings for many years is that the investment might be lost entirely, or may not return any profit at all. So is carried interest the same as ordinary income? Centuries of sound and settled tax policies say no. But Barack Obama, a novice, with no business experience, and a track record of failed economic policies; and Warren Buffett, a retiring billionaire, who has profited from lower taxes on carried interest during his lifetime, say yes. So who’s right, centuries of proven economic science, or 32 months of butt kissing and B.S.?

The Obama-Buffett Rule presumes that carried interest is the same as ordinary income and should be taxed at ordinary income tax rates of up to 35%, instead of at capital gains rates of up to 15%. The contention that the profits earned through long-term capital investment, which involves placing previously taxed income at risk through investing in risky business ventures, which employ hundreds of thousands of American workers, and which help drive the American economy, should be taxed at the same rate as fixed compensation, such as wages earned from labor, is quite a leap. The problem with Obama’s latest Socialist twist is that unlike fixed compensation, which is properly taxed as ordinary income, carried interest, garnered through private equity investments, only rewards general partners if, at the end of the term, the fund actually results in a net gain.

To break this down further, you have on the one hand wage earners, who work 40 hours per week, get paid weekly (or semi-monthly), consume most of their pay, and have taxes withheld from each paycheck. And on the other hand, you have private equity partners who work on a project for 3 to 7 years, expending capital and sweat equity, aiding in the employment of thousands of tax paying workers, helping make tax paying businesses profitable, and ultimately hoping to, at the end of the term, regain their investment along with a handsome profit. So is carried interest the same as ordinary income? Is all income created equal? Is Capitalism the same as Socialism? Do words still have meaning?

Private Equity in Action

Within the State of Georgia there are approximately 30 private equity firms, which have invested an estimated $26 billion in Georgia-based companies, which back approximately 340 private companies, which employ more than 175,000 U.S. workers. If more capital is diverted away from private equity investments, through errant tax policies, and instead invested in tax-free securities or some other jurisdiction, then where will the capital to fund these Georgia businesses come from? It’s not likely to come from banks, which are currently paying investors taxable interest of between .01% and 1.0% on savings. And it’s not likely to come from the federal government which is currently $14.7 trillion in debt. Thus, when private equity capital is finally taxed out of existence, there will be no capital, and most of these 340 companies will cease to exist, along with 175,000 jobs.

In the State of Illinois there are approximately 137 private equity firms, which have invested an estimated $72.9 billion in Illinois companies, which back approximately 450 private companies, which employ more than 350,000 workers in the U.S. The State Employees’ Retirement System of Illinois had nearly $525 million invested in private equity as of June 30, 2008, about 5 percent of the System’s total pension fund portfolio of more than $11.4 billion. And as of June 30, 2009, the Illinois’ Teachers Retirement System had $2.34 billion invested in private equity, about 8.2 percent of TRS’ total portfolio of nearly $29 billion. Are the billions of dollars that Illinois pension funds invest in private equity firms any more or less important than any other American citizen’s savings? I think not. If the government takes away the incentive of private equity partners, then where will this capital go? If you say, “To the Banks”, again you err. If you say, “Directly into businesses”, then who will oversee and manage these investments, the government? Yeah, right, just like Solyndra.

It’s Math!

And then there’s this hogwash about wealthy people paying lower tax rates than middle income earners. Does anyone really believe this? All you have to do is glance over at one of our “progressive” tax rate schedules, to know that’s not the case. Since our tax rate structure is “progressive”, the rates increase along with income. One’s combined tax rate is never the same as their bracket rate. In other words, you may be in a 25% bracket, but that doesn’t mean you’ll fork over 25% of your taxable income. As you can see below, married couples with ‘ordinary taxable income’ of $25,000 pay a tax of 11.6%, those with $50,000 pay 13.3%, and those with $100,000 pay 17.2%; while married couples with ‘ordinary taxable income’ of $250,000 pay a tax of 24.0%, those with $1,000,000 pay 32.0%, and those with $10,000,000 pay 34.7%.

In terms of dollar amounts, on the low-end, 11.6% of $25,000 translates into $2,900, while on the high-end, 34.7% of $10 million works out to around $3.5 million. So is paying $2,900 in taxes greater than or equal to paying $3.5 million? It’s math! One must also consider that five times out of ten, that $2,900 liability gets magically turned into a tax refund of up to $8,000, as nearly half of all American workers are either not liable for any income tax whatsoever, or fall into the negative category. So perhaps the words “fair share” could be more appropriately expressed as “unfair and not-shared”.

From Taxing the Rich
From Taxing the Rich

Although it may seem fair for Obama and Buffett to compare a private equity partner with $10,000,000 of carried interest, to a married couple with taxable wages of $100,000, it’s really not. It’s like comparing oranges to apples. Although the wage earning couple will pay federal taxes of 17.2% versus the carried interest earners 15.0%, in the end, the couple will have paid a total of $17,250 in taxes, versus $1,500,000 for the private equity partner. So is $17,250 greater than $1,500,000? “It’s math!”

The real difference is that a private equity partner may then turn around and reinvest most or all of the remaining $8,500,000 into the same company that the married couple works for, thus enabling them to continue their very employment. In terms of economics, the multiplier effect on private equity investment generates many times the tax revenue paid by the partner himself. Just add up the taxes collected on all the additional wages, salaries and business profits he helps to generate. But if that capital be muzzled, the result will be less free-enterprise and even higher levels of unemployment. Thus, while earning a salary is productive, it’s nowhere near as productive as carried interest. Perhaps there’s a reason why some of our tax policies are the way they are! “It’s math!”

If Obama and Buffett really wanted to compare apples to apples, then they would be comparing a married couple with carried interest income of $10,000,000, to a couple with long-term capital gains income of $10,000,000. Each will pay $1,500,000 in taxes. So is fairness still an issue? The truth is that no American is prevented from saving his or her own money and investing in activities generating similar capital gains. Anyone can do it, and will reap an equal reward — a maximum 15% long-term capital gains tax. But if the government ever takes away this incentive, or begins to discriminate against certain forms of long-term gains, then you can kiss the American Dream goodbye.

Government Subsidies vs. Private Equity

If the government steps in and confiscates a larger chunk of the profits earned by private equity firms, then there will be that much less capital to reinvest in new acquisitions. And what will the government do to make up the shortfall? Will the government invest in and manage new enterprises? Perhaps, the federal government will subsidize more companies like Solyndra, but then who gets the ‘return on subsidy’ (ROS), if and when the government is successful? Will every taxpayer get an equal slice of the pie? That’s highly doubtful. More than likely, the money will simply be absorbed into the federal government’s irresponsible $1.3 trillion per year budget deficits, or into its $14.7 trillion national debt, or used to pay unemployment compensation, or to dole out more food stamps, neither of which will create new jobs. In other words, the money will be pilfered and consumed rather than invested in viable job creating enterprises. And we all know that America needs more jobs, not more debt, unemployment compensation and food stamps.

Private equity investors fund American businesses which employ millions of American workers. By investing in non-public companies they typically hold their investments with the intent of realizing a return within 3 to 7 years. Shouldn’t there be some reward for committing previously taxed income for 3 to 7 years, in order to help businesses grow, and to enable employment for millions of workers, with no guarantee of a profit let alone return of the original investment? I say, yes. Obama and Buffett say, no. Where they err in their quest for “fairness” is in that 42% of the profits earned by private equity investors are already taxed at ordinary tax rates, while just 58% represents carried interest. They also fail to realize that such profits are typically reinvested back into the cash account to fund the next acquisition. You would think that at least Buffett would understand this concept, since most of his earnings have been likewise reinvested.

Hell No!

With Obama’s brand of math, one would surmise that if the government could just confiscate the $1.4 trillion in annual private savings, and use it to pay the $1.4 trillion of annual government deficits this would somehow bring about “balance”. But all it would really bring about is a permanent state of depression, mass government dependency, and even greater deficits once the government runs out of other people’s money. And considering that the best the federal government could possibly do, by confiscating additional tax revenue, is to immediately absorb it into its irresponsibly amassed $14.7 trillion in accumulated deficits, over $4 trillion of which was squandered by Obama himself, the answer to the request for more revenue is still, “Hell No”. Cut spending, stop squandering the tax dollars we’re already paying, and stop regurgitating the same old lies over and over again.

Although the federal government does employ a couple of million workers, about 59% of the money used to pay them is already confiscated from taxpayers, while the other 41% is merely borrowed from the Federal Reserve Bank and from countries like China. Every dime taken away from private investors and spent by the government is a dime taken away from private businesses and private sector workers. Once the point of no return was breached, back in 2010, there was no longer enough personal income to cover the amount of federal debt, on a per capita basis, and if this is not corrected soon, it will lead to the death of the American Dream. If there is already not enough income to pay the government’s debt, then why is Obama begging for higher taxes? When there is nothing left but government, then what? Will the government pay everyone a subsidy of say $50,000, and then proceed to levy a 100% tax on everyone in order to fund itself into infinity? Isn’t this exactly where Obama’s plan leads?

The failure of Obamanomics can be summed up in a few short phrases: If it produces jobs, tax it. If it keeps producing jobs, regulate it. And when it stops producing jobs, subsidize it. Thus Obama’s plan for deficit reduction, like his Jobs Act, is just another gimmick leading to economic reduction, job destruction, government dependence, poverty and the end of the American Dream. Obama gave it his best, but his best just wasn’t good enough for America. Hey Obama, “Hell no, and good riddance.”

*** BTW – Raising the tax rate on carried interest from 15% to 35% would result in a 133.33% tax hike, or to 39.6% would equal a 164.0% hike, just in case anyone is still considering this madness. ***

“There is a limit to the taxing power of a State beyond which increased rates produce decreased revenue. If that be exceeded intangible securities and other personal property become driven out of its jurisdiction, industry cannot meet its less burdened competitors, and no capital will be found for enlarging old or starting new enterprises. Such a condition means first stagnation, then decay and dissolution. There is before us a danger that our resources may be taxed out of existence and our prosperity destroyed.” ~Calvin Coolidge (Address to the General Court beginning the 2nd year as Governor of Massachusetts January 8, 1920)


Private Equity Info

Private Equity Growth Capital Council


The Problems with Raising Taxes on Carried Interest, Part II

Obama’s 1950s Tax Fallacy

– Is the FICA tax a tax?

– By: Larry Walker, Jr. –

During a press conference on June 29, 2011, Barack Obama said, “The revenue we’re talking about isn’t coming out of the pockets of middle-class families that are struggling — it’s coming out of folks who are doing extraordinarily well and who are enjoying the lowest tax rates since before I was born. If you’re a — if you are a wealthy CEO or a … hedge fund manager in America right now, your taxes are lower than they have ever been. They’re lower than they’ve been since the 1950s.”

Does Obama really want to go there? Why stop at the 1950s? Why not go all the way back to 1913, or 1926, when top marginal tax rates were only 7.0% and 25.0%, respectively? And if top marginal tax rates are lower today than they’ve been since the 1950s, are they not also lower than they’ve been since 1964? For what it’s worth, I know that within my lifetime, top marginal tax rates are higher today than they were in the late 1980s, and lower than they were for most of the 1990s, but as for the 1950s, why should I care? That was before my time as well.

If I understand Obama correctly, what he’s saying is that if you were a wealthy CEO or a hedge fund manager in the 1950s, your taxes are lower today, than they were back then. But, if you were a wealthy CEO or a hedge fund manager in the 1950s, and are still breathing, you’re probably well into your 80s and could care less, like me. Enjoy forking over the paltry 35% of your earnings for your remaining years, and don’t forget the Social Security, Medicare, and State taxes. I mean, if anyone deserves a break, it’s our elders.

Now, I wasn’t born until 1960, and didn’t start working consistently until the 1980s, and I think my Mom was only 12 in 1950, so is anyone around today who can relate? The truth is that for anyone to have entered the workforce, at say the age of 18, in 1950, would make them at least 79 years old today. And anyone who entered the workforce at the end of that decade, in 1959, would be at least 70. So in order to have been in the prime earning years back then, ages 30 to 50, would make one well beyond 80 years of age today. For example, Alfred Winslow Jones (9 September 1900 – 2 June 1989), who formed the first hedge fund in 1949, would have been 111 years old by now. And, since the average age of a CEO in the United States, today, is just 56, most wouldn’t even have been born until the mid-1950s. The fact that there aren’t any CEOs or hedge fund managers around today, who were in those positions in the 1950s, leads anyone paying attention to think that Obama is out of touch with reality. And that’s putting it kindly.

The table below compares what 1950s tax rates looked like back then, against what they would look like in 2010 dollars. [Note: Tax rates were the same throughout the 1950s, and the brackets for Single and Married Filing Separate taxpayers were exactly one-half of the amounts in the following 1955 Married Filing Joint schedule.]

From 1950s Tax Fallacy

Winning The ‘50s – At least in the 1950s, everyone had skin in the game. If you had taxable income of under $32,352, in 2010 dollars, your marginal tax rate would have been 20%. If you had taxable income of $250,000, in today’s dollars, your marginal tax rate would have been 47%. And if you had taxable income of over $1,000,000, in 2010 dollars, your marginal rate would have been between 78% and 91%. So is this what Obama wants? If so, he should change his slogan from “Winning the Future” to “Winning the ‘50s”, or something.

Nobody really knows what Obama is bloviating about, but just for the heck of it, let’s analyze whether the amount of personal tax revenues collected, as a percentage of GDP, was any higher in the 1950s than it is today. The chart below was derived from statistics published by the U.S. Bureau of Economic Analysis. According to the data, personal taxes, as a percentage of GDP, averaged 7.6% in the 1950s, and 7.5% between 2001 and 2010. So in that sense, Americans are paying a whopping 1.3% less in personal taxes than our grandparents, and great-grandparents paid back in the 1950s. I included federal government spending just out of curiosity. It turns out that government spending as a percentage of GDP, while only averaging 16.4% in the 1950s, has averaged 21.3% since 2001. So it appears that the percentage decline of 1.3% in personal taxes, which we are all enjoying today, is miniscule, compared to the unsustainable 29.8% spike in federal government spending. Perhaps Obama should have picked a different decade.

From 1950s Tax Fallacy

Although it may be true that in the single year of 2010, personal taxes declined to 6.2% of GDP, versus the 7.6% average of the 1950s, or by -18.4%; at the same time, government spending has skyrocketed to 25.5% of GDP, versus 16.4% in the 1950s, or by +55.5%. So in 2010, personal taxes declined by -18.4%, while federal spending increased by +55.5%, compared to 1950s averages. So what’s wrong with this picture? Should we just adopt the 1950s tax brackets and then jack the rates up by 73.9%?

Back to the point of Obama’s tirade: Although in terms of tax brackets, it would appear on the surface that we are paying lower taxes today, than our ancestors who worked in the 1950s, there is one additional item to consider. Without getting into all the other taxes we pay today, which either were not around or at least not as burdensome in the 1950s (i.e. federal fuel taxes, airline ticket taxes, state and local taxes, and such), FICA payroll taxes were much lower in the 1950s compared to today.

Is the FICA tax a tax?

We know that the Federal Insurance Contributions Act (FICA) is codified at Title 26, Subtitle C, Chapter 21 of the United States Code. And that the FICA tax is a United States payroll (or employment) tax imposed by the federal government on both employees and employers to fund Social Security and Medicare —federal programs that provide benefits for retirees, the disabled, and children of deceased workers, etc… And we know that the amount that one pays in payroll taxes throughout one’s working career is indirectly tied to the social security benefits annuity that one receives as a retiree. Yet while some folks claim that the payroll tax is not a tax because its collection is tied to a benefit, the United States Supreme Court decided in Flemming v. Nestor (1960) that no one has an accrued property right to benefits from Social Security. Add to that the fact that the Trust Funds have been looted, and it is clear that the FICA tax is really just a tax. My basic rule of thumb is that, if it comes out of my paycheck, and goes to the federal government, it’s a tax.

In 1950, the Old-Age, Survivors, and Disability Insurance (OASDI) tax rate levied on both employees and employers was just 1.5% of the first $3,000 in wages ($3,000 in 1950 was equivalent to $27,451 in 2010). And by 1959, the rate had increased to 2.5% of the first $4,800 in wages ($35,866.96 in 2010 dollars). There wasn’t any Medicare tax in the 1950s, as it was not implemented until 1966. Historical FICA tax rates are shown below.

From 1950s Tax Fallacy

As most of us working today are aware, beginning in 1990, the OASDI tax rate was increased to 6.2% of the first $51,300 in earnings, and the wage base has increased each year since by increases in the national average wage index. Also beginning in 1990, Medicare taxes were assessed at the rate of 1.45% of the first $51,300 in wages, and the wage base was stepped up to $125,000 in 1991, $130,200 in 1992, $135,000 in 1993, and has been levied without earnings limitations since 1994. Most of today’s workforce is also aware that since 2009, the OASDI rate of 6.2% has applied to the first $108,600 in wages, while the Medicare tax of 1.45% has been levied without limit (see chart below). By the way, Medicare taxes are scheduled to increase in 2013, for those who are not paying their “fair share” today.

From 1950s Tax Fallacy

So if we add social insurance taxes, since they are a tax, to personal income taxes, and compare the total amount of taxes paid in the 1950s to the present, are taxes still lower today? Well, per the chart below, the average amount of combined social insurance and personal taxes paid in the 1950s was 9.7% of GDP, versus an average of 14.3% for the decade ending in 2010. So it turns out that the total amount of taxes the federal government collects from us today are 47.4% more than in the 1950s. This might explain why many of us feel as though we are taxed enough already. But how would we know without first checking the facts? What is clear, without question, is that taxes are a heck of a lot lower today, than they were when they reached a record 17% of GDP in the year 2000. Also of note is the fact that government spending only represented 18.8% of GDP in the year 2000, or about the same as it was in 1969, versus a disgraceful 25.5% in 2010.

From 1950s Tax Fallacy

The Point: The fact that we are paying 6.2% in Social Security taxes on the first $108,600 of earnings today, whereas the rate was only 2.5% of the first $4,800 in 1959; and that we are paying an additional 1.45% in Medicare taxes on an unlimited amount of earnings today, whereas the tax did not exist in the 1950s; means that the amount of taxes paid by individuals, as a percentage of GDP, is much greater today than it was for those living and working in the 1950s. In fact, the total amount of taxes Americans pay today is at least 47.4% greater than it was in the 1950s. It’s also interesting to note that the amount of taxes paid in 2010 was exactly the same, as a percentage of GDP, as paid by those who lived and worked in 1970 (see the chart above, data here). So what’s the bottom line?

The bottom line: If Obama wants to go back to the 1950s, let’s go. But it’s not going to work unless government spending follows suit. So cut government spending from 25.5% of GDP, back down to 16.4%, and you’ve got a deal. But I’m afraid that short of passing the Monetary Reform Act, the next step forward is another shellacking. But that’s a given. America lacks leadership. Either you’re hot, lukewarm or cold, but attempting to divert attention away from the real problem, excessive government spending, towards some make-believe injustice since the 1950s, is so far from the mark that it’s almost incomprehensible. As I see it, there are two problems with Obama’s sound bite. First of all, 51% of the current American workforce doesn’t pay any income taxes at all (i.e. not paying their fair share). Secondly, the injustice du jour lies not in the amount of taxes being collected, but rather in the amount of money the federal government is squandering. It would appear that with Obama, all roads lead to Athens, or is it Rome?

“It is a paradoxical truth that tax rates are too high and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now … Cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.” ~John F. Kennedy, Nov. 20, 1962, president’s news conference


Data Tables

Solving the Debt Crisis | A Catch-22

~ Pass The Monetary Reform Act ~

By: Larry Walker, Jr. ~

The Obama administration’s solution for the nation’s impending destruction, due to out-of-control deficit spending, is to increase the debt ceiling now, and worry about spending cuts later. The Obama administration is under the impression that more borrowing power will enable the nation to maintain its AAA Credit rating. The Catch-22 is that an instant increase in the debt ceiling will result in an instant downgrade to the nation’s credit rating. You see, the problem is not the level of the nation’s debt ceiling; the problem is America’s debt-to-GDP ratio. If raising the debt ceiling by $2.5 trillion would result in an equal increase in gross domestic product, then the problem would be solved. However, there is no verifiable link between government spending and economic growth.

The following passage, from Joseph Heller’s book, “Catch-22”, about sums up the whole zero-sum debt dilemma: “There was only one catch and that was Catch-22, which specified that a concern for one’s safety in the face of dangers that were real and immediate was the process of a rational mind. Orr was crazy and could be grounded. All he had to do was ask; and as soon as he did, he would no longer be crazy and would have to fly more missions. Orr would be crazy to fly more missions and sane if he didn’t, but if he was sane he had to fly them. If he flew them he was crazy and didn’t have to; but if he didn’t want to he was sane and had to.” The solution to Orr’s problem would be to simply end the war. Similarly, the solution to the National Debt problem is to simply end the Fed.

Obama and his supporters are basically saying, “You have to buy more government bonds, otherwise the bonds you already own will go into default.” In other words, the only way the government can continue to pay the interest on its $14.5 trillion National Debt is through incurring more debt. Like Orr in Heller’s Catch-22, Obama must be thinking: I have bankrupted the federal government and need to borrow more to keep from going broke. If we don’t raise the debt ceiling, the National Debt will be contained, but we will not be able to pay the interest on the current debt. If we raise the debt ceiling, we will increase our debt thus ensuring our demise, but if we don’t raise the debt ceiling then we must declare bankruptcy. If we raise the debt ceiling we will be bankrupt, and if we don’t raise the debt ceiling we will be bankrupt.

What AAA Rating? – While American politicians claim that their intention is to preserve the nation’s alleged AAA credit rating, Dagong Global Credit Rating Co., Ltd. (Dagong), China’s credit rating service, has already lowered its rating to A+/negative. Dagong initially assigned the United States a sovereign credit rating of AA in July 2010, but lowered this rating on November 3, 2010, when the U.S. Federal Reserve announced its QE2 monetary policy. In Dagong’s opinion, QE2 was “aimed at stimulating the U.S. economy through issuing an excessive amount of U.S. dollars”, which it saw as a sign of “the collapse of the U.S. government’s ability to repay its debt and a drastic decline of its intention to repay”. Dagong therefore downgraded the U.S.A.’s credit rating to A+/negative, and has since placed the sovereign credit rating of the United States on its Negative Watch List. But who cares about China’s credit rating service, right? After all, we only acknowledge Moody’s and S&P in the West, because we can always borrow from Europeans, right?

Unasked Questions – The questions that politicians have failed to consider in this entire futile debate are as follows:

Why is the government in debt? – The federal government is in debt because it has given its ability to create money over to the privately owned Federal Reserve, and to privately owned National Banks. Every time the government needs money, it must first borrow it from the Federal Reserve by exchanging bonds for cash. Why? If the government were to simply print its own currency, similar to Lincoln’s Greenbacks, then there would be no National Debt at all. So why not change this first? If the federal government were to pass the Monetary Reform Act, it would be able to payoff the entire National Debt within a year, and would simultaneously extinguish from its budget $400 billion per year in interest payments.

Where will the money come from? – When the Obama administration proposes to increase the National Debt by another $2.5 trillion, it’s most profound that no one is asking where the money will come from. So where will the money come from? The answer is out of thin air. That’s right. The money the government borrows is created out of thin air. But creating money out of thin air has consequences, namely inflation. When the Fed prints money and exchanges it for government bonds, the existing money supply is diluted, in other words, worth less. Who needs QE3, when you’ve got Obama-Year-3?

Dazed and Confused – Many, so called, conservatives seem to be confused on the matter of Monetary Reform. When we say, “Who cares about the banks, let them go broke”, they reply, “but banks are businesses and what you are proposing is anti-capitalism.” It’s funny that when it came to big bank bailouts, the same crowd who was chanting, “Let them go broke,” is now saying, “Don’t take away our precious banks.” I maintain that banks are not businesses. Banks produce no real goods or services; they merely buy, sell and hold debt. They also receive the largest government subsidy there is, the ability to create money out of thin air and to loan it out at interest.

Real businesses produce real products and services such as oil companies. Oil companies drill for oil and natural gas, and then refine it into tangible products sold to the public for profit. When politicians speak of taking away, so called, tax subsidies for oil companies, what they are really saying is that U.S. citizens should pay more in energy costs, not that oil companies should pay more in taxes. When we say, “End the Fed,” what we are really saying is, “End the National Debt”. When we say, “Raise bank reserve ratios from 0% to 10%, to 100%”, what we are saying is, “Take away the national banking system’s ability to create and loan out money that it doesn’t have.”

The Only Solution – Cutting taxes, reducing spending, raising taxes, and increasing spending are proposals which no matter how you structure them will not solve the real problem. Borrowing more to keep from going broke is not only absurd, it’s insane. So who’s kidding who? Passing the Monetary Reform Act will solve the National Debt problem and place America firmly on the road to recovery. In my opinion, there is no other solution.

Until there is reform, “Render unto Caesar the things which are Caesar’s, and unto The United States the things that are the Federal Reserve Bank’s.”

Photo Credit: World Crisis by Petr Kratochvil

The Monetary Reform Act of 201X | Authentic

The Two Step Plan to National Economic Reform and Recovery

Step 1: Directs the Treasury Department to issue U.S. Notes (like Lincoln’s Greenbacks; can also be in electronic deposit format) to pay off the National debt.

Step 2: Increases the reserve ratio private banks are required to maintain from 10% to 100%, thereby terminating their ability to create money, while simultaneously absorbing the funds created to retire the national debt.

These two relatively simple steps, which Congress has the power to enact, would extinguish the national debt, without inflation or deflation, and end the unjust practice of private banks creating money as loans (i.e. fractional reserve banking). Paying off the national debt would wipe out the $400+ billion annual interest payments and thereby balance the budget. This Act would stabilize the economy and end the boom-bust economic cycles caused by fractional reserve banking.

Monetary Reform Act – Summary

This proposed law would require banks to increase their reserves on deposits from the current 10%, to 100%, over a one-year period. This would abolish fractional reserve banking (i.e., money creation by private banks) which depends upon fractional (i.e., partial) reserve lending. To provide the funds for this reserve increase, the US Treasury Department would be authorized to issue new United States Notes (and/or US Note accounts) sufficient in quantity to pay off the entire national debt (and replace all Federal Reserve Notes).

The funds required to pay off the national debt are always closely equivalent to the amount of money the banks have created by engaging in fractional lending because the Fed creates 10% of the money the government needs to finance deficit spending (and uses that newly created money to buy US bonds on the open market), then the banks create the other 90% as loans (as is explained on our FAQ page). Thus the national debt closely tracks the combined total of US Treasury debt held by the Fed (10%) and the amount of money created by private banks (90%).

Because this two-part action (increasing bank reserves to 100% and paying off the entire national debt) adds no net increase to the money supply (the two actions cancel each other in net effect on the money supply), it would cause neither inflation nor deflation, but would result in monetary stability and the end of the boom-bust pattern of US economic activity caused by our current, inherently unstable system.

Thus our entire national debt would be extinguished – thereby dramatically reducing or entirely eliminating the US budget deficit and the need for taxes to pay the $400+ billion interest per year on the national debt – and our economic system would be stabilized, while ending the terrible injustice of private banks being allowed to create over 90% of our money as loans on which they charge us interest. Wealth would cease to be concentrated in fewer and fewer hands as a result of private bank money creation. Thereafter, apart from a regular 3% annual increase (roughly matching population growth), only Congress would have the power to authorize changes in the US money supply – for public use -not private banks increasing only private bankers’ wealth.

Support the Monetary Reform Act – write your Congressman today!

Read the full version of the Monetary Reform Act here.

If not now, when?

“I am a firm believer in the people. If given the truth, they can be depended upon to meet any national crisis. The great point is to bring them the real facts.” ~ Abraham Lincoln

“The ignorance of one voter in a democracy impairs the security of all.” ~ John F. Kennedy

Debt Mayhem | End Fractional-Reserve Banking

An Empire Built on Sand ~

~ By: Larry Walker, Jr. ~

Those of us who lived through the financial crisis of 2008 are most familiar with the drawbacks of fractional-reserve banking. It’s core theory, that wealth is created through debt, is now so ridiculously out of control, that every newborn American citizen today enters this world more than $46,000 in debt. Those naive enough to think that America’s most pressing problem started in January of 2001, or some other arbitrary date, need to look back a bit further, to 1913 to be precise. In America, taxpayers have been the suckers, while the “middle class” have been lulled into serfdom. But since we the people are no longer willing to perpetuate this fraud, the federal government, on our behalf, and at our expense, has volunteered to further prop up a broken and obsolete monetary system, yet the days of fractional-reserve banking are numbered.

What is fractional-reserve banking? – Fractional-reserve banking is a type of banking whereby a bank does not retain all of a customer’s deposits within the bank. Funds received by the bank are generally loaned out to other customers. This means that the available funds, called bank reserves, are only a fraction (reserve ratio) of the quantity of deposits at the bank. As most bank deposits are treated as money in their own right, fractional reserve banking increases the money supply, and banks are said to create money, literally out of thin air.

Fractional-reserve banking is prone to bank runs, or other systemic crisis, as anyone who has studied the American economy since 1913 is well aware. In order to mitigate this risk, the governments of most countries, usually acting through a central bank, regulate and oversee commercial banks, provide deposit insurance and act as a lender of last resort. If the banking system could only find a big enough sucker, one dumb enough to borrow say $14.4 trillion or more indefinitely, its prospects would be unlimited.

How does it work? – As an example, let’s say you work hard and are able to deposit $100,000 into Bank A. What does the bank do with your money? I mean if you wanted to withdraw it all in the following week, would it still be there? The answer is yes, and no. You see once you deposit your money, the bank immediately loans it out to someone else, likely keeping none of it in reserve, or at the most 10%. Let’s assume that Bank A is one of the mega-banks subject to the maximum bank reserve requirement of 10%. What happens is that the bank will hold $10,000 of your money either in its vault, or in a regional federal reserve bank, and will loan the other $90,000 to someone else.

Let’s say that Joe, a borrower, walks in to Bank A and applies for a $90,000 home loan on the day after you make your deposit. Bank A gladly gives Joe the $90,000 loan, at 5% interest over 30 years. When Joe closes on the loan, the $90,000 is paid to Jenn, the seller of the home. Jenn then deposits the $90,000 into her account at Bank B. Bank B keeps $9,000 of her money in reserve while lending out the other $81,000. Now let’s say that Jack comes along and secures an $81,000 business loan from Bank B on the day after Jenn makes her deposit. Now Jack deposits the $81,000 into his account with Bank C, and the cycle continues.

Bank A counts the $100,000 in your account as a liability, because it owes this amount back to you, and at the same time counts the $90,000 loan made to Joe, and the $10,000 held in reserve as assets. In effect Bank A has created a $90,000 loan asset for itself out of thin air. Fractional-reserve banks count loans as assets, and then earn their money through charging interest on this fictitious money. They also make money through repackaging loans as investments and selling them on the open market, potentially creating an even bigger fraud.

Following the money, your bank statement shows a balance of $100,000 at Bank A, Jenn’s bank statement reveals a balance of $90,000 with Bank B, and Jack has a balance of $81,000 on deposit with Bank C. The money supply has amazingly increased by $171,000 (90,000 + 81,000), through very little effort. Amazing, considering that the only real money introduced into the system was your initial $100,000 deposit. Through the system of fractional-reserve banking your original $100,000 has been magically transformed into $271,000 of liquid cash, while at the same time creating $171,000 of debt.

So what happens if you come back the following week to withdraw all of your money? Well first of all, Bank A will likely tell you that you need to give them several days notice before making such a large withdrawal, because in reality, they don’t have your money anymore. Bank A is then forced to do one of three things: borrow the money overnight from the Federal Reserve, or another member bank; sell some of its loans on the secondary market; or wait until another customer makes a $100,000 deposit – using $90,000 of that plus the $10,000 it held in reserve for you. If this sounds like a Ponzi scheme, it just might be.

Creating Wealth through Debt – The table below displays how loans are funded and how the money supply is affected. It shows how a commercial bank creates money from an initial deposit of $100,000. In the example, the initial deposit is lent out 10 times with a fractional-reserve rate of 10% to ultimately create $686,189 of commercial bank money. Each successive bank involved in this process creates new commercial bank money (out of thin air) on a diminishing portion of the original deposit. This is because banks only lend out a portion of the initial money deposited, in order to fulfill reserve requirements and to allegedly ensure that they have enough reserves on hand to meet normal transaction demands.

The model begins when the initial $100,000 deposit of your money is made into Bank A. Bank A sets aside 10 percent of it, or $10,000, as reserves, and then loans out the remaining 90 percent, or $90,000. At this point, the money supply actually totals $190,000, not $100,000. This is because the bank has loaned out $90,000 of your money, kept $10,000 of it in reserve (which is not counted as part of the money supply), and has substituted a newly created $100,000 IOU for you that acts equivalently to and can be implicitly redeemed (i.e. you can transfer it to another account, write a check on it, demand your cash back, etc.). These claims by depositors on banks are termed demand deposits or commercial bank money and are simply recorded on a bank’s books as a liability (specifically, an IOU to the depositor). From your perspective, commercial bank money is equivalent to real money as it is impossible to tell the real money apart from the fake, until a bank run occurs (at which time everyone wants real money).

At this point in the model, Bank A now only has $10,000 of your money on its books. A loan recipient is holding $90,000 of your money, but soon spends the $90,000. The receiver of that $90,000 then deposits it into Bank B. Bank B is now in the same situation that Bank A started with, except it has a deposit of $90,000 instead of $100,000. Similar to Bank A, Bank B sets aside 10 percent of the $90,000, or $9,000, as reserves and lends out the remaining $81,000, increasing the money supply by another $81,000. As the process continues, more commercial bank money is created out of thin air. To simplify the table, different banks (A – K) are used for each deposit, but in the real world, the money a bank lends may end up in the same bank so that it then has more money to lend out.

Although no new money was physically created, through the process of fractional-reserve banking new commercial bank money is created through debt. The total amount of reserves plus the last deposit (or last loan, whichever is last) will always equal the original amount, which in this case is $100,000. As this process continues, more commercial bank money is created. The amounts in each step decrease towards a limit. This limit is the maximum amount of money that can be created with a given reserve ratio. When the reserve rate is 10%, as in the example above, the maximum amount of total deposits that can be created is $1,000,000 and the maximum increase in the money supply is $900,000 (explained below).

Fractional reserve banking allows the money supply to expand or contract. Generally the expansion or contraction is dictated by the balance between the rate of new loans being created and the rate of existing loans being repaid or defaulted on. The balance between these two rates can be influenced to some degree by actions of the Fed. The value of commercial bank money is based on the fact that it can be exchanged freely as legal tender. The actual increase in the money supply through this process may be lower, as at each step, banks may choose to hold reserves in excess of the statutory minimum, or borrowers may let some funds sit idle, or some people may choose to hold cash (such as the unbanked). There also may be delays or frictions in the lending process, or government regulations may also limit the amount of money creation by preventing banks from giving out loans even though the reserve requirements have been fulfilled.

What are the Fed’s current reserve requirements? – According to the Federal Reserve, banks with less than $10.7 million on deposit are not required to reserve any amount. When deposits reach $10.7 to $58.8 million the requirement is just 3%. It’s only when deposits exceed $58.8 million that a 10% reserve requirement applies. The table below was extracted from the Federal Reserve’s website.

How much money can our banking system create out of thin air? – The most common mechanism used to measure the increase in the money supply is typically called the money multiplier. It calculates the maximum amount of money that an initial deposit can be expanded to with a given reserve ratio.

FormulaThe money multiplier, m, is the inverse of the reserve requirement R:


A reserve ratio of 10 percent yields a money multiplier of 10. This means that an initial deposit of $100,000 will create $1,000,000 in bank deposits.

A reserve ratio of 3 percent yields a money multiplier of 33. This means that an initial deposit of $100,000 will create $3,300,000 in bank deposits.

A reserve ratio of 0 percent yields a money multiplier of ∞ (infinity). This means that an initial deposit of $100,000 will create an unlimited amount of bank deposits.

What’s the problem? – The system works fine as long as everyone plays along. The biggest problem is that it’s a system by which wealth is only created through debt. Through this system, the lender always wins; while debtors – nowadays referred to as the middle class – always lose. As long as there are willing borrowers, our economy grows. When consumers, businesses, and the federal government stop borrowing, the system shuts down. But one cannot very well borrow into infinity; after all, life itself is finite. “There is a time to borrow, and a time to repay; a time to live and a time to die.” One definitely cannot borrow while lacking the means of repayment, unless of course, it has a seeming unlimited ability to tax.

The next biggest problem is that of absurdly low bank reserve requirements. With bank reserve requirements set at 0% to 10%, what could possibly go wrong? I mean besides banks having the ability to create an infinite supply of make-believe money through debt. The modern mainstream view of reserve requirements is that they are intended to prevent banks from:

  1. Generating too much money by making too many loans against the narrow money deposit base;
  2. Having a shortage of cash when large deposits are withdrawn (although the reserve is thought to be a legal minimum, it is understood that in a crisis or bank run, reserves may be made available on a temporary basis).

Let’s face the facts. Our present monetary policy is a disaster. When too many players wish to withdraw their money to hold as cash, or too many purchases are made overseas, or an excessive amount of loan defaults occur, the house comes crashing down. When all three events occur at the same time, as actually happened in 2008, it should have spelled the end of fractional-reserve banking. But instead, our leaders are in denial. Now “wealthy” U.S. taxpayers are being called upon to bailout the federal government, while at the same time, the government seeks more borrowing power. But when all our wealth is gone, who will rescue us then? And if the entire global monetary system has likewise been built on the same sinking sand, who will rescue them?

Well, hopefully you now have a better understanding of why our present monetary system is dysfunctional, why the federal government wants you to borrow more, and why it wants to borrow more itself. We are a nation built on a Ponzi scheme; one which cannot grow without incurring further debt. But as I said before, growth through debt amounts to nothing more than spending next year’s income today. Man does not live by debt alone.

What’s the solution? – We have to put an end to fractional-reserve banking. It should be clear, to all those with understanding that we need to get off of this merry-go-round. The first step is for the Federal government to take the power of money creation away from the Federal Reserve and from commercial banks by both issuing and controlling the quantity of its own currency (rather than Federal Reserve Notes). The second step is to increase bank reserve requirements to 100%, as banks should never again be allowed to loan out more money than actually on deposit. If there was a way to end the debt-money system and to payoff the national debt within a year or two, wouldn’t you want to know? For the details on how to accomplish this, I implore you to watch Bill Still’s full video entitled, The Secret of Oz (preview).

“Therefore everyone who hears these words of mine and puts them into practice is like a wise man who built his house on the rock. The rain came down, the streams rose, and the winds blew and beat against that house; yet it did not fall, because it had its foundation on the rock. But everyone who hears these words of mine and does not put them into practice is like a foolish man who built his house on sand. The rain came down, the streams rose, and the winds blew and beat against that house, and it fell with a great crash.” ~ Matthew 7:24-27 (NIV)


Fractional-Reserve Banking

Principles of Monetary Reform

Federal Reserve: Monetary Policy

Monetary Reform, Part II | Lending and Interest

– By: Larry Walker, Jr. –

The interest that U.S. taxpayers pay on behalf of the federal government, for the privilege of having money in our wallets, and to cover irresponsible deficit-spending, is only the beginning of our woes. When it comes to our personal credit needs, American citizens are once again shackled and sold down river. With regards to borrowing and lending, we may be able to take a few pointers from Islamic banking. I know what you’re thinking, but just bear with me. Let me make one thing clear, I am a Christian, and I do not agree with any of the principles of Sharia, except for those it shares in common with the Bible. Upon these, I think most humans can agree. For in this case, we are not talking about matters of heaven or hell; we’re talking about money.

“If one of your countrymen becomes poor and is unable to support himself among you, help him as you would an alien or a temporary resident, so he can continue to live among you. Do not take interest of any kind from him, but fear your God, so that your countryman may continue to live among you. You must not lend him money at interest or sell him food at a profit.” ~ Leviticus 25:35-37

Interest – Sharia prohibits the charging of interest (known as usury) for loans of money. The Bible is also very clear on the matter of usury. The Biblical term for usury, neshek, is strongly negative, coming from a root whose basic meaning is to strike as a serpent. Islamic banking has the same purpose as conventional banking: to make money for the banking institute through the lending of capital. But because Islam forbids simply lending out money at interest, Islamic rules on transactions have been created to avoid this problem. The basic technique to avoid the prohibition is the sharing of profit and loss, via terms such as profit sharing, safekeeping, joint venture, cost plus, and leasing.

Loans in pre-industrial societies were made to farmers in seed grains, animals and tools. Since one grain of seed could generate a plant with over 100 new grain seeds, after the harvest, farmers could easily repay the grain with “interest” in grain. When an animal was loaned, interest was paid by sharing in any new offspring. What was loaned had the power of generation, and interest was a sharing of the result. Interest on tool loans would be paid in the produce which the tools had helped to create.

Monetary problems didn’t surface until societies began using metals, like gold, as forms of currency. When interest was allowed to be charged on loans of metals, with the interest to be paid in more metal, life became more difficult, particularly with agricultural loans. The problem is that inorganic materials, not being living organisms, have no means of reproduction. Thus, any interest paid on them must originate from some other source or process. The same is true with paper money today.

For example, if you borrow money to start a farming business, the only way to pay it back is if you are able to sell your crops to others in exchange for sufficient paper money to cover your expenses, including principal and interest. If your crops happen to get wiped out one season, then most likely, so do you. Even if you borrow money to start any kind of business, and are successful, you must make enough profit to cover the principal and interest payments on the debt. And in case you don’t know it, principal repayments are never deductible for income tax purposes. So a business with $100,000 in profit, which uses it to repay its debt, must then come up with additional money to cover the income taxes thereon; leading to the incurrence of more debt. What we have in the United States is a system of winners and losers, where the big banks always win, while the citizens of the Republic mostly lose.

Mortgage Loans – Let’s say you decide to buy a home for $110,000 by paying $10,000 down, and taking out a $100,000, 30 year – 5% fixed rate mortgage. When the term is over, you will have paid the lender $193,256, plus your down payment, for a total of $203,256. What you get in exchange is the privilege of living in a home which may or may not be worth its original value of $110,000 in 30 years. If your home loses value midstream, as far as the lender is concerned, “too bad”. If you miss, or are late on a payment, the lender will charge you penalties and destroy your credit, preventing you from obtaining future loans. If you get too far behind, the lender will put you out on the street. It doesn’t matter how good your credit was before your troubles, or how long you made timely payments, you will be destroyed. The lender will then confiscate your home, and sell it to someone else, pocketing any profit in the process.

In an Islamic mortgage transaction, instead of loaning the buyer money to purchase a home, a bank might buy the home itself from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in installments. However, the bank’s profit cannot be made explicit and therefore there are no additional penalties for late payment. In order to protect itself against default, the bank asks for strict collateral. The property is registered to the name of the buyer from the start of the transaction. This arrangement is called Murabahah.

An innovative approach applied by some banks for home loans, called Musharaka al-Mutanaqisa, allows for a floating rate in the form of rental. The bank and borrower form a partnership entity, both providing capital at an agreed percentage to purchase the property. The partnership entity then rents out the property to the borrower and charges rent. The bank and the borrower will then share the proceeds from this rent based on the current equity share of the partnership. At the same time, the borrower in the partnership entity also buys the bank’s share of the property at agreed installments until the full equity is transferred to the borrower and the partnership is ended. If default occurs, both the bank and the borrower receive a proportion of the proceeds from the sale of the property based on each party’s current equity.

Business Loans – U.S. banks lend money to companies by issuing fixed or variable interest rate loans. The rate of interest is based on prevailing market rates and is not pegged to a company’s profit margin in any way. U.S. banks currently borrow the money they lend to businesses at rates as low as 0.25%. When was the last time you saw an ad for small business loans charging 0.50%, which would give the lender a 100% return? The fact is that banks are still charging rates of between 4.0% and 30.0%, in spite of the cost of money. When prevailing interest rates are too high fewer businesses are able to borrow, thus inhibiting economic growth; and when rates are too low, profit-dependent banks are less willing to lend, also hindering the economy at large. If a business with a profit margin of just 5.0% could only borrow money at interest rates of 10.0% or more, why would it bother?

Islamic banks lend their money to companies by issuing floating rate loans. The floating rate is pegged to the company’s individual rate of return. Thus the bank’s profit on the loan is equal to a certain percentage of the company’s profits. Once the principal amount of the loan is repaid, the profit-sharing arrangement is concluded. This practice is called Musharaka.

Risk – Under our present system, if a company has a bad year and misses a few payments, it may be forced into bankruptcy. In the U.S. the risk of failure is placed squarely on the back of entrepreneurs. If a small business owner defaults on a loan, he is run out of business and his future ability to borrow is destroyed. In the case of government guaranteed loans, which are backed by the full faith and credit of you and I, the banks get their money back, while the failed entrepreneur, having been made a personal guarantor, is hunted down by his own government, like a fugitive, for the rest of his days.

Islamic banks also lend through Mudaraba, which is venture capital funding to an entrepreneur who provides labor while financing is provided by the bank so that both profit and risk are shared. Such participatory arrangements between capital and labor reflect the Islamic view that the borrower must not bear all the risk/cost of a failure, resulting in a balanced distribution of income and not allowing the lender to monopolize the economy.

End Usury, Now – Our monetary system needs a complete overhaul. But so far, the only reforms offered have been to further back big banks, at the expense of U.S. citizens. This is not acceptable. Until there is real reform, you and I, our children and grandchildren will remain enslaved. Backing our currency with gold is not the answer. The first step is for the government to begin printing its own fiat currency. The second step is to outlaw the practice of charging interest.


Islam in the Bible – Usury

Islamic banking

Leviticus, Chapter 25

Monetary Reform, Part I | End the Debt

~ By: Larry Walker, Jr. ~

The rich rule over the poor. The borrower is servant to the lender. ~ Proverbs 22:7 ~

Free Our Money – So what’s the problem? You know, you think about it all the time. It’s debt, debt, debt! The way our economy is set up now, the only way it can grow is through incurring more debt, either through government, business or consumers. Our economy cannot grow without increasing its money supply, and the only way that new money can be introduced, under the present monetary system, is through debt. But growth through debt really amounts to nothing more than spending next year’s income today. It’s a vicious cycle, one which has reduced millions to poverty, and to lives of indentured servitude. It’s time to end the debt, now. I believe that most good ideas are simple, and that any lasting reform must, like our very Constitution, be rooted and grounded in Judeo-Christian Principles.

There are two ways to approach monetary reform. One involves making changes to our current system, and the other involves a complete overthrow, starting over from scratch. I believe that one method is practical while the other is not. I am from the school of thought that believes it impossible to make the necessary reforms within the present corrupt system. Our monetary system has failed. Revolution is the only solution.

Under the current debt regime, there are two primary ways that our money supply is increased.

  1. The first way is that the Federal Reserve (the Fed) prints new money and loans it to the federal government by purchasing Treasury Bonds through Open Market Operations. The cash then enters the economy by being deposited into regional Federal Reserve banks accounts. Thus, the federal government, as it is today, can only create money through borrowing.

  2. The other way that money is created is through fractional-reserve banking. Under this system, Federal Reserve member banks are allowed to loan out at least ten-times the amount deposited with them in checking and savings accounts. When fewer loans are demanded, the supply of money contracts. It’s only when loan demand is high that the money supply increases.

Let’s face the facts. Consumers are tapped out. Most Americans have lost the equity in their homes and are buried in consumer debt. It’s not that banks aren’t willing to lend, it’s that nobody is willing to pay 4.0% to 30.0% interest on money the banks borrow at 0.25%. The system is broken. So today, our economy is being propped up mainly through deficit-financed government spending, but this will not continue. We have already passed the point of no return. This mark was decisively breached in early 2010, when per capita national debt surpassed per capita personal income. At this point there is no longer enough income to support the federal debt. Every additional dollar the government borrows merely expands the base of government-dependent citizens. If the course is not altered today, the government will eventually run out of other people’s money, leaving its citizens vulnerable to enslavement by an alien entity. So the problem is the federal government’s inability to create new money without incurring debt. If we can fix this, the problem is solved.

What happens when population growth outpaces its money supply? As an example, let’s say we have a two person society comprised of you and me, with a total of $1,000 in our economy. Our per capita money supply is $500. Now let’s say two more people cross over the border and become members of our society. Without an increase in the money supply, our standard of living will decline to $250 per person. This is also known as a recession or even depression. Recessions occur coincident with declines in the supply of money, as there is no longer enough to go around. Economic activity declines without an ability to increase the money supply. In order to maintain our standard of living, our money supply will need to increase from $1,000 to $2,000.

As long as there is population growth, the supply of money must constantly increase. In fact, regardless of population changes, in order for there to be any meaningful economic growth at all, a society demands steady increases in its supply of money. That’s our dilemma today. With U.S. population increasing by approximately 1.0% per year, the money supply must keep pace. However, the only way that the money supply can increase, without reform, is through debt.

Who’s to blame? – We the people have knowingly or unknowingly subscribed to a monetary system in which the Federal Reserve is our master, and we are its slaves. In this respect, we are not truly free. Some blame the bankers; others blame politicians; while still others blame more affluent taxpayers such as small businessmen or corporate jet owners. (By the way, corporations and their assets, including jets, are owned by shareholders; so if you own stock either directly, or through a retirement plan, you might be a corporate jet owner yourself.) In reality, you and I are to blame. We are the ones who have elected ignorant and corrupt politicians, who have allowed our government to maintain a flawed monetary policy.

When our monetary system achieved total failure in 2008, we had an opportunity to institute real reform, but instead we were conned into bailing it out, again at our own expense. The present administration promised change, but instead has delivered more chains. Next time will be different. We know that if we want a different result, we have to try something different. Any political candidate who doesn’t have a monetary reform plan which promotes the creation of debt-free money (fiat money), and solid debt reduction, and balanced budget plans is dead in the water.

“The ax is already at the root of the trees, and every tree that does not produce good fruit will be cut down and thrown into the fire.” ~ Matthew 3:10

Who’s Getting Hosed? – Under our present monetary system, the federal government, through the Treasury Department, prints Federal Reserve Notes and hands them over to the Fed. The Fed then lends the same money back to the federal government in exchange for U.S. Treasury Bills, Notes and Bonds. The Fed then sells some of these Treasury obligations at a discount to its member banks, investors, and foreign governments. The interest paid on these bills, notes and bonds is paid from income tax revenue collected off of the backs of U.S. taxpayers.

If the federal government could ever pay off its debt and balance its budget, it wouldn’t need to borrow as much. With the national debt already in excess of $14.4 trillion, it has become a burden for our government to meet its real responsibilities. This is the main reason why the national debt matters. As politicians do battle over whether or not the debt ceiling should be raised, in this case, to cover its own irresponsible spending, a more critical issue, the creation of money has been left in the hands of the Fed. Under our current system, the money supply cannot increase without adding to the debt. But if there was a way that the federal government could simply issue its own debt-free currency (fiat money), rather than Federal Reserve Notes, it would never have to borrow money from anyone ever again.

The more the federal government borrows, the more it binds U.S. taxpayers to cover its interest payments. It makes you wonder why a U.S. citizen would ever invest in Treasury obligations at all. I mean, in a way, the same citizen who buys this debt is also responsible, through income taxes, for paying the very interest he or she receives. And to make matters worse, the same citizen is taxed again on the interest earned. It’s a spiral of negative returns in which those who actually pay income taxes and invest in government debt are the losers; while the Fed, its member banks, and foreign investors can’t fail.

The Fed also loans some of this borrowed money to its member banks and to other “too big to fail” entities at interest rates currently as low as 0.25%. The banks then provide you and I, and our businesses with loans, or allow us credit, for the privilege of paying them anywhere from 4.0% to 30.0% interest, plus other transaction fees, pocketing the difference as profit. Banks even allow us to open checking or savings accounts for the additional privileges of earning next to nothing, and paying them even more in transaction fees, for the use of our own money. So we pay interest on debt just so the government can issue currency, we pay interest on the national debt, and then we pay more interest for banking and loan privileges. These are hidden taxes of which certain politicians, those who are always harping about higher taxes, seem to be completely ignorant. But we know better.

End the Debt, Now – Why does the federal government print money, give it to the Federal Reserve, and then borrow its own money back at interest? Couldn’t the government simply print United States Notes, rather than Federal Reserve Notes, and spend it into the economy without a middle man? According to Bill Still, yes it can. In fact, Mr. Still says that if the government took this route, it could repay all of its existing debt within a year or two, by simply replacing the old notes with new ones. For more on this, I recommend that you watch his video entitled, The Secret of Oz.

“There is no retreat but in submission and slavery! Our chains are forged!” ~ Patrick Henry

Other References:

Oz Economics

Progressive Regression II | Financial Regulation Crisis

– By: Larry Walker, Jr. –

Government Regulation vs. Self-Regulation

Once again, the Progressive Obama Administration’s magical solution, for all problems American, is more government regulation. But is government regulation really any better than self-regulation? Progressive government regulation is even worse. (A Progressive regulator is pictured to the left.)

I contend that banks and financial services companies have a direct interest in the safe, efficient, and profitable business of making loans, investments, and protecting assets. Would it benefit a bank to carelessly make loans to unqualified borrowers, taking the risk of never being repaid? No. Would it benefit a financial services company to recommend investments in financial instruments that continually lose money? No. Every private sector company has a direct interest in self-regulation.

Surely there will be incidents of fraud, theft, and abuse, but when such incidents occur, private companies will pay stiff fines under applicable Federal and State laws. When it is discovered that laws have been violated, corporate employees, and executives often face stiff fines and/or prison time. But what happens when government regulators screw up?

On August 9, 2007, former SEC Commissioner, Roel C. Campos officially announced his resignation.

On October 2, 2007, former SEC Commissioner, Annette L. Nazareth, a nine-year SEC veteran, officially announced her resignation.

On August 13, 2008, Florida’s top financial regulator, Don B. Saxon resigned before he could be fired. He was blamed for lax enforcement of state laws which allowed convicted felons to be licensed as mortgage brokers, including individuals who took part in mortgage fraud.

On January 26, 2009, Timothy Geithner, former President of the Federal Reserve Bank of New York, was sworn in as Secretary of the Treasury.

On May 7, 2009, Stephen Friedman, the former chairman of the Federal Reserve Bank of New York, abruptly resigned; days after questions arose about his ties to Goldman Sachs.

When regulators make costly mistakes most of them simply resign, disappearing into the shadows with taxpayer funded golden-parachutes. However, in some cases (Geithner) they get promoted. So there is no accountability when it comes to government regulation.

The case against more government regulation:

Raymond Richmond, in his latest article, Geithner and Summers Make Their Economic Mistakes Transparent, reminds us that the last major governmental intrusion into the private financial sector is what created our current recession. Instead of learning the valuable lesson that ‘government regulation equals no regulation’, the Progressive Obama Administration’s solution, like a junkie in relapse, is more of the same. “This time it will be different.”

“Here at home, we are on the verge of completing the most sweeping financial reform in more than 70 years.”

They failed to mention that the last major intervention in bank regulation caused this recession. Beginning in 1977 with the Community Reinvestment Act, every administration pressured the banks to make loans on easy terms, turning their eyes away from the housing bubble they were causing and the dangerous lack of collateral backing most mortgages. Government created two Government Sponsored Enterprises, Fannie Mae and Freddie Mac to create a secondary market for such ill-fated loans. Wall Street got into the act and created derivatives which brokers sold all over the world. When the housing bubble burst, the U.S. and Europe’s largest banks and insurance companies faced bankruptcy, and stock markets round the world collapsed. The U.S. does not need new bank regulations; it needs to keep the politicians from making decisions that should be left to the shareholders of private firms who have the major stake in the firm’s success. This is the lesson that should be learned around the world.

The past year and a half has seen unemployment grow in the U.S. to double digits, factories disappear, witnessed a worsening in the distribution of income, saw soaring government budget deficits, saw the U.S. dollar, the world’s standard, lose more than a third of its value in foreign exchange.

Prospects have never been worse. And all of these are the product of government intervention in the private economy. This is the lesson the G-20 ought to learn, government intervention in the economy usually does more harm than good. That would include intervention in the economy by the G-20, should it become an institution that makes and enforces decisions.

Michael Pomerleano in a Financial Times article entitled, The Failure of Financial Regulation, explains how government regulation failed. This is more proof that all of the time, effort, and money spent on government financial regulation has been for naught.

The regulation and supervision of the banking system rest on three pillars: disclosure to ensure market discipline, adequate capital and effective supervision.

Did the regulatory philosophy governing our financial markets withstand the test of the recent crisis? My conclusion is that all three regulatory pillars failed.

Was adequate information available before the crisis erupted? The information on the subprime exposure was out there for anyone who had the determination to collect and [analyze] the (sometimes patchy) data from quarterly 10Q reports filed with the Securities and Exchange Commission for US banks, supplemented by rating agencies’ and investment banks’ research reports.

A final question we need to ask is how effective was the supervisory apparatus in this crisis?

It is reasonable therefore to infer that the regulatory agencies would have taken notice of those estimates as early as the autumn of 2007. For a long time the regulatory and supervisory apparatus was silent.

We need to question why didn’t any regulator add up the potential size of the losses on the sub prime exposure, based on publicly available information, and verify them with on-site examinations?

Why wasn’t there a far more forceful response from the supervisory agencies? Equally, we should have expected credit rating agencies, investment research and investors to respond more forcefully. In this context, one can only express puzzlement and disappointment at the tepid regulatory reaction. Only after the monumental policy mistake of allowing Lehman Brothers to fail, did the authorities grasp the full significance of the problems and we witnessed a systematic effort to manage and contain the crisis.

Finally, Glenn Hubbard in his Harvard Business Review Article, Financial Regulation: It’s Not About More, reminds us that over-regulation by the government can do more harm than good.

…the economic concern that over-regulation of financial instruments and institutions in the name of safety can lead to aggregate harm — most obviously by raising the cost of funds to household and business borrowers. The key is to design regulation to insure proper pricing of risk and information about risk — such an approach (not that really taken in the bill winding its way through Congress) offers the right balance between protection of the individual and society.

The end result of the Progressive Obama Administration’s magical plan of more government regulation will lead directly to higher costs for American consumers and businesses. Businesses will pass their costs on to customers. Consumers will be hurt. Those who get hurt the most will be those on the lowest end of the economic food chain. Thus, the end result of Barack Obama’s cowardly, status quo, regressive, regulation policies will be to harm those that he claims to be helping.

Smaller government and less governmental regulation will lead to lower taxes, lower consumer prices, greater accountability, more freedom, and more opportunities for wealth creation. What exactly have we gotten in return for all of our money that has been squandered on regulating the financial industry? What will we get with Obama’s ‘more of the same’ approach?