Chapter 59 - Government Accounting

Government accounting is done in an inappropriate manner. If the government sells, for example, an electricity utility for $2 billion, it records this as $2 billion income. If the utility was worth $4 billion, then, in reality, it has made a two billion dollar loss. The government is not accounting for its assets as is done by even the smallest business. I was explaining this to a café owner the other day. In his business, he has to depreciate his refrigerator, originally purchased for $10,000. Each year he effectively writes down the decreased asset value for the refrigerator. He might record $2000 as ‘Depreciation of Refrigerator’ leaving the refrigerator with a ‘Written Down Value’ of $8000. The government does not do this. Even a small business records the value of its assets at the end of the accounting cycle. The government does not.

The government tends to sell assets to pay interest on Bank Credit to private banking corporations. The assets it sells off include: utilities, mining rights, fishing rights, land for agriculture, and residential land. These are all public assets sold on a one-off income basis. The government is selling assets to pay interest on money borrowed from creditors that it has the authority to create itself.

Fishing

With fishing rights, the income is a permanent regular annual income providing the fishing is at a sustainable rate. It is reasonable to consider that the fish in the sea up to the fishing limits belong to the nation and that foreign fishing vessels should be kept out of the area. This area of sea was always part of the food source of the nation and the resource effectively belongs to the state for the benefit of the people living close to the sea. There is a matter of deciding whether it is a free resource for the people or taxable resource for the people and whether it is justified income for the government. Perhaps small quantities of fish for personal consumption should be free and fishing for personal gain should incur a cost. Irrespective of your view, controls need to be placed to prevent overfishing and maintain sustainability. Taxation is a good way of doing this. Taxation on the use of nature’s provided resources is more effective than the economy-destroying taxes such as Sales Tax and Income Tax.

Farming

The land of a nation is an asset of the nation irrespective of who has title over the property. It is difficult to contemplate the effect on the nation of losing all agricultural land. Fracking has the potential to do this. If the farmer uses inappropriate farming methods and degrades the land rendering the land unusable, this action would also be a permanent loss to the nation. In the extreme, the nation will not be able to feed itself. It denies the ability of future generations to support themselves all for a short term financial gain. Such inappropriate farming methods might include:

Never forget that land was provided by nature or god for all living creatures to share. It is also our duty to keep the land in good condition so that future generations can live on it.

When a farmer has title to land, the land remains an asset of the nation and it is important to the nation that the land should remain productive into the future. It might be better that the land is leased on lifetime non-transferable leases on generous but strict terms. The lease being approved and reviewed by a body composed of appropriate people primarily of a farming background. It must be remembered that:

The value of a farm is dependent upon its ability to produce. The value is a capitalization of the future earnings of the land. The money to purchase is created by a bank by double entry accounting. The size of the loan is not dependent on available funds, thus the bank is unrestricted in what it lends. The loan is purely related to the future earnings of the farm. Thus the price of farmland rises to the point where the farm is barely viable. After interest payments to the bank, the farm income is capable of providing little more than a livable income for the farmer’s family. Any downturn in turnover or selling prices will send the farmer to the wall and create a possible suicide situation. It is possible for the banks to be making more from the farming than the farmer. I call this “Usury of Land”. Effectively, credit creation for the purchase of land, in a competitive environment, drives the price of land up until the land becomes barely viable.

Residential Land

In primitive village life, the land would be apportioned on an as-needs basis so that each family had land appropriate to its needs in a manner that was best for the family and the village as a whole. Thus, a farming family would be given productive farming land of a size they could manage. The shopkeeper would be given a central plot of land with an appropriate building or assistance to build such building. It must be remembered that we need the products that the shopkeeper is selling. So apportionment of land and improvements would be done on the basis of the family need and the village need. This would be done by village elders with input from all in society. The village would not put the individual into a lifetime debt situation to obtain the basic necessities of life. This village is working on the basis that land is free but its use is apportioned according to need.

In a city, this benevolent system will not work. So the system involves money. Under a banking system where Bank Credit is freely created by a bank by double-entry accounting and where the bank can create as much Bank Credit as it desires, the house prices will inflate. The limiting factor is the income of the purchaser. The profit orientated bank will maximize the return by loaning Bank Credit to a level that the purchaser can barely manage. With competition from other prospective purchasers, house prices rise to the maximum affordable on local wages. A great portion of the income of all house purchasers goes to the bank as interest. The creditor class is thus scalping the income of the house owner and thus the businesses of the district. If the bank did not exist, the house would sell for whatever people could afford, which would be quite low. As house prices rise in the city, production in the city becomes expensive. High bank interest payments make residence in the area expensive. Production costs for business rise due to this upward pressure on employee incomes until business becomes unviable. Business then moves overseas to places where usury has yet to get a grip. One gets a good feel for this when one visits Detroit.

Consideration needs to be made to the renting of land from the government on long-term secure leases. In such a situation, the expenses of using land are given to the government which allows other taxes to be reduced. The money obtained from this Land Tax arrangement would be spent on parks and facilities in the locality. It does not solve the problems of housing affordability, but it ensures the money is spent in a worthwhile manner. Where there is heavy demand for housing, people will pay the maximum affordable. The monthly payments will rise to the same monthly payment irrespective of whether it is paid to a lending institution or the government as Land Tax. It is better that the money goes to the government so that more destructive taxes can be reduced. Freehold is not the best option for the nation. A mix of leasehold and Land Tax will give the best for the nation and its citizens.

Where city housing is sold on a ‘highest bidder’ arrangement, the financially weak will always be marginalized. The streets will fill with those that cannot afford rents or land prices influenced by Usury. One can have some fascinating conversations talking with street people in New York. They were often working productive lives before misfortune. They are products of the ‘Usury of Land’.

Mining Rights

When mining rights are sold to mining companies, the government is effectively selling the minerals under the ground. I include oil in this analysis. The government treats this collected money as income. The nature of the sale does not take account of the asset value of the minerals. The minerals have value whether they are in the ground or extracted. It may be that if the copper, gold, oil or other minerals were to be left in the ground, they may become more valuable in the future. This leaves a valuable asset to the future generations. Mining, by its nature, is unsustainable in the long run because the minerals become depleted and then exhausted. The current accounting system used all over the world is operating on a ‘money now basis’ with no consideration for the incomes of our future generations. Some minor procedures have a double harm effect. Besides producing some short-term money, they damage the environment to the extent that more long-term activities, such as farming, become impossible in the future. The most bizarre activity of all would have to be fracking. This is the practice of pumping inappropriate chemicals into the ground for a short-term supply of gas. For the short term monetary gain of a minor quantity of gas, nations are risking permanent poisoning of their farmland and permanent poisoning of water supplies. This would have to be one of the most illogical activities ever conducted on this earth. This has the potential to cause more permanent damage than all human activity and wars throughout history.

Utilities

This is a tricky topic for me to comment on. I am a small business operator and I am no great fan of publicly operated enterprises. When a government runs a business it tends to be inefficient. When that business is privatized, the government tends not to regulate it well. Government run enterprises tend to rely on handouts of public money to cover for their inefficiencies. Government departments tend to bloat with staff. My experience as a computer consultant led me to believe that I could run some of these government departments with vastly reduced staff levels. As a sort of joke, a government department could reach the situation where they spend their entire workforce time administering the department, leaving no work-time to carry out the activities that they were created to perform. We could create a ‘Department of Doing Nothing’ full of people walking around with sheets of paper in hand and holding meetings on the procedures for walking around with sheets of paper in the hand. I learned, whilst working in these departments, to always have something in my hand to look like I was doing something. Even though I was always doing something, I had to also look like I was doing something.

Government departments tend not to adopt new technologies and procedures. They tend to operate from budgets rather than prudent spending. On the other hand, large private organizations in captive market situations, tend to take advantage of this situation. They may even claim special privileges and even handouts or tax concessions from the government. Private organizations operate well in free and open business and free market situations. They are poor in monopoly and captive market situations.

One of the main reasons that a government would sell utilities is to obtain Bank Credit to operate in the banking system’s Bank Credit network. It must never be forgotten that the government has the sole authority to create money. The logic of selling a utility to obtain money as a short-term gain is utterly illogical. The sale price is the capitalization of future earning capacity and is thus the value of the lost future earnings for the government. Governments are only selling utilities and public assets because governments rely on the bank-system-created virtual Bank Credit for their tax collection and government payments. This Bank Credit is an artificial substitute for real money.