Tuesday, August 17, 2010

No Business Starting a Business: Overcoming the Road Blocks to Starting IBC

by M.Z. from Kansas.

We really had no business starting a business! The following story is the reality of how my family had no business starting a business, the road blocks we faced in starting it, and how behind each road block was blessing after blessing that resulted in greater determination to continue in what we started. In reality this is the Zimmer family IBC (Infinite Banking Concept) story.
Back in April 2004 my wife, Jeni, and I found ourselves on a road we didn't want to go down. In short, I had been laid off from my job and in August 2004 we transitioned back to Kansas City from Oklahoma City to make a fresh start. I had no jobs lined up and Jeni had nothing lined up either. As God ordained I was able to land a job in Kansas City in October 2004. You do the math - I had nothing for eleven weeks after arriving in KC while Jeni had the income of a school crossing guard supervisor. Those were challenging days! The next two years were spent in a rental duplex and then eventually a bigger duplex in the neighborhood that we really wanted to be in. We were able to buy that half duplex with no money down. Still, by July 2008 we found ourselves nearly $17K in credit card debt and getting no where with minimum payments. We needed a plan. But before we instituted any plan - we prayed.
After prayer and hitting reality we first decided - no more credit cards and we thought of the quickest route to repayment. We settled on consultation with Consumer Credit Counseling Service (CCCS). They assessed our income and ability to pay back the debt to our creditors and we were quickly on the road to no credit card usage and doable monthly payments to CCCS (now Apprisen Financial Services). After this we knew it would be a long road to just be debt free of the credit card payments. CCCS told us it would be a little over four years. Not real encouraging, but we were on the right track. The very next month, September 2004, I would have THE MOST fortuitous, I believe most Divine, connection with another piece to our financial freedom puzzle.
I'm sitting at KCI Airport around 6:45 AM headed to somewhere. I decided it was time to read my "devotional for busy dads" daily reading. As I get half way through a guy sits down next to me and he begins reading, what I perceived to be, his Bible. We struck up a conversation about the Bibles were reading and so forth. The conversation led to what our vocation was and where we were headed and why. A short 30 minutes later the world of Infinite Baking Concept had unfolded in my heart and mind and was I jazzed! You see, I hadn't met just any ordinary business man shucking a sweet pie-in-the-sky financial pitch. I met a man that I knew in my heart was a follower of Christ and I knew, yes I knew, he was speaking some financial truth into my life. Jeni and I had been praying for more to the financial freedom puzzle than simply debt elimination and after 30-40 minutes with Mr. Mike Everett of Alpha and Omega Financial Services, Inc. I was on my way to a different universe in terms of my families financial dreams!
Yet, the questions and challenges seemed plentiful. As I watched the video that Mike gave me in the airport and as I did read the book (Becoming Your Own Banker by Nelson Nash) that he recommended I buy, I was wondering about IF my wife agreed to even listen to me about IBC and allow Mike to make his in-home presentation, could we do this IBC thing? Could we do it? Would we even have the funds to start such a venture? Would my wife, a daughter of a traditional bank board member, go for those "out of the box" idea? Could we sustain debt reduction and funding IBC simultaneously? why would my pastor say, "Don't do it?" And what about our growing kids and their needs and two cars that pretty much suck the financial life right out of a guy (and they did in the summer of 2009)?
Well, Mike came into our home and about 15 minutes into his presentation light bulbs were flashing, truth was unfolding, doubts were being erased and when Mike excused himself Jeni and I were utterly convinced that God had indeed sent Mike into our lives to reveal financial truth to us. Now for the hard part. We had committed to this road, but the money, what about the money to start? Amazingly we did gather the necessary funds we needed to start my $10,000 annual policy, and with very little borrowing I would add. We found funds in places we didn't know we had money and in the following tax season only paid about $340 of taxes on the funds we had secured to start our IBC.
Year one came and went with way too much money being spent on car repairs and things looked spooky going into our November annual premium payment. With the very little we paid into the premium and a conventional unsecured loan from our local bank, we paid year one! What a relief! We felt so excited to meet this goal and at this point be down to nearly $6K in credit card debt due to a second season of using our IBC funds to pay off debt. Then a day I'll never forget came into play that would affect our lives and our son's life for as long as we will live. On December 21, 2009 we found ourselves in Children's Mercy Hospital in Kansas City in a room with doctors around us explaining that our son indeed has Diabetes Type 1. What a shock to us. This was a huge road block in so many ways, but we are people of trust in our God. And so, after all bills have been processed and now we know what we need to pay, we again, continue with our focus of staying on the IBC path, knowing that not even diabetes is going to stop us from reaching our financial goals. In addition, God provided both my wife and I second jobs in the evenings (beginning May 2010) that pay very well so we can quickly pay off medical bills, and then with great hope, we desire to also use this money to fund IBC in year three beginning in November (which is also the dates we will have eliminated our entire $17,000 of credit card debt)!
So, life in it's ups and downs, with ill children, broken down cars, parents who seem skeptical that their kids have gone on some crazy wild financial goose chase, and two people who don't make a lot of money, but put it to good use, has afforded us a hopeful financial future. We hope to pay for college tuitions and fees, additional cars, vacations, and house repairs through IBC. I know we have no business thinking like that right now, but because we started our IBC, one day we'll say we had no business starting a business, but we're so glad we did!


The Role of Social Institutions

The Role of Social Institutions
(Excerpt from book: How Privatized Banking Really Works)

To understand our civilization, one must appreciate that the extended order resulted not from human design or intention but spontaneously: it arose from unintentionally conforming to certain traditional and largely moral practices...

—Friedrich Hayek

Social institutions are relationships and behavioral practices that allow humans to better cope with the problems of life in this world. At the most general level, institutions can include staples of society such as the family and the moral code, but institutions can also include fairly trivial examples such as the practice of tipping or giving gifts on birthdays.


Institutions provide a framework of continuity and predictability that allows people to more accurately plan their activities. In particular, institutions help us interact with each other by imposing a sense of stability and order onto the initially chaotic jumble of life. We all understand that parents and teachers need to provide a "routine" for young children, but ironically we adults need routines ourselves for modern civilization to be possible. We go through our routines of going to work, buying items from the store, going home to live with our family members (or roommates), and of course we directly communicate with each other with the institution of language—complete with its rules of grammar and definitions that everyone in the community shares.

The Fatal Conceit

One of the scourges of the 20th century was the arrogant belief by many intellectuals that they could overturn the inherited social order and remake society from scratch. In their view, if the existing customs and social practices couldn't be justified on a purely "rationalist" basis, then they were obviously obsolete and should be jettisoned in favor of new, "scientific" principles.

We have put these terms in quotation marks because in reality, it was incredibly irrational to try to revamp society from scratch, and it was very unscientific to try to substitute the time-tested traditions with new practices dreamed up by idealistic revolutionaries. Friedrich Hayek, one of the most celebrated Austrian economists and winner of the 1974 Nobel Prize, termed this hubris the fatal conceit. In his book The Fatal Conceit: The Errors of Socialism, Hayek writes:

[The socialists] assume that, since people had been able to generate some system of rules [in society] coordinating their efforts, they must also be able to design an even better and more gratifying system. But if humankind owes its very existence to one particular rule-guided form of conduct of proven effectiveness, it simply does not have the option of choosing another merely for the sake of the apparent pleasantness of its immediately visible effects. The dispute between the market order and socialism is no less than a matter of survival. To follow socialist morality would destroy much of present humankind and impoverish much of the rest.

The tragic mistake of the socialist reformers of the 20th century was in thinking that they could retain the bounty of free-market capitalism, while correcting its alleged faults such as inequalities in wealth or periods of high unemployment. But by overturning the traditional rules of property rights, the socialists did not create a utopia. Instead they unwittingly paved the way for the most murderous regimes in human history, whether on the "left" (Stalinist Russia and Maoist China) or the "right" (Hitler's Germany, where the Nazi Party was the National Socialist Party).

The Results of Human Action, But Not of Human Design

One of Hayek' major insights was that the fatal conceit of the socialist intellectuals led them to believe that simply because a social institution was created by humans, that it was therefore designed by them and could, in principle, be redesigned as a new and improved institution. Especially before witnessing the horrors of totalitarianism, many "good men" believed that a better world could be created if only the smartest, most humane men put their heads together and crafted a better plan for society. Instead of the anarchic market system, in which goods and services were produced on the basis of profit, the socialists wanted the State to organize all production in the service of people. It was simply the reincarnation of Plato's vision of rule by the philosopher kings.

Besides their naïve trust in those who would seize power in a socialist State, the intellectuals committed a basic mistake in their analysis. As Hayek repeatedly argued, these intellectuals overlooked the capacity of social institutions to tap the dispersed knowledge of the entire community. So rather than relying on a few of the "smartest guys in the room" to design a new society from the top-down, the inherited social institutions effectively solicited input from everyone, both brilliant and dull. The combined knowledge and experience of the entire community was always better than that of any small sample of individuals, even if those individuals were the best and the brightest.

It was understandable that the socialist reformers overlooked this key insight; it took a scholar of Hayek's brilliance to flesh out the point during his long career. Hayek devoted articles and books to the study of spontaneous orders, referring to self-organizing systems that exhibited predictable patterns, even though nobody deliberately set about to create such an orderly pattern. Borrowing a phrase from the Scottish moral philosopher Adam Ferguson, Hayek said that in a social context, spontaneous orders were "the product of human action, but not of human design."

What did Hayek mean by this odd phrase? He was underscoring the crucial fact that some of our most important institutions—including spoken language, our rules of morality, and the market economy itself—are obviously not "natural" creations, but instead are clearly the result of human beings. On the other hand, we can't scour the history books to find out which wise king, or group of scholars, invented the English language, or rules of morality, or the operation of the capitalist system. The earliest economists saw the hand of God behind these orderly outcomes, but both theist and skeptical writers understood that human beings on their own did not design such institutions.

Before tackling the more complex spontaneous order of the modern market economy, let's start with a simple example: a path through a forest. When a newcomer begins a hike in the forest, he will likely take the path of least resistance, meaning he will follow the well-worn trail that others have already created. Now this path or trail is clearly the result of human action; the branches were not removed by beavers, and the foliage on the ground was not eaten away by cows. Even so, we don't need to assume that the first human to stumble into the virgin woods, deliberately set out to create a path to serve subsequent travelers.

On the contrary, it's almost certainly the case that the first person to wander into the forest picked his way through it, looking for the most advantageous route. He obviously would walk around large trees, would avoid prickly bushes, and wouldn't walk into a deep river. But what the pioneer would be doing, quite unwittingly, was make it easier for the next person to follow in his footsteps. Perhaps he would carry a machete and hack away the branches as he stumbled along this maiden voyage; this would make it much easier for the next person to take the same route.

Gradually, over the decades, and especially if hundreds of people had to walk through this particular forest, a "good" route would be discovered. Its excellence would be enhanced every time another person walked along it, for each such passage would stamp down any weeds attempting to grow in the dirt trail, and would snap any small branches that had ventured into the corridor.
This hypothetical path through the forest would thus clearly be the result of human action, and yet not of human design. All of the hikers collectively contributed to its creation, over the course of decades, even though each individual hiker was acting in his own interest and in fact probably had no idea he was assisting all subsequent hikers.

Now it's true, the path might not be "optimal" from the viewpoint of a park ranger who conducts a helicopter survey of the entire forest. The ranger might lament the fact that the path goes a certain way, rather than another. Even so, taking the world as it is, the ranger realizes that it would be too confusing to try to "fix" the path. It would take a lot of manpower (with machetes and axes) to clear the "better" path, and then the ranger would have to set up fences or other obstacles to induce people to stop using the original, convenient path.

Our simple example of a path through a forest is a good metaphor for the Austrians' insights on the institutions of a market economy. We will outline some of the most important ones in the following chapters. But it is important to keep in mind that even though we will discuss the role or "function" of each institution, and how it helps humans deal with the economic problem of scarcity, that even so these institutions were not consciously invented by any human being.

By Robert P. Murphy, Ph.D. | Monday, June 21, 2010

Notes:
(1) Friedrich A. Hayek (ed. W.W. Bartley III), The fatal Conceit: The Errors of Socialism (Chicago: The University of Chicago Press, 1988) p. 6.
(2) Hayek, The Fatal Conceit, P. 7.

Money

Money
(Excerpt from new book: How Privatized Banking Really Works)

"Money is such a routine part of everyday living that its existence and acceptance ordinarily are taken for granted. A user may sense that money must come into being either automatically as a result of economic activity or as an outgrowth of some government operation. But just how this happens all too often remains a mystery."

—Federal Reserve Bank of Chicago1


It is an error to think that everybody in society truly understands money, how it originates, how it functions, or even the concept that it is simply a medium of exchange. When we take the time to seriously consider the subject of money and ask ourselves the same kind of questions the young child asked in the opening chapter of this book, we come full circle to realize that money is the common denominator of virtually everything on this planet. Virtually everything is expressed within the terms of this one system. Most, if not all, of our relationships with other entities and other humans involve money. Even time is expressed in terms of money. If the goal of this text is to help bring clarity to all of the hidden aspects of the money problem, then we must start with the more basic facts about money and move along a deliberate line of thought that eventually addresses our concern. The idea is to make sure we inform everyone, because everyone's full understanding is important to our cause.

A good place to begin our basic study of money is by physically examining it. It is true that in our current times money in one sense has become invisible. Often moving electronically at the speed of light it does not even posses a physical body. Typically it is most often seen as numbers on a ledger on some account balance, your account or theirs. Nevertheless, all forms of our current money must convert back to our paper currency and coins. An economist would refer to our money as fiat money, electronic or otherwise. Our first query will be, "Why fiat money?"

First of all, the word fiat is defined as a "declaration by supreme law or a formal authorization, a command." By fiat, the supreme law of this land has declared this paper note to be legal tender for all debts public and private. Study the small print at the top left hand corner of this familiar piece of green paper. Simply put, this is officially our medium of exchange, the only money we can use—period! We may use a check, online banking or even credit cards to pay for things, but ultimately all payment transactions are denominated in reference to these paper dollars. To clarify further, if a creditor owes you money and you refuse to accept this currency in payment, that creditor's debt to you, by law, is simply canceled.

Notice also at the very top of our dollar bill the wording Federal Reserve Note. Again, very simply, the note indicates clearly that it was made and distributed by the Federal Reserve, our country's central bank. Obviously, we know that this is printed money because it is paper and ink. We also determine by observation that it certainly appears official. It is elaborately adorned with authoritative images that express the full faith and strength of the U.S. government. However, we shall soon see that there is nothing federal about it and there is no reserve.

Now compare the first dollar bill with the one below.

This dollar, which circulated in 1957, looks exactly like the dollar on the previous page except for this one very important distinction. At the very top we see that this dollar has written across it SILVER CERTIFICATE. We also read the following: "This certifies that there is on deposit with the Treasury of the United States of America, one silver dollar, payable to the bearer on demand."

That is quite a distinction. In case the reader isn't sure, let us be crystal clear: There is nothing backing our current currency. By that we mean that its precious metal convertibility has been removed, gradually at first, but over time permanently. This process actually began when President Franklin D. Roosevelt, in one of his first acts in office, declared as illegal the use of gold as money in 1933. It was pronounced a crime for any citizen to continue using gold as money, a law that was strictly enforced by a stiff fine, even imprisonment. Furthermore, President Roosevelt demanded that all gold be turned over to the government, to be stored and locked in a vault under armed military protection. The gold vault is known as Fort Knox and is located in the state of Kentucky.

Our coins were at one time made of 97% pure silver. Today they are merely tokens made of cheap metal. When we say that our money has lost 95% of it value since the early 1900s, we are speaking of its loss of purchasing power, but also of the fact that it has been un-linked from precious metals—real money.

One other significant point needs mentioning. The U.S. once owned a large share of all the gold in the world, but today the amount actually in U.S. possession is unknown. No outside agency has been allowed inside Fort Knox in many decades to audit the gold bullion held there. Obviously none of this is good news. Understanding how and why we have wound up in this situation is of supreme importance to us today. We will learn more specifics later, but for now these facts should not be forgotten.

A Brief Tour of America's Early Monetary History

There were two large-scale experiments with fiat money in our country's early history. Both times illustrated the danger of giving politicians control of the printing press. The first episode occurred during our country's infancy. During the War of Independence, the desperate Continental Congress began paying its debts in fiat money called Continentals. At one point, General Washington complained to Congress that it took a wheelbarrow of Continentals in order to buy bread for his starving soldiers. People would not readily accept Continentals as money, simply because they knew it was not real money. (The reader may have heard the phrase "not worth a Continental.") They knew it was paper fiat money whose convertibility to a precious metal was questionable.

Indeed this early disaster with fiat money greatly influenced the Founding Fathers. G. Edward Griffin describes some of the commentary at the Constitutional Convention:


Oliver Ellsworth from Connecticut, who later was to become our third Chief Justice of the Supreme Court, said, "This is a favorable moment to shut and bar the door against paper money. The mischief of the various experiments which have been made are now fresh in the public mind and have excited the disgust of all the respectable parts of America."

George Mason from Virginia told the delegates he had a "mortal hatred to paper money." Previously he had written to George Washington: "They may pass a law to issue paper money, but twenty laws will not make the people receive it. Paper money is founded upon fraud and knavery."

James Wilson of Pennsylvania said: "It will have the most salutary influence on the credit of the United States to remove the possibility of paper money."

John Langdon from New Hampshire warned that he would rather reject the whole plan of federation than to grant the new government the right to issue fiat money.

George Reed from Delaware declared that a provision in the Constitution granting the new government the right to issue fiat money "would be as alarming as the mark of the beast in Revelation.2


Needless to say, the original signers of the Constitution did not think they were creating a federal government that had the right to give green pieces of paper the force of legal tender. The clause granting Congress the power to "coin money" and "regulate the value thereof" has been as heroically strained (in order to justify the government's debasement of the dollar) as the other modern misinterpretations of the obvious intentions of the signatories. Griffin explains:

In view of the fact that gold and silver coin was specifically defined as the only kind of money to be allowed, there can be no doubt of what was meant...To coin money meant to mint precious-metal coins. Period.

The second half [of the clause] is equally clear. Both in the Constitution and in the discussions among the delegates, the power to regulate the value of gold and silver coin was closely tied to the power to determine weights and measures. They are, in fact, one and the same. To regulate the value of coin is exactly the same as to set the nationally accepted value of a mile or a pound or a quart. It is to create a standard against which a thing may be measured....

The intent, therefore, was simply for Congress to determine the exact weight of a precious metal that would constitute the national monetary unit.3

To drive home the point that the Founders did not think the new Constitution gave the federal government the power to issue fiat money, consider the following thoughts that George Washington wrote in 1789:

We may one day become a great commercial and flourishing nation. But if in the pursuit of the means we should unfortunately stumble again on unfunded paper money or any similar species of fraud, we shall assuredly give a fatal stab to our national credit in its infancy.4

During Washington's first term as president, his Secretary of the Treasury Alexander Hamilton proposed the creation of a central bank (the First Bank of the United States). This raised the fierce ire of Secretary of State Thomas Jefferson, who declared: "A private central bank issuing the public currency is a greater menace to the liberties of the people than a standing army." We see that the Founding Fathers, were they to view present-day America, would be shocked on many levels.

Despite the awful experience with Continentals during the War for Independence, both sides in the Civil War (or what is also known as the War Between the States) succumbed to the temptation to rely on unbacked fiat money to pay their expenses. The price inflation in the Confederate states was appalling, and even in the North the public became disillusioned with the rapidly deteriorating "Greenbacks" until they were once again linked to precious metals after the war.
Anytime sound money, as in gold, circulates alongside paper money not backed by a precious metal, the people tend to hoard the sound money and spend the bad money. This phenomenon was first discovered in the 1500s and is known as Gresham's Law: "Bad money drives out good under legal tender laws." When the government forces merchants and creditors to accept debased money as if it were equivalent to the genuine article, everyone trades away the inferior version. No one wants the paper money. No one saves the paper money. The people will hoard the good money each and every time. This partly explains FDR's confiscation of citizens' holdings of gold in 1933.

Once again, our nation is using a paper money not redeemable in precious metals. Federal Reserve Notes now circulate in our economy totally free from its main competitors, gold and silver. It is officially legal tender and it is the only money we can use. Even more noteworthy, today all countries in the world use fiat money. Here and abroad we are completely off the gold standard. Universally it is all nothing more than paper and ink.

The Bretton Woods Agreement 1944

After World War II, the United States emerged as a world superpower. Using this powerful influence the U.S. formulated and drove into acceptance a new global monetary system at the conference in Bretton Woods, New Hampshire in 1944. In contrast to the classical gold standard, in which every nation's currency was convertible by anyone into a specified weight of gold, the new system enshrined the U.S. dollar as the anchor upon which all other fiat currencies were based. Rather than stockpiling bars of gold in their vaults as reserves, foreign central banks were encouraged to use U.S. dollars as their "reserves."

Under the Bretton Woods agreement, the U.S. dollar itself was still backed up by gold, at the official exchange rate of $35 an ounce, thus providing a firm foundation to the entire system. However, unlike the practice during the classical gold standard, in the new arrangement only central banks had the right to turn in their paper dollars for gold bullion. American citizens would never again regain the ability—stripped from them by FDR—to turn their dollars in for gold. Thus one of the most potent checks on inflation had been removed.

As stated earlier, the United States had a huge stock of gold reserves after World War II and began pursuing a highly inflationary course much to the dismay of foreign countries. As the dollar weakened because of these monetary activities, gold started flowing out of the country in large amounts as foreign governments cashed in their dollars for gold. It reached a crisis point by 1968, and in 1971 President Richard Nixon took our dollar totally off gold and declared the Bretton Woods agreement null and void. At this point, the U.S. dollar—and by extension, the currencies of other world powers—was an asset unto itself, having no link to the precious metals. At this point, the only restraint on the printing of new paper dollars was the discretion of Federal Reserve officials. There were no formal checks left on their appetite for inflation.

Many people expected that the entire international monetary system would collapse after the breakup of Bretton Woods. Surprisingly it didn't. Some historians speculate that U.S. military might and fears of an outbreak of World War III kept other governments in check, continuing to use the U.S. dollar as the world's reserve currency even though they never would have agreed to the arrangement originally without the dollar's backing by gold. In any event, the U.S. experience of "stagflation" during the 1970s showed that the tie to gold—weak though it was under Bretton Woods—had restrained inflation. After Nixon removed the last shackles, the U.S. suffered from an orgy of dollar printing.


L. Carlos Lara | Tuesday, July 6th, 2010

L. Carlos Lara is President of United services and Trust Corporation, a Management Consulting Firm specializing in Business Consulting, Corporate Trust Services, Corporate and Private Seminars and Speaking Engagements. Visit him or contact him at www.usatrustonline.com.

Notes:
(1) Federal Reserve Bank of Chicago, Modern Money Mechanics: A Workbook on Bank Reserves and Deposit Expansion (1994), p. 1. Available at: http://www.rayservers.com/images/ModernMoneyMechanics.pdf. Accessed June 3, 2010.
(2) G. Edward Griffin, The Creature From Jekyll Island (Westlake Village, CA: American Media, 2002), p. 315.
(3) G. Edward Griffin, The Creature From Jekyll Island, pp. 317-318.
(4) Quoted in Griffin, p. 323.