Playing Political Games with Financial Terms

by James Jaeger

One of America's favorite past times is blaming someone else for their problems. If you're a Democrat, your favorite whipping boy is the big greedy corporations and the rich. If you're a Republican, your favorite whipping boy is the government and the unions. If you're an Independent, your favorite whipping boy is the Democrats and the Republicans. Yes WE THE PEOPLE love to blame anyone but ourselves, thus we are in fact not really WE THE PEOPLE, but WE THE PROBLEM, especially when we use and abuse financial terms that are vital to our financial health.

It has been said that the problem with a democracy is that when WE THE PEOPLE figure out a way to legislate perks, special privileges and entitlements for ourselves, the entire nation becomes little more than a feeding frenzy to the bottom. Everybody wants something from the government. Everybody wants a subsidy, a tax credit, a military contract, unemployment benefits, welfare or some more political candy. Everybody feels entitled, thus entitlements become a "right" not merely a privilege.

And given the fact that the Universe is probably infinite, everybody SHOULD be able to have all these things -- and much more. Technically every human being should be entitled not only to entitlements, but an ENTIRE PLANET, as there are that many worlds out there.

But before we get to this place in our "universal entitlement," we are going to have eat some crow and start practicing some prudent financial methodologies as we get our act together. And the primary way we can get our act together is by understanding and properly applying financial terms and practices used in the free-market business world.

Accordingly, perhaps the most abused word in the world of finance, hence government, is the word "budget." By misdefining the word "budget" as a "commitment" -- rather than an "estimating tool" -- spend-thrifts amongst WE THE PROBLEM and in the Congress try to make a case for endless expenditure-driven debt.

The traditional role of a "budget," as apposed to "use of proceeds," is that the former is only an estimate, whereas the later is a promise made on a "best effort" basis. As such, you will never see the word "budget" in a prospectus or a Private Placement Memorandum ("PPM"). The term "use of proceeds" is the preferred term in such instruments, and the reason for this is quite valid. When an entrepreneur or corporation wishes to raise capital, it will often offer the sale of its stock. This offer is a proposal, not a demand. It is a proposal to investors, stating that IF investors will allocate a LUMP SUM of money (known as "proceeds of the offering" and "capitalization") the entrepreneur or corporation will do its best to ALLOCATE that sum in accordance with what is stipulated in the "use of proceeds" section of the prospectus or PPM. The reason the term "budget" is not used is because, at the offering level, the entrepreneur DOES NOT YET HAVE MONEY TO ALLOCATE. The offering has not been closed. There is no capital to budget.

Thus, from the world of standard business practices -- as opposed to the fuzzy, insane world of government -- we can glean a substantial idea of what the word "budget" means in practice. A budget is an allocation of a lump sum of money. If there is no lump sum of money, there can be no allocation, thus no "budget" can exist.

If there is no money to allocate, there can only be PROPOSALS as to what will be done with that money, when and if it exists in the future. This is why lawyers that write PPMs call it "use of proceeds" -- what proceeds from a successful offering, if any. Use of proceeds is thus nothing more than a PROPOSAL to investors as how and where their money will be allocated IF they invest that money in the company by purchasing the stock offered by the company's PPM or prospectus.







Note the word PROPOSAL. A proposal is much closer to the idea of a "commitment" than a "tool." A proposal is a representation that such and such will be done if you, Mr. Investor, allocate such and such money to such and such activity. Once the money is allocated, the entrepreneur will do his best -- use his best efforts -- to allocate or USE the money as proposed in the "use of proceeds" section of the financial circular used to capitalize the company.

The reason for this distinction -- which may seem small to the non-business person -- is because the world does not run perfectly. Often reality dictates that managers must change their financial plans. Sometimes a lump sum of money must be allocated DIFFERENTLY than what was represented in the "use of proceeds" section of a PPM. This happens because the environment continually changes. Prices change. Supply and demand of inventories and products change. Markets change. Valuations change. Personnel come and go. In short, the manager uses a TOOL, known as a BUDGET to navigate this ocean of change and a tool known as Use of Proceeds to represent how money will be used, in a perfect world, if invested or raised.

A BUDGET is thus an INTERNAL FINANCIAL INSTRUMENT which managers use to prudently allocate capital in a sea of changing circumstances, such that the project gets done without going into to contingency, completion bond or debt.

Now back to the murky world of government, a world where "thugs with guns" as Ayan Rand might say, don't have to abide by any of the wisdom developed by the business communities of the world over the past 5 thousand years.

When WE THE PEOPLE -- with all our imperfections -- grant to some imperfect subset of ourselves the power to collect and allocate lump sums of money in the trillions of dollars, we have to expect that WE THE PEOPLE will become WE THE PROBLEM sooner or later.

Specifically, the "thugs with guns" that manage the money WE THE PEOPLE allocate through taxes, don't give a rat's ass what the terms "budget" or "use of proceeds" mean. To them they are interchangeable or non-existent. To them a budget can be anything they want. To the Democrats a budget is an obligation, a commitment, each line item a "bill" that's "due and payable." To the Republicans, who knows what this term means.

As Ellen Brown says in her recent article, Bipartisan "Russian Roulette":

"Taxes aren't collected until after the annual budget is passed, so Congress can't know in advance whether or how much additional borrowing will be required. Inevitably, there will be some years that the budget pushes the debt over the limit, requiring new legislation."

In other words, the imperfect human beings we have sent to Congress to "manage" our money, feel perfectly fine about spending money before they have even collected it, because they know they can simply point a gun at WE THE PEOPLE and force us to ante up taxes or debt service. And then, they can take this "budget" they have dreamt up and use it as a "bill" to "justify" borrowing yet more billions anytime they want.

Ellen goes on to say:

"The Fourteenth Amendment provides at Section 4:

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.

"Where statute and the Constitution collide, the Constitution prevails. Whether the government should pay the bills it has already incurred is not a matter of negotiation. It is a Constitutional mandate. And those are the bills we are talking about here, as President Obama stressed in his remarks on the issue last Friday. He said:

Raising the debt ceiling simply gives our country the ability to pay the bills that Congress has already racked up. I want to emphasize that. The debt ceiling does not determine how much more money we can spend, it simply authorizes us to pay the bills we already have racked up. It gives the United States of America the ability to keep its word."

Note how twisted and contorted government-think is. They have drafted a "budget" for money that they have not yet collected -- inevitably creating a pie-in-the-sky document -- but again, through the oppressive force of government, they know they can extort any short-fall from citizens through taxes and debt service. And, they can do all this because the U.S. Constitution says they can do it, i.e., "The validity of the public debt of the United States . . . . shall not be questioned.

So, based on the 14th Amendment, Obama, the Chief Thug, states or implies that line items in the budget are "bills that Congress has already racked up."

The astute citizen, and practicing free-market businessman, will laugh at the foolishness of this government-speak and insane, statist logic. Such will immediately see that government officials have no respect for the well-established principles of financial prudence or even common English words. In short: a budget is NOT a bill. A budget is a tool. A budget does not authorize someone to borrow or tax. It's the opposite from government-villes' view of reality: tax money authorizes one to make a budget. A budget proceeds from the existence of money. A budget exists only AFTER tax revenue is collected. A budget exists AFTER the proceeds of an offering have been consummated. Is that so difficult?

So what is the moral of the story? The moral is, when WE THE PEOPLE grant to one subset of ourselves the authority to i. collect tax money at gunpoint; ii. print up fiat currency; and iii. borrow endless amounts of money, that subset will become unwise, if not tyrannical, with our money sooner or later. Figuring that it has a guaranteed source of funds, and that it can jail or murder any citizen who does not comply, an entrenched government will use these resident threats to extort all the money its privileged class wants once in power, and to hell with WE THE PEOPLE. Thus, to the degree WE THE PEOPLE allow such "thugs with guns" to operate a government and "manage" our money and resources, WE become WE THE PROBLEM.

But there is a solution to the PROBLEM.

First. Congress should not be permitted to budget money BEFORE it collects taxes. This is known as anticipation or hypothecation, something the business world and common decency frown on at inappropriate times. Taxes should be collected and then whatever this LUMP SUM amounts to should be allocated in accordance with the approved "budget".

Second. The Congress, and all other Branches, should no longer be permitted to borrow money. If a government cannot operate on taxes, excises, duties and imposts then such inability is a red flag that that government is too big for its given population. This is common sense. The solution is to prune back government services, not permit borrowing. Taxes from any and all sources, federal, state and local, should NEVER amount to more than some uniformly agreed upon percentage of the wealth of the citizenry. Government, at all levels, should probably NEVER preempt more than about 10% of the wealth of a given economy. The human brain, which manages the human body, never requires more than a certain percentage of the body's energy supply. This easily-observable fact in nature is proof that an exact percentage CAN be assigned to the amount of money (energy) a government uses, for a government is hardly more complex than the human body.

WE THE PEOPLE must thus determine exactly what percentage of our wealth we want to allocate for the services our many governments -- federal, state, local, community -- provide.

In one of my books, THE BOOK OF BUDGETS, I state:

Warren Buffett says that the most important thing a company can do to succeed is allocate capital prudently. Learn invaluable financial philosophy while mastering exact budget procedures. Find out why Investors love budgeting by Method One and why Vendors love budgeting by Method Two.

What is Method Two? Method Two is what the U.S. Government uses to allocate funds. Applied to government, this Method favors constituencies. Creating a "budget" before one has the capital is the essence of Method Two because it allows everyone to simply submit a bill or proposal to "help" build a "realistic" budget.

Unfortunately, a review of six modern dictionaries, two of which I will cite, shows that the definition of the word "budget" is inaccurate as to what function such provides in the real world. The "Free Dictionary" and "Wikipedia Dictionary," respectively, define a budget as "an estimate of expected income and expense for a given period in the future; and "a list of all planned expenses and revenues . . . a plan for saving, borrowing and spending."

In due respect to these dictionaries, and the other four referenced, the primary purpose of a budget is not to ESTIMATE income or PLAN FOR revenues, it is to ALLOCATE revenue and income once such revenue and income -- more accurately, "proceeds of an offering" -- materialize.

If, under Method Two, everyone -- whether constituency or vender -- is permitted to simple send in their "bill" or wish list, such bills and wish lists will, of course, be high, or excessive, as it's only human nature to want more. But such "budgets" will always be ever higher and ever less sustainable. Probably the lump sum to satisfy all these wishes and "bills" will NEVER be sufficient, so, of course, the government will have to endlessly raise taxes and/or borrow money to close "deficits." In this light, a "deficit" for the U.S. Government is always created as a result of improper budgetary methodology.

What should be happening is the U.S. Congress should use Method One to budget. Method One is a causative method, whereas Method Two is effect of every special interest group on K Street. Method One will inject predictability into the U.S. financial system. Method Two injects chaos and gridlock. Investors, businesses, equity financial markets and most citizens will love and benefit by Method One, whereas banks, the Federal Reserve, the military-industrial complex, power-hungry politicians and special interest groups will hate it.

Method One simply says: AFTER tax revenues are collected they are allocated in certain percentages. In other words, money is allocated NOT promised. It's allocated in terms of PERCENTAGES, not in terms of AMOUNTS. The entire proceeds of U.S. taxation should be allocated only AFTER they are received, NOT in anticipation of revenues to be received. Only after revenue exists can it be allocated in accordance with percentages and without the necessity to borrow. For instance, for the year 2012, the allocation could be 20% goes to defense; 10% goes to infrastructure; 5% goes to operating the government; 5% goes to paying down the national debt; 10% goes to helping the poor; 10% goes to new energy development and the balance goes to whatever the citizens vote as expedient that year.

So, once the tax revenue comes in, each constituency gets only the exact PERCENTAGE of what's allocated for that line item. Per the above example, if tax revenue is $1 trillion then defense gets $200 billion, $100 billion is allocated to infrastructure, $50 billion to operate the government, etc. If citizens want more government services, they will have to either vote for higher taxes or change the allocation percentages -- but the expenditures of the government do not "grow" or go into deficit spending as they would under Method Two budgeting.

Such a system would brutally simplify the operation of government, make it entirely transparent, and enter the element of competition into the management of services for there would be, under Method One, competition for higher percentages of the budget to be allocated to such and such activity or constituency.

In such a system -- moving towards so-called pure democracy combined with principles of free-market competition -- an economy could really bloom. It could bloom for every citizen, for every citizen could literally vote on exactly where he or she wants his or her tax dollars allocated on demand. The power-hungry politicians would spit vomit if such a system were instituted, for such a system would pleasantly rape them of most of their power. In this electronic age, such a system is possible. It would be a simple matter for citizens to literally vote-in a constant stream of percentage allocations they want to assign to each and every budget category in the allocation of U.S. tax revenues. Why let politicians, who mostly just want to get re-elected, allocate the personal and corporate wealth of a nation?

Under a Method One system you might see the "wisdom of crowds" phenomenon enable a sort of "global financial brain" in the allocation of human resources. Perhaps this financial strategy applied, first with government, might latter be applicable to industry. Imagine, you and I wake up each morning, and instead of watching a nauseating litany of pundits complaining about how bad it all is, we simply log-on to a secure computer terminal, and place votes as to how we want to allocate the National Budget in terms, not of dollar SUMS, but in terms of PERCENTAGES. It would be impossible to do this kind of financial management in terms of dollar SUMS because the exact number of dollars is always an elusive figure. On the other hand, establishing PERCENTAGES is like laying down a network of pipes. Citizens, through their votes, would lay down the network of financial pipes that would allocate their income and resources as expedient. This network would be in terms of percentages. Such and such percentage goes to line item 1, such and such percentage goes to line item 2, such and such goes to line item 1,427. If citizens failed to make a percentage allocation, or there was a public debate on a certain allocation, the system would default to automatically allocating the funds to a contingency account. All this would take place in real time and each and every citizen would be able to watch a SIMPLE, yet powerful display on their computer, in real time.

Voting would thus become about FINANCIAL ALLOCATION, not about FALLIBLE PERSONALITIES.

Under a Method One system, news outlets, book and periodical authors, bloggers, filmmakers, pundits and social scientists would find their research and opinions to be exponentially more valued. If personalities are taken out of the equation, and citizens have direct access to the financial allocation and statistics of their government, it would be difficult, if not impossible to play the blame game. So much frivolous "news entertainment" would no longer exist as there would be no one to blame or complain about. A Method One system would chug along under the direct dictates of WE THE PEOPLE and anything and everything that happened would be our direct responsibility.

Instead of WE THE PROBLEM listening to news outlets, book and periodical authors, bloggers, filmmakers, pundits and social scientists in an attempt to decide which power-hungry, math-challenged thug to vote for so same can pretend to "manage" our tax receipts, WE THE PEOPLE would manage everything ourselves. We would be a truly self-governing nation as envisioned by the Framers. And we could do this using computers and Method One each and every day, week, month or year we were moved to register our financial advice into the "global financial brain," such advice based on our study and perception of the environment.

If WE THE PEOPLE were directly responsible for allocating our money and resources, rather than fallible politicians, I bet we would allocate it much more prudently. And surprise of all surprises, we may find that much of what government does can be done by the private sector, thus our percentage allocations for many line items would move ever closer to zero. Ultimately, someday in the near or distant future, allocation percentages would move towards zero and the days of a state-managed world may come to a close.

Proper use of terms and financial instruments could start us on this road or bring it about, for what else is government really but the institutionalized conflict over the allocation of human resources. In an infinite universe, if we humans stop being WE THE PROBLEM and once again become WE THE PEOPLE, we can be, do and have all that we want and the horizons of our accomplishments will forever expand -- not our suppressive governments.

31 July 2010

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