The IBC Solution
By L. Carlos Lara

Life, as we all know, is difficult. Each twenty-four hours of every day is filled with uncertainty and a host of stress filled problems of one kind or another. In fact, the demand for stress relief from life’s problems is so large that it has spawned a multitude of billion dollar industries. The books, articles, and studies that have been written on the subject of human anxiety are innumerable going as far as categorizing and ranking our fears from the least to the greatest. Not surprisingly, what we find when we read these reports is that the greatest fears center mostly on money issues. Even above the fear of death is the fear of being without money or the lack of financial security. Ask the average American to list his greatest fear and almost one hundred percent of the time the fear of impoverishment tops the list.

These facts present a unique situation for financial professionals. After all, these are the men and women who speak to people about their money and do so in an advisory capacity. In 2011 the greatest fear that people are known to have, the fear of financial ruin, is now at its highest peak. Consequently, financial professionals are faced with the daunting task of helping clients navigate through the most devastating financial crises in history. This is an awesome responsibility with critical consequences hinging on the advice that is given. Since the financial crisis, which started in 2008, huge losses have been suffered by millions of individuals either by way of the stock market’s erratic behavior, or by the collapse of the housing market. Many have lost their jobs and remain unable to find employment. Countless others have lost their businesses and have gone broke.

Today, there seems to be nowhere left to put ones money where it is safe. For the older generation, there is the ever-present fear of running out of money while the younger generation worries about how they will ever be able to save any money at all. The result is a nation of people who are skeptical, cynical and mistrusting. For this reason the general public is showing an interest in economic affairs that has not surfaced in decades. People everywhere are paying greater attention to issues dealing with monetary policy and are eager to learn simply because they are in such financial turmoil.

Americans need a financial professional who is able to accurately explain to his clients the causes of the financial crisis, its current state and a way of escape. In order to be able to do this, the financial professional must know, unequivocally, that an accurate economic analysis can be found only in an education in Austrian economics.

In this article we want to focus on three fundamental economic explanations that can help financial advisors provide the advice their clients most need right now. These are inflation, the Federal Reserve and Privatized Banking. Two of them explain the core problem and the third is the solution.

Inflation

One of the most basic pieces for understanding the cause of our current crisis is to have a complete and accurate definition of inflation. Armed with this correct understanding, the financial professional can open the mind of a client who has been misled by the traditional definition of inflation as simply the increase in prices. The client needs to hear an accurate explanation of why and how prices rise. Without this proper understanding the money dilemma can never be deciphered and remains a mystery. An understanding of savings, investments, rates of interest and returns become untenable without this proper explanation.

Once again, only Austrian economics provides the true meaning. If the financial professional can accurately explain that inflation is a form of indirect tax he becomes rare among his peers. If he can demonstrate to his clients that the tax is hidden and why, he will certainly be set apart from the rest of the professionals in the financial services industry. The client will soon realize that he is in the presence of someone who truly understands how the economy works. In effect, what the advisor will be exposing is that inflation is deliberately set in motion by the few in power at the expense of everyone else in society. He is exposing a practice that is not only morally wrong, but, if continued, will ultimately destroy the economy itself.

The importance of this cannot be overstated. Not only because inflation is so disastrous to the client’s own situation, but by the simple fact that only one man in a million is aware of it. Ludwig von Mises, the greatest member of the Austrian School of Economics in the latter half of the 20th century explains it this way:

Everything that is being done by a government against the purchasing power of the monetary unit is, under present conditions, done against the middle classes and the working classes of the population. Only these people don’t know it. And this is the tragedy…
What I want to point out is that the greatest problem today is precisely this, although the people don’t realize it. The danger is due to the fact that people consider inflation as something that hurts other people. They realize very well that they too have to suffer because the prices of the commodities they are buying go up continually, but they don’t realize fully that the greatest danger for them is precisely the progress of inflation and the effect it will have on the value of their savings.
…We should not forget that over and above the consequences of destroying a country’s monetary standard, there is the danger that depriving the masses of their savings will make them desperate. (1)

The Federal Reserve

Let’s be clear. Inflation is the increase of the money supply. High prices are the effects of the increases in the quantity of money. More money in circulation simply lowers the value of the money and bids up prices on everything. The net result for society is always disastrous yet the process of inflation has been around since the first coin was minted. Every time inflation is mysteriously set in motion it creates distress and confusion among the people.

The word “inflation” originally applied solely to the quantity of money. It meant that the volume of money was inflated, blown up, overextended. It is not mere pedantry to insist that the word should be used only in its original meaning. To use it to mean “a rise in prices” is to deflect attention away from the real cause of inflation and the real cure for it. (2)

Who or what sets inflation in motion? Long ago Caesar began inflating the Roman coin when he first discovered that tax revenues were insufficient to pay for all of Rome’s expenditures. To solve his deficit problem, Caesar resorted to clipping the edges of the coins in order to make more coins. He debased and increased the money supply to solve his problem, but did it at the expense of Roman society. In our modern times the federal government and the Federal Reserve employ the same basic mechanism used by Caesar: In addition to what the government spends through direct taxation and borrowing (bonds) from the private sector, the government also finances some of its purchases through the creation of new money supplied by the Federal Reserve. The process is not as overt as Caesar’s methods, but the underlying economics are essentially the same. All holders of dollar bills ultimately pay the cost through the hidden tax of rising prices. In other words, in addition to their direct tax payments and whatever money they directly lend to the government by buying Treasury bonds, the public also pays in the form of the rising cost of living.

The financial advisor must be ready to explain how the government justifies this massive transfer of wealth from the public. The answer, of course, is Keynesian economics. Made famous by John Maynard Keynes in 1936, Keynesian economics actually advocates the increase of deficit spending (borrowing). According to his theory, and one that politicians enthusiastically embraced, spending could boost aggregate demand and would eventually lead to the elimination of unemployment. The implication is that if only we could have Christmas everyday of the year, we would never have recessions. In the Keynesian view, the old-fashioned virtue of thrift—living below one’s means—is positively harmful during a recession. This, of course, is just the opposite of what we should be doing. Nevertheless, whether liberal or conservative, our universities and financial press today are thoroughly infused with the Keynesian mindset. This is precisely why we see the Federal Reserve continuing the creation of more money (quantitative easing). An economy that is already on its knees is taking further blows and having more of its resources siphoned away from the productive sector by an inefficient political process.

Once the financial professional is able to understand the basic mechanics of inflation and can relay them over to his clients; they in turn will able to see why politicians are so reluctant to cut spending and balance the budget. Unlike a private household or corporation, there is no danger of insolvency for the government, so long as it can rely on the Federal Reserve to create new dollar bills. Of course greater inflation of the money supply will lead to rising prices and soaring interest rates, and so the Federal Reserve must exercise some restraint. Nonetheless, the overall trend is clear: the government is making no real effort to pay off any of the mounting debt which now stands at over 14 trillion, and is seeking legislation to borrow even more. This symbiotic relationship that exists between the Federal Reserve and our political system has led us to the brink whereby the U.S. dollar could actually collapse. Is there no way out of this madness?

Privatized Banking

What if there was a solution? Would your client hesitate one moment in wanting to know the answer? Of course not! No one would. Here is where the financial professional makes the case for the Sound Money Solution.

It is impossible to grasp the meaning of the idea of “sound money” if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights. (3)

The obvious cure for rampant price inflation and economic crises is to remove political interference from the institutions of money and banking. When money is once again a commodity produced by the market, and when bankers receive no special privileges exempting them from their contractual obligations, people will once again be able to lean heavily on a stable medium of exchange for their financial planning. We will have sound money. However, a society can only return to sound money when enough people demand it of their government. That is why education is the first and most important step—people need to understand the importance of sound money, and the dangers of fiat money and central banking. Everyone knows our current financial system is sick, but only people steeped in Austrian economics can offer the correct diagnosis and cure. Unfortunately, there are also many powerful people and institutions who benefit from the status quo. But, the practical suggestions for how our society could move, bit by bit, back towards the ultimate goal of complete freedom in money and banking are frequently recommended by those who understand the lessons of the Austrian economists.

Step one of the Sound Money Solution is to tie the dollar back to gold. The reason this is such an important first step is because it stops inflation. Gold cannot be inflated like paper bills. The second step is privatized banking: return the institutions of money and banking back to the private sector. The most important result of this step is that the nation’s purse strings are removed from the grasp of government officials and big banks. If step one and step two can be accomplished then there would be no need for a central bank; step three would eliminate it. In his book End the Fed Ron Paul spells out that our current financial system is untenable as he explains:

There is another path, but it requires a complete turnaround. It requires only the political will to unplug the machinery of the Fed. Contrary to what people might think at first, this will not mean an end to the financial system, as we know it. In a post-Fed world, we will still have the dollar, banks, ATMs, online trading, Web-based systems of fund transfer—none of this is going anywhere…
When we unplug the Fed, the dollar will stop its long depreciating trend, international currency values will stop fluctuating wildly, banking will no longer be a dice game, and financial power will cease to gravitate toward a small circle of government-connected insiders. (4)

Without the Federal Reserve continuing to expand the money supply and grow the size of government, our national expenditures would be greatly reduced. Our taxes would necessarily come down. This in turn would allow our savings to go up: since it is savings that fuels investments, production and a healthy economy would return.

Obviously, government officials will only relinquish their vast powers in this realm when public opinion demands it. Therefore, we need more people behind our effort. Fortunately, the return to sound money does not require the “conversion” of the entire population, or even a majority. Many Austrians believe that if they could reach just a solid 10 percent of the population, especially from key positions in academia, the media, and the business community, then this group could turn the tide. This is why the role of the financial professional is so important. Once he discovers that the Infinite Banking Concept (IBC) provides a powerful contribution to the Sound Money Solution while at the same time helping each of his clients, the goal of reaching the 10 percent actually becomes possible.

The Sound Money Solution’s key action is in Step 2— Privatized Banking. Nelson Nash, the originator of the IBC concept, discovered that a traditional, centuries old, financial product—dividend-paying whole life insurance—can be used to immediately implement a form of privatized banking, one household at a time. Equally important, when major purchases are financed through whole life policy loans, this does not expand the money supply. This is a crucial point that should not be taken lightly. Nash has shown that the proper use of dividend-paying whole life insurance could eventually allow someone to “become his own banker,” meaning that he could obtain his lifetime financing needs (for cars, children’s education, retirement income, and even house purchases) from policy loans and dividend payments, rather than from traditional banks or other lending institutions. This means that the bondage under the current debt-based system can finally be broken and Americans will not be nearly as vulnerable to the credit whiplashes unleashed by the Federal Reserve. In essence, whole life insurance can allow Americans to effectively secede from the current fractional reserve banking system. Unlike other potential strategies for “starving the beast,” the practice of IBC makes sense at an individual household level, in addition to its social benefits of muting inflationary credit expansion.

What is amazing is that a revolution or uprising is not required in order to change the insanity of the world around us. It can be implemented regardless of what government and the politically connected are doing right now. There is no need to picket the streets, hold huge rallies, or storm Washington demanding changes. Not a single shot needs to be fired. This solution’s only requirement is the action of a single person acting in a manner to help only himself, but in so acting ultimately he helps all of society. It is the most natural and innocent action a human being can do, and yet the idea is so powerful that as it spreads from one individual to another, a massive movement silently develops and gains velocity. Once it spreads to the masses, nothing will be able to prevail against it! Government and destructive monetary policy will be forced to change. History will be recorded differently.

Conclusion

The financial professional who is versed in Austrian economics and is himself an IBC practitioner plays a pivotal role in spreading the message and building the 10 percent. As more households begin practicing IBC, we will see three major effects: First, the idea of Privatized Banking—one of the planks in the Sound Money Solution—will seem less farfetched. Second, a growing number of households will become financially independent. Third, as more people add sizeable life insurance policies to their long-term financial plans, the public agitation against inflationary policies and deficit spending will be stronger. A portion of the nation’s financial resources will be transferred out of the volatile commercial banking sector and into the conservative, solid insurance sector. The practitioners of IBC will find it in their great personal interest to aid the Austrians and other champions of sound money, because the value of their insurance policies would be enhanced with a stronger dollar.

All this requires action. Not only does the switch to insurance financing make sense at the individual level, but it also contributes to the ultimate solution—to remove government intervention from money and banking altogether. The thing we must never forget is that it is the masses that determine the course of history, but its initial movement must start with the individual. That means you and me.

Bibliography

1. Quoted in G. Edward Griffin, The Creature From Jekyll Island (Westlake Village, CA: American Media, 2002), pages 323 and 329
2. Henry Hazlitt, What You Should Know About Inflation (New York: D Van Nostrand Company, Inc., 1965), p. 2
3. Ludwig von Mises, The Theory of Money and Credit, p. 454
4. Ron Paul, End the Fed, (New York, Grand Central Publishing, 2009),p.202 and 203