The economist John Kenneth
Galbraith once quipped that the answers economists give to the question “what is money?” are
usually incoherent. So in this blog we turn to law for some answers. Debate about the nature of money
has been renewed by recent financial crises and the rise of digital currencies (Ali
et al 2014; Desan
2014;
Ryan-Collins et al 2014;
Martin 2013). This was the focus of a panel session at the Bank’s recent annual conference on
Monetary and Financial Law, which brought together lawyers and economists to develop interdisciplinary
perspectives on topics such as money. It prompted us to think more deeply about how law does and
does not constitute ‘it.’
Common legal attributes of money
Anything can function as money. And many things have: cattle; cowry shells; even cigarettes. But
as Minsky once said, while “everyone
can create money, the problem is to get it accepted.”
While in theory anything can be money, the reality is few things are. Monies produced by the Royal
Mint and the Bank of England (BoE) are the ultimate means of payment, followed by private sector
claims, in order of how immediate they provide for full convertibility into these.
Some economists argue that this
hierarchy of money is
the result of legal privileges, especially legal tender legislation (Smith
1936;
Hayek
1976). However,
legal tender
legislation in the UK only applies to the settlement of debts. It doesn’t cover spot transactions
— our daily buying and selling in the marketplace.
So if we want to explain why state issued tokens and claims, and promises of immediate conversion
into them, are monies, legal tender laws seem less important than other legal attributes that make
them trusted and give people comfort they can get someone else to accept them.
In the past, when gold and silver were monies, economists often explained this reality by reference
to these metals’ physical attributes such as portability, uniformity and durability. Today these
physical attributes of metal monies have legal analogues.
Think of a
fiver.
Three legal attributes make it money.
First, a fiver is portable because it is legally negotiable: it can be transferred to
others without each time gaining consent from the BoE (the fiver’s issuer), and, once transferred,
it’s free and clear of any claims being brought by those who previously possessed it provided it
was taken in good faith (Geva
2011).
Second, fivers are uniform because they are fungible: each can substitute for another.
This is because the rights and obligations they confer are the same.
While all monies share hues of negotiability, fungibility, and instant par redemption, each type
of money also has unique legal features. Ordinarily, these legal differences don’t matter because
one type of money is easily convertible into another.
Qualitative differences in the legal construction of monies appear, if at all, merely as quantitative
differences in their rate of financial return. For example, in ordinary times, although term
bank deposits accrue interest and BoE notes do not, they are treated by most people as equivalents.
However, during financial crises, qualitative differences reassert themselves and, in the extreme,
parity breaks down. In classic bank runs, for example, individuals seek to convert bank balances
into cash because the difference between having a claim on a private counterparty that can go bust,
versus a public counterparty like
central banks that can operate
even on negative capital, acquires greater salience.
Consequently legal differences between monies sometimes matter. So we note some below. Here our
analysis chimes with research in sociology and behavioural economics showing that money is not singular
but plural (Dodd 2014).
However, while those studies focus on how money is imbued with different meanings by individuals
once in circulation, for example, depending on its source (e.g. whether it’s from wages or inheritance),
our point is that monies are plural from the start, in the nature of their legal construction.
Royal Mint coins
Sterling coins are manufactured by the Royal Mint Limited, a public limited company wholly owned
by HM Treasury through the Royal Mint Trading Fund. Different denominations of coin are legal tender
up to different thresholds. For example,
5p coins are
legal tender for any amount not exceeding £5, while 50p coins are legal tender for any amount not
exceeding £10. Royal Mint coins are unique among UK monies in that they are not the legal obligations
of any counterparty, though they are treated as a liability of central government in the financial
accounts of national income statistics.
BoE notes
Legally, notes represent debt obligations of the Bank. Originally they could be redeemed in gold.
However, since 1931, the Bank
no longer
pays out gold against its notes. BoE notes were first issued in the seventeenth century but did
not acquire legal tender status in England and Wales until 1833. They are not legal tender in Scotland
or Northern Ireland.
Seven banks in Scotland and Northern Ireland issue their own notes which are these banks’ debt
obligations. These notes are not legal tender even in Scotland and Northern Ireland. Rather, they
circulate by convention, underscoring our thesis about the importance of other legal attributes besides
legal tender legislation in conferring ‘money-ness.’ As a result of the
Banking
Act 2009, these notes are backed in full by a combination of Royal Mint coins, BoE notes and
reserve account balances.
Accounts with banks and mutual organisations
Banks and mutual organisations offer current and other types of spendable accounts used for payments.
On the one hand, these accounts are unsecured debt obligations of private organisations. On the other
hand, many are backed up to certain limits by
statutory
guarantees. Today the value of transactions involving these accounts greatly exceeds the value
of transactions involving legal tender. And growth in these accounts’ balances is mainly driven by
additional loans that create equal and opposite accounting entries.
Further research
Economists and lawyers often approach the topic of money differently because they have different
philosophies underpinning their professions. Economics is basically a branch of
utilitarianism,
meaning that the consequences of actions are the basis for judging their rightness or wrongness.
Hence many problems in economics are about optimization and involve cost-benefit analysis. By contrast,
law is derived from
deontology, meaning some actions are intrinsically right or wrong according to normative rules.
Hence legal decisions are typically justified by history and notions of justice.
These philosophical differences mean economists and lawyers often think about money differently.
For example, many economists think money arose as a transaction cost reducing, utility enhancing
device to overcome the absence of a double coincidence of wants that hampers barter, while many lawyers
and institutionally minded economists think the origins of money is the state (Goodhart
1998). Economists mostly think of
money as a medium of exchange (Kiyotaki
and Wright 1989) because this function relates to trade and commerce, while law emphasises money
as a means of payment (Proctor
2012): whether one party has discharged their obligation to another. In emphasising the settlement
of obligations, law draws attention to money’s role in non-commercial transactions such
as taxation and transfers. And while economists treat money mainly as an indicator or intermediate
target for influencing real, macroeconomic variables, lawyers typically think about money in the
context of individual cases and adhere to the
doctrine of nominalism.
Despite these different points of emphasis, this blog has tried to show that understanding money
requires joining legal with economic perspectives. For example, while for a long time lawyers saw
bank deposits simply as loans, economists much earlier appreciated their wider bearing on inflation
and output. However, if economists want to explain why certain claims like bank deposits are money,
while others are not, they must look at their legal attributes and socio-legal history. Recent research
on money by Bank staff has been informed by both law and economics (McLeay
et al. 2014;
Bholat 2013). Here are a couple paths on which further interdisciplinary research might advance:
How is the money demand for a claim impacted by changes in its legal constitution, for example,
after a major structural break like the conferring of legal tender status on BoE notes or abolition
of their gold convertibility?
Besides negotiability, fungibility and instant par redemption, what other legal features make
claims suitable to be money?
David Bholat works in the Bank’s Advanced Analytics Division, Jonathan Grant works
in the Bank’s Legal Directorate and Ryland Thomas works in the Bank’s Monetary Assessment and Strategy
Division.
Bank Underground is a blog for Bank of England staff to share views that challenge
– or support – prevailing policy orthodoxies. The views expressed here are those of the authors,
and are not necessarily those of the Bank of England, or its policy committees.
Cryptos are a collectors item just like fine art. While money has value based on the military jack boot of empire which insures
its value only with its domination of most countries and the violent destruction of any attempt to set up a transparent real money
system exchangable for gold (Libya). A painting by a hot painter is worth 900k because there are a handful of people who will
pay that for it, they're interest in it keeps the value at a certain level. Same with Bitcoin, but that interest is spread out
to millions of people. If they all decide its worthless than it is, but why would they? I think a lot of these evidence free claims
of hacking and ransom wear are made to devalue the currency that the ransom is paid in, it could have easily been paid in dollars
via the internet, as cryptos is basiclly just that: a stand in for the dollar being moved to an account that is a number. Cryptos
in this way provide a window to real capitalism. This to me is natural human evolution toward anarchism and a system of exchange
that is transparent and based on people working together instead of militaristic violence. You can exchange cryptos for gold,
rubles and yaun, so saying that it exist only based on the dollars supremacy is wrong.
What I know about computers and Bitcoin would get lost in a thimble. However, what I've learnt about the US Govt over the years
tells me that this problem wouldn't be happening if the USG hadn't dedicated itself to micro-managing, and dominating the www
- for Top Secret (i.e. bullshit) reasons.
I was appalled when I learnt that the USG had made strong encryption ILLEGAL, and dumbfounded when I first heard about the
PRISM 'co-operative' USG-mandated www surveillance program. Edward Snowden's NSA revellations confirmed that the USG has KILLED
computer security for crappy, feeble-minded reasons.
It's more or less par for the course that the USG blames other entities for its own prying and mischief-making. Were it not
for the USG placing LOW limits on computer security, we would all have access to Pretty Good Privacy and pro-active, timely means
of detecting and defending and/or evading malware.
"They mostly never see the piece, it's kept in climate controlled storage."
This is standard practice. Using "Ports Franches" as in several Swiss towns including Geneva. Perfectly legal as they are not
IN the country (for Tax purposes).
However, this is not really for "drug" cartels but just a way of transferring assets from one rich person to another.
Many ownership deals are made inside the Port Franche itself, without the need to transport the work outside. There is a limitation
on the time a work can be left inside the building, but I believe all that they have to do is drive more or less "round the block"
and re-enter it. I'm a bit hazy about that detail, as I do not have a spare Rembrandt to verify this personally.
****
jsanprox | Jul 12 2021 1:59 utc | 103
A painting by a hot painter is worth 900k because there are a handful of people who will pay that for it, they're interest
in it keeps the value at a certain level.
The primary dealers agree on a common price level for a stated painter. These paintings can even be used as collateral when
borrowing money.
Other painters do not have a "guaranteed" price level but one based on auction values (ie. What the customer is willing to pay.)
The Primary dealers are a very small group who control all the big art fairs and which other dealers are allowed to sell or deal
there -.
There are "rules" about "participation" (not sure about the terminology here), that various dealers will have made between themseves.
ie. There is a split-up of profits following certain agreed parts. Woe unto a dealer that doesn't pay his part. (OK; personal
note here, I once accidently fell foul of the "cartel" because a gallery owner with my works, had not paid "out" on a large sum
that he had made on another artist he was representing. They decided to "get" him.)
****
Ransomware ; Why are people getting all hot and bothered about Corporations paying money in Bitcoin? Happens all the
time.
Another Personal anecdote ; About five years ago I started recieving emails from unknown "people", Real first names,
with an attachement. As normal, these go into trash without being opened (or into a folder I have, called "dodgy spam?) About
20 + of them. Next I recieved one email saying (in French) " I know your little secret, and if you don't want everyone else to
know, pay (about €30) a "Small" sum into the following bitcoin account xxxxx."
In France you can " porter plainte" , ie, denounce and start a legal process against an "unknown person, or persons".
This is to protect yourself, and is run by the Government/police. In my case, never having opened any of the "attachments", I
don't know what they were, probably porn of some sort. IF they had been opened there would have been a suspicion that I was a
"willling" victim. (The first question asked by the Gov. Site was "Have you paid them/it, and by how much". in my case - none)
******
Haven't heard anything since. BUT, Bitcoin was already being used for criminal purposes.
Nobody had to find a super-secret backdoor into my computer. Just buy a data base with working emails - Corporations
use them all the time to send publicity. By looking at the address, and other more or less freely available information, they
can target people, by location, age, etc.
But you only know a Picasso is worth a lot because you can calculate it in USD terms (ultimately: you can also calculate in
any other fiat currency, but, since we live in the USD Standard, we only know a certain amount of fiat currency is worth if we
can convert it to USDs). The USD is still the unit of accountancy and the means of payment even in the art market.
You can never pay your taxes or fill the tank of your car with a Picasso - you would have to sell it for USDs, and use these
USDs to pay for everything you need. Sure, two megarich persons could exchange art between them as some kind of permute, but that
doesn't constitute a societal unity (because billionares don't exist in a vacuum). It is a particularity of society, not society
itself.
The same is true with crypto. And with gold. And with platinum. And with whatever else you want. It is a myth crypto is "fake"
just because it is purely digital: the material specification of the thing doesn't matter for its status of money. Being digital
is the lesser of crypto's problems. Crypto's main problem is the very economic foundations of its existence, which ensure it will
never be money.
And no: subdividing crypto wouldn't solve it - they tried it with gold when capitalism lived through the Gold Standard (when
it was on its death throes) and there's a limit to this. Even if the digital era allowed it, you would then simply have fiat money
system with extra steps and double the brutality, because then the power to issue money would rest with few private individual
hoarders of the crypto with no legal accountability and responsibility; it would be a dystopian "Pirates of the Caribbean" meets
"Mad Max" scenario.
I worry that people cannot survive this. Real, warm blooded, caring, loving people can be
broken by this. And that's what makes me angry. Because this is unnecessary. The money to
deliver a decent society exists.
All that we need to make the lives of the vast majority of people in this country is a real
understanding of economics, of money, of how it interacts with tax, and how we can use that for
the common good.
But no political party seems to get that as yet. And until they do, this unnecessary
suffering will continue. And that makes me very angry. Pointless pain is what we're enduring.
And all for the sake of accepting that money is not a constraint on our potential, and never
will be.
Let me have a go.
If prosperity and wealth can be created by printing more money, why there is still poverty
in the world?
After all, isn't every country equipped with a central bank that can print as much money as
they want?
Real wealth is not denominated in dollars, only in what those dollars can buy. Devaluing
the dollar doesn't hurt the wealthy, most of their wealth is in the form of equity and real
assets, not dollars.
The average person's wealth is measured mostly in his future labor, how much he is going to
earn. He will earn less because the Fed devalues his labor through its manipulation of the
dollar. He will see this in the rising cost of living without an increase in his pay. Sure
perhaps the value of labor will at some point catch up to the devalued dollar, but in the
interim he will earn less and will never catch up to what he would have earned otherwise.
It doesn't hurt the wealthy, it hurts the middle class, and will for years to come.
Your macroeconomic ignorance is duly noted, featuring as it does the usual "commodity
money" and mercantilist shibboleths.
MMT describes fiat monetary operations which have been in effect since the Nixon
shock and the abandonment of Bretton Woods almost 50 years ago . Do catch up.
honest question, wouldn't MMT (in a hypothetical universe run by committed MMTers) in
the UK likely will produce vastly different results than MMT in relatively autarkic
economics like the USA or Russia?
The UK relies on imports to one degree or another for virtually every physical good
necessary for a first-world living standard (food -- even basic foodstuffs like wheat,
medicine, spare parts, petrol, apparel, even steel, etc).
While the UK's economy tilts to exporting services education, finance, media,
medicinal/technological intellectual property, tourism, etc.
Would a weaker UK pound encourage more service exports? Or merely increase inflation,
particularly for the bottom 50%?
Because MMT analysts tend to be mostly US or Australian, the applicability of it to
smaller, more open economies has not, I think, had the attention thats needed (although to
be fair, Richard Murphy has done quite a lot of writing on this). While the UK is a large
economy, its also very open (although increasingly less so, thanks to Brexit). So it
clearly has much less room to manoeuvre in terms of monetary or fiscal policy than a more
autarkical nation. Its not just with MMT and inflation – things like Keynesian
multipliers tend to be lower in more open economies as the benefits of fiscal expansion get
exported out. The Labour party under Corbyn did put together some very interesting and well
thought through MMT-influenced policies, but of course that all got thrown out with
Corbyn.
As Yves has pointed out before, the UK has a particular problem in that it has little
spare physical capacity in its economy to take advantage of a weaker currency. In the past,
it has been unable to increase output when the pound has been weaker. So a weakening pound
is likely to be more inflationary than in many other economies.
I think that in a general sense, MMT makes sense in all economies in a Covid scenario of
a massive drop in output thanks to a black swan event. As Murphy points out, you just need
to shove the cash into the economy through monetary means and forget about having to repay
it. Inflation just isn't a problem in those circumstances, and it has the benefit of
maintaining productive capacity within the economy. But in more 'normal' times, MMT needs
to be applied with far more care in an economy like the UK than in a US or China or Russia
or EU.
Kind of wondering here what would happen if all the poor and unemployed/welfare
recipients and even the precarious middle class also decided to offshore their money. Why
not? Say in every country; say it became a global movement. The neoliberal nightmare should
inform us all. Just because a small country doesn't have spare capacity or idle resources
is not really a contraindication for MMT. It is more a factor of having an intrinsic
imbalance due to decades if not centuries of grift and graft by those in a position to help
themselves. And it creates confused politics. As you mentioned above – the Tories in
the UK seem to have also usurped the opposition. Well, to my thinking, that is exactly what
Trump did. And it is almost a crazy hope of "If you can't beat them, join them." And just
exactly where does that leave a functional economy? My first image is a junkyard.
First, apropos the applicability of Modern Money Theory to relatively open economies
like that of the U.K., see the discussion of the prerequisites for monetary sovereignty as
outlined by Robert Hockett and Aaron James in their 2020 book, Money for Nothing .
In addition to the well-known requirements (nation must issue its own currency; currency
not pegged to metal or any other currency; no borrowing in foreign currencies), Hockett and
James add others, including "limited trade dependence in essential goods such as food or
energy sources, in order to mitigate foreign exchange and inflation risk ." (274)
Second, apropos the applicability of MMT to smaller economies, I am pleased to note that
Fanny Pigeaud and Ndongo Samba Sylla's 2018 book, L'Arme Invisible de la
Françafrique: Une Histoire du Franc CFA , has at last been published in English
as Africa's Last Colonial Currency: The CFA Franc Story . (Your search engine will
take you either to the
publisher or to an internet behemoth where you can order it.)
Pigeaud and Sylla's book is a history and analysis of the political economy of the CFA
zone: the countries of central and west Africa which were French colonies and which
continue to use a common currency imposed on them by the French imperialists in 1945.
This book is, in my estimation, the best book we have so far in applying the insights of
Modern Money Theory to non-monetarily sovereign economies. You have to love any book that
starts out by translating Hyman Minsky's most famous aphorism into French: Tout un
chacun peut creér de la monnaie: le problème est de la faire
accepter.
"limited trade dependence in essential goods such as food or energy sources, in order
to mitigate foreign exchange and inflation risk ."
Again, we/they have choices based on resource constraints. But, as usual, they are
political. Most of these choices seem impossible now, but remember Victory Gardens ?
Alas, such things are not looked upon favourably by Big Ag and the supermarket chains, but
my depression-era grandparents grew most of their own food for their very large (by our
standards) families. Maternal side, farmers -- my mother, born 1923, said that she never
even knew there was a depression until she read about it later in high school. Grandpa paid
his property taxes by driving snowplow for the county in the winter. Father's side -- my
father, born 1922, grew up in a village (5-bedroom two story house built by his father, a
shoemaker, and friends/relatives/contractors) on a biggish, maybe 1-2 acre? lot, which was
part of a grant to the family for Civil War service. Grandma still had apple, peach, cherry
and walnut trees, raspberry and currant bushes when I knew her, and had grown beans,
tomatoes, potatoes and all that stuff before the 7 kids got married. Obviously, the kids
did a lot of the work, too. Sewing room -- made most of the clothes for family, Dad says
the kids' diapers were made of sugar sacks.
IOW, this is not rocket science. We did this sort of thing for millions of years,
omitting the last 200 or so, and can very likely do it again. People explored the whole
round world, and conquered a lot of it, without electricity or the internal combustion
engine. We're not all gonna die!
Unless we as a species continue to act on maximizing shareholder value rather than
surviving.
I think that you might be onto something here. I suspect that the lives of our
grandchildren as they grow older will resemble the lives of our grandparents from your
description. Of course that may mean a lot off decentralization from out of big cities but
it can be done – especially if there is no other choice. And it's not like in the US
that there is not the land to do this with.
It is an excellent article, with one small exception, the words, "I accept that creating
money this way is inflationary."
Contrary to popular wisdom, inflation is not caused by money creation . All
inflations are caused by shortages , most often shortages of food or energy.
That includes hyperinflations. Consider, for one, the Zimbabwe hyperinflation. The
government took farmland from farmers and gave it to non-farmers. The inevitable food
shortages caused inflation. The government's "money-printing" was merely the wrongheaded
response to the inflation, not the cause.
In fact, the hyperinflation could have been cured by more money creation, had that money
been used to cure the food shortage, by purchasing food from abroad and distributing it, or
by teaching the non-farmers how to farm.
In the past year, the U.S. has spent an astounding $4 trillion, and soon it will spend
another $2 trillion, Yet, there will be no inflation so long as there are no shortages of
food, oil, or labor.
Bottom line: Scarcity, not money creation, causes inflation.
In the US, as in the UK, planned inequality and (managed) unequal access to the benefits
of the money system are two of the most salient activities of our (US) three government
branches.
So are ye telling me the reason conservatives don't (for example) want to raise the
minimum wage is not because of some economic or monetary reason or law but instead just to
keep people in their place, i.e. preserve the status quo? Amazing! And I guess them
conservatives that "havenot" go along because of that "relative advantage" thing –
they are so fixated on keeping those below in their place that they are blind to the upside
of a more democratic and social monetary policy. Well I'll be. Now I git it!
Then the MMT School are conservatives since they'd use taxation to curb inflation (by
some undisclosed means that does not curb consumption).
But why should price inflation be a problem so long as:
1) It does not exceed income gains for ALL citizens;
2) the means that produce it do not violate equal protection under the law;
and
3) it is not extreme?
The only reason I can think of, and it's a contemptible one, is that large fiat
hoarders* would see their hoards diminish in value in real terms.
*not to disparage those saving for a home, initial capital formation, legitimate
liquidity needs, etc.
One point of inflation is to restrain creditors (rhymes with "predators").
Meanwhile, "printing" money does not initiate inflation. Most inflation–even
hyperinflation–is "cost push," i.e. related to shortages of goods. In Zimbabwe, the
Rhodesian farmers left, and the people to whom Mugabe gave their land were not as
productive. Result: a shortage of food requiring imports (balance of payments problem).
In Weimar Germany, the French army invaded the Ruhr, shutting down Germany's industrial
heartland, making a shortage of goods. They already had a balance of payments problems with
WWI reparations.
it was always thus.
the real Burkean Conservatives behind it all, who yes want to keep everyone in their
place.
as i've lamented many times, it's hard to get a read on who the real Bosses are, since they
don't go on TV and brag, generally(various rightwing billionaires in the last 15 years,
notwithstanding)
C.Wright Mills and Domhoff are the only taxonomists of that cohort that i'm aware of
Diannah Johnstone, perhaps.
Maybe Pepe Escobar when they hide the rum.
otherwise, every attempt i've seen in the last 30 years has had elements of tinfoil and
illuminatii/NWO scattered throughout.
I reckon this is by design, at some level.
whatever there exists a demographic cohort of humanity that is exceedingly wealthy, thinks
it's in charge and mostly really is and that is truly cosmopolitiain citizens of the
world.
their most defining feature is that they pretend real hard not to exist and most of us
little people give them no mind, and pretend right along.
This cohort is not monolithic, nor all powerful they each are as prone to tunnel vision and
stupidity as any of us but they have better connected steering wheels, and cleaner
windshields, and mirrors that work.
One hopes that, like in FDR Times, they will feel threatened enough by the results of their
long term policy preferences to allow a few larger crumbs to fall from the table, so as to
mollify the ravening hordes .ere those hordes notice who the real Hostis Humani Generis
are.
But it looks like they're more likely to double down on the diversionary division of the
Bewildered Herd hence, Cancel Seuss! and Sinema's little antoinette dance .and an hundred
other mostly unimportant things that happened just yesterday to keep us'n's riled up about
the wrong things.
I actually talked about this with Kuppy last week.
He considers HFT a problem but not crippling; he says they cost him $10K to $25K a day
but apparently this isn't enough to deter his hedge fund activities. He said that up to 70%
of trading volume activity in any stock is HFT (!).
As for scam: well - the value of the front running exists only so long as the herd is in
the market. Every single market crash - whether bitcoin or the stock market or whatever -
sees the vast majority of players exit (or bankrupt). At that point, the trading volumes
and numbers of people participating plummet dramatically.
How valuable do you think RH's model is then?
Sounds to me that HFT is a scam in itself. Am I to believe that algorithms trading against
each other repetitively at high speed is anything other than machine driven gambling on one
algorithm's interpretation of the behaviour of another algorithm, mostly outside of the human
buy and sell in the market place. Are the humans just strapped on for the ride through a
cabal of trading companies?
@ uncle t # 168 who wrote
"
I was looking back at some earlier reports to gain an insight into the means by which the USA
gave the game away and the means that might restore its place in the economic world. It has
allowed itself to be completely captive to global private finance AND ownership of the keys
to its salvation. If it does not nationalize its key industries then it can rest assured of
its doom.
"
I continue to posit that the key industry that needs to be "nationalized/made totally
sovereign" is finance. If humanity can follow China's lead, the motivations in the other
industries will revert to doing what is right, rather than what is profitable.
In regards to your HFT comment in # 172, you have calling HFT a scam correct. It is
programmed/manufactured theft under the guise of AI.
When guys like Michael Saylor put a half a billion into bitcoin they have done their
homework. Seems to me a scam is an operation containing a lot of lies. I don't see how
bitcoin falls into that category.
As far as a Ponzi scheme I also do not see the connection. It is nothing like a Ponzi.
There are no promises of big returns or large dividends.
When people follow 'guys like Michael Saylor [and see him] put a half a billion into bitcoin
they [think] have done their homework [and follow like fish chasing a lure] THEN they have
been sucked into a ponzi scheme where the lure is a fast buck if they follow the (smart?)
leader. Then the smart leader progressively sells out at a sweet peak and the chumps watch it
dip for a month or two. Unless of course there are lots of paid journalists and bloggers and
facebook praise singers pumping the lure of the endless profit of bitcoin.
Sounds like rumours of gold in them thar hills.
There are a large number of lies (or exaggeration?) in bitcoin and all spun within a
sheath of mystery and complexity and even 'mining' to smear some credible lipstick on the
scheme.
There is a sucker born every minute and they invest in BS and love a veneer of mystique
and bitcoin falls squarely into the category of lies and scams and fancy imaginings and the
lure that suckers are forever chasing. Yes, people buy and sell and some make a profit - same
as any ponzi scheme.
Russia-China "Dedollarization" Reaches "Breakthrough Moment" As Countries Ditch Greenback
For Bilateral Trade by Tyler Durden Thu, 08/06/2020 - 21:55
Twitter Facebook Reddit EmailPrint
Late last year, data released by the PBOC and the Russian Central Bank shone a light on a
disturbing - at least, for the US - trend: As the Trump Administration ratcheted up sanctions
pressure on Russia and China, both countries and their central banks have substantially
"diversified" their foreign-currency reserves, dumping dollars and buying up gold and each
other's currencies.
Back in September, we wrote about the PBOC and RCB building their reserves of gold bullion
to levels not seen in years. The Russian Central Bank became one of the world's largest buyers
of bullion last year (at least among the world's central banks). At the time, we also
introduced this chart.
We've been writing about the impending demise of the greenback for years now, and of course
we're not alone. Some well-regarded economists have theorized that the fall of the greenback
could be a good thing for humanity - it could open the door to a multi-currency basket, or
better yet, a global current (bitcoin perhaps?) - by allowing us to transition to a global
monetary system with with less endemic instability.
Though, to be sure, the greenback is hardly the first "global currency".
Falling confidence in the greenback has been masked by the Fed's aggressive buying, as
central bankers in the Eccles Building now fear that the asset bubbles they've blown are big
enough to harm the real economy, so we must wait for exactly the right time to let the air out
of these bubbles so they don't ruin people's lives and upset the global economic apple cart. As
the coronavirus outbreak has taught us, that time may never come.
But all the while, Russia and China have been quietly weening off of the dollar, and instead
using rubles and yuan to settle transnational trade.
Since we live in a world where commerce is directed by the whims of the free market (at
least, in theory), the Kremlin can just make Russian and Chinese companies substitute yuan and
rubles for dollars with the flip of a switch:
as Russian President Vladimir Putin once exclaimed , the US's aggressive sanctions policy
risks destroying the dollar's reserve status by forcing more companies from Russia and China to
search for alternatives to transacting in dollars, if for no other reason than to keep costs
down (international economic sanctions can make moving money abroad difficult).
In 2019, Putin gleefully revealed that Russia had reduced the dollar holdings of its central
bank by $101 billion, cutting the total in half.
And according to new data from the Russian Central Bank and Federal Customs Service, the
dollar's share of bilateral trade between Russia and China fell below 50% for the first time in
modern history.
Businesses only used the greenback for roughly 46% of settlements between the two countries.
Over the same period, the euro constituted an all-time high of 30%. While other national
currencies accounted for 24%, also a new high.
As one 'expert' told the Nikkei Asian Review, it's just the latest sign that Russia and
China are forming a "de-dollarization alliance" to diminish the economic heft of Washington's
sanctions powers, and its de facto control of SWIFT, the primary inter-bank messaging service
via which banks move money from country to country.
The shift is happening much more quickly than the US probably expected. As recently as 2015,
more than 90% of bilateral trade between China and Russia was conducted in dollars.
Alexey Maslov, director of the Institute of Far Eastern Studies at the Russian Academy of
Sciences, told the Nikkei Asian Review that the Russia-China "dedollarization" was
approaching a "breakthrough moment" that could elevate their relationship to a de facto
alliance.
"The collaboration between Russia and China in the financial sphere tells us that they are
finally finding the parameters for a new alliance with each other," he said. "Many expected
that this would be a military alliance or a trading alliance, but now the alliance is moving
more in the banking and financial direction, and that is what can guarantee independence for
both countries."
Dedollarization has been a priority for Russia and China since 2014, when they began
expanding economic cooperation following Moscow's estrangement from the West over its
annexation of Crimea. Replacing the dollar in trade settlements became a necessity to
sidestep U.S. sanctions against Russia.
"Any wire transaction that takes place in the world involving U.S. dollars is at some
point cleared through a U.S. bank," explained Dmitry Dolgin, ING Bank's chief economist for
Russia. "That means that the U.S. government can tell that bank to freeze certain
transactions."
The process gained further momentum after the Donald Trump administration imposed tariffs on
hundreds of billions of dollars worth of Chinese goods. Whereas previously Moscow had taken
the initiative on dedollarization, Beijing came to view it as critical, too.
"Only very recently did the Chinese state and major economic entities begin to feel that
they might end up in a similar situation as our Russian counterparts: being the target of the
sanctions and potentially even getting shut out of the SWIFT system," said Zhang Xin, a
research fellow at the Center for Russian Studies at Shanghai's East China Normal
University.
As commentators focus on the hospitalisations of two Gulf monarchs, and permutate likely
succession issues, they may miss the wood for the succession trees: Of course, the death of
either the Emir of Kuwait (91 years old) or King Salman of Saudi Arabia (84 years old) is a
serious political matter. King Salman's particularly has the potential to upturn the region (or
not). Yet Gulf stability today rests less on who succeeds, but rather on tectonic shifts in
geo-finance and politics that are just becoming visible. Time to move on from stale ruminations
about who's 'up and coming', and who's 'down and out' in these dysfunctional families.
The stark fact is that Gulf stability rests on selling enough energy to buy-off internal
discontents, and to pay for supersized surveillance and security set-ups.
For the moment, times are hard, but the States' financial 'cushions' are just about
holding-up (albeit only for the big three: Saudi Arabia, Abu Dhabi and Qatar). For others the
situation is dire. The question is, will this present status quo persist? This is where the
warnings of shifts in certain global tectonic plates becomes salient.
The Kuwaiti succession struggle is emblematic of the Gulf rift: One candidate for Emir, (the
brother), stands with Saudi Arabia and its Wahhabi-led 'war' on Sunni Islamists (the Muslim
Brotherhood). Whereas the other, (the eldest son), is actively backed by the Muslim
Brotherhood, Qatar and Turkey. Thus, Kuwait sits on firmly on the Gulf abyss – a region
with significant, but disempowered Shi'a minorities, and a Sunni camp divided and 'at war' with
itself over support for the Muslim Brotherhood; or what is (politely called) 'autocratic
secular stability'.
Interesting though this is, is this really still so relevant?
The Gulf, perhaps more significantly, is held hostage to two huge financial bubbles. The
real risk to these States may prove to come from these bubbles, which are the very devil to
prick-down into any gentle, expelling of gas. They are sustained by mass psychology –
which can pivot on a dime – and usually end catastrophically in a market 'tantrum', or a
'bust' – and with consequent risk of depression, should Central Banks ever try to lift
the foot off the monetary accelerator.
The U.S. ubiquitous 'asset bubble' is famous. Central Bankers have been worrying about it
for years. And the Fed is throwing money at it – with abandon – to keep it from
popping. But as indicated earlier, such bubbles are highly vulnerable to psychology – and
that may be turning, as the celebrated V-shaped, expected economic recovery recedes into the
virus-induced distance. But for now, investors believe that the Fed daren't let it implode
– that the Fed has absolutely no option but go on throwing more and more money at it (at
least until November elections & then what?).
Less visible is that other vast 'asset bubble': The Chinese domestic property market. With
its closed capital account, China has a huge sum (some $40 trillion) sloshing around in
collective bank accounts. That money can't go abroad (at least legally), so it rotates around
between three asset markets: apartments, stocks, and commodities somewhat whimsically. But
investing in apartments is absolutely king! 96%
of urban Chinese own more than one: 75% of private wealth is represented by investments in
condos – albeit with 21% standing empty in urban China, for lack of a tenant.
Long story, short, the Chinese massively chase property valuations. Indeed, as the WSJ has
noted "the central problem in China is that buyers have figured out the government doesn't
appear to be willing to let the market fall. If home prices did drop significantly, it would
wipe out most citizens' primary source of wealth, and potentially trigger unrest". Even during
the pandemic – or, perhaps because of it as the Chinese piled-in – prices rose 4.9%
in June, year on year. The total
value of Chinese homes and developers' inventory hit $52 trillion in 2019, according to
Goldman Sachs; i.e. twice the size of the U.S. residential market, and outstripping even the
entire U.S. bond market.
If it sounds just like America's QE-inflated asset markets, that's because it is. As things
stand, both the Chinese residential and the U.S. equity bubbles are unstable. Which might
fracture fist? Who knows but bubbles are also vulnerable to pop on geo-political events (such
as a U.S. naval landing on one of China's disputed South Sea islands, to which
China is promising , absolutely, a military response).
No one has any idea how Chinese officials can manage the property bubble, without
destabilizing the broader economy. And even should the market stay strong, it creates headaches
for policy makers, who have had to hold off on more aggressive economic stimulus this year
– which some analysts say is needed, partly because of fears it will inflate
housing further.
Ah there it is: Out in plain view – the risk. The condo-trade has hijacked the entire
Chinese economy, tying officials' hands. This, at the moment when Trump's trade war has turned
into a new ideological cold war targeting the Chinese Communist Party. What if the Chinese
economy, under further U.S. sanctions, slides further, or if Covid 19 resurges (as it is in
Hong Kong)? Will then the housing market break, causing recession or depression? It is, after
all, China and Asia that buy the bulk of Gulf energy: Demand shrinks, and price falls. The fate
of the Gulf States' economies – and stability – is tied to these mega-bubbles not
popping.
Bubbles are one factor, but there are also signs of the tectonic plates drifting apart in a
different way, but no less threatening. Bankers Goldman Sachs sits at the very heart of the
western financial system – and incidentally staffs much of Team Trump, as well as the
Federal Reserve.
And Goldman wrote something this week that one might not expect from such a system stalwart:
Its commodity strategist Jeffrey Currie,
wrote that "real concerns around the longevity of the U.S. dollar as a reserve currency
have started to emerge".
What? Goldman says the dollar might lose its reserve currency status. Unthinkable? Well that
would be the standard view. Dollar hegemony and sanctions have long been seen as Washington's
stranglehold on the world through which to preserve U.S. primacy. America's 'hidden war', as it
were. Trump clearly views the dollar as the bludgeon that can make America Great Again.
Furthermore, as Trump and Mnuchin – and now Congress – have taken control of the
Treasury arsenal, the roll-out of new sanctions bludgeoning has turned into a deluge.
But there has also been within certain U.S. circles, a contrarian view. Which is that the
U.S. needs to 're-boot' its economic model with a Tech-led, 'supply-side' miracle to end growth
stagnation. Too much debt suffocates an economy, and populates it with zombie enterprises.
In 2014, Jared Bernstein, Obama's former chief economist said that the U.S. Dollar
must
lose its reserve status , if such a re-boot were to be done. He explained why, in a New
York Times op-ed:
"There are few truisms about the world economy, but for decades, one has been the role of
the United States dollar as the world's reserve currency. It's a core principle of American
economic policy. After all, who wouldn't want their currency to be the one that foreign banks
and governments want to hold in reserve?
"But new research reveals that what was once a privilege is now a burden, undermining job
growth, pumping up budget and trade deficits and inflating financial bubbles. To get the
American economy on track, the government needs to drop its commitment to maintaining the
dollar's reserve-currency status."
In essence, this is the Davos Great Reset line
. Christine Lagarde, in the same year, called too for a 'reset' (or re-boot) of monetary policy
(in the face of "bubbles growing here and there) – and to deal with stagnant growth and
unemployment. And this week, the U.S. Council on Foreign Relations issued a paper entitled:
It
is Time to Abandon Dollar Hegemony .
That, we repeat, is the globalist line. The CFR has been a progenitor of both the European
and Davos projects. It is not Trump's. He is fighting to keep America as the seat of western
power, and not to accede that role to Merkel's European project – or to China.
So why would Goldman Sachs say such a thing? Attend carefully to Goldman's framing: It is
not the Davos line. Instead, Currie writes that the soaring disconnect between spiking gold
price and a weakening dollar "is being driven by a potential shift in the U.S. Fed towards an
inflationary bias, against a backdrop of rising geopolitical tensions, elevated U.S. domestic
political and social uncertainty, and a growing second wave of covid-19 related
infections".
Translation: It is about U.S. explosive debt accumulation, on account of the Coronavirus
lockdown. In a world where there is already over $100 trillion in dollar-denominated debt, on
which the U.S. cannot default; nor will it ever be repaid. It can therefore only be inflated
away. That is to say the debt can only be managed through debasing the currency. (Debt jubilees
are viewed as beyond the pale.)
That is to say, Goldman's man says dollar debasement is firmly on the Fed agenda. And that
means that "real concerns around the longevity of the U.S. dollar as a reserve currency, have
started to emerge".
It is a nuanced message: It hints that the monetary experiment, which began in 1971, is
ending. Currie is telling U.S. that the U.S. is no longer able to manage an economy with this
much debt – simply by printing new currency, and with its hands tied on other options.
The debt situation already is unprecedented – and the pandemic is accelerating the
process.
In short, things are starting to spin out of control, which is not the same as advocating a
re-boot. And the debasement of money is inevitable. That's why Currie points to the disconnect
between the gold price (which usually governments like to repress), and a weakening dollar. If
it is out of the Fed's control, it is ultimately (post-November) out of Trump's hands, too.
Should confidence in the dollar begin to evaporate, all fiat currencies will sink in tandem
– as G20 Central Banks are bound by the same policies as the U.S.. China's situation is
complicated. It would in one way be harmed by dollar debasement, but in another way, a general
debasement of fiat currency would offer China and Russia the crisis (i.e. the opportunity), to
escape the dollar's knee pressed onto their throats.
And for Gulf States? The slump in oil prices this year already has prompted some investors
to bet against Gulf nations' currencies, putting longstanding currency pegs with the dollar
under pressure. GCC states have kept their currencies glued to the dollar since the 1970s, but
low oil demand, combined with dollar weakness would exacerbate the threat to Gulf 'pegs', as
their trade deficits blow out. Were a peg to break, it is not clear there would be any obvious
floor to that currency, in present circumstances.
Against such a backdrop, the royal successions underway in Gulf States might perhaps be
regarded a sideshow.
The MMTers reading your article will take umbrage at your use of finance .
According to MMT, all government spending is financed by creating money. The
problem of where to get the money is a non-problem.
Once the government has spent money into existence, the real problem is how to distribute
the social opportunity cost of the spending, especially if the government has spent money to
allocate real resources away from the production of private goods and services.
MMT makes this distinction precisely because they (we?) want to eliminate the rich as a
veto point for spending. We don't need to get their money in order to spend it, and they
cannot (or we should not let them) essentially restrict spending by obstructing the
government's taxation of their wealth.
If we want to get the money belonging to the rich (and we do!), we want to do so because
we don't want them to have it, for whatever reason.
There's another reason to be explicit about the difference between financing and
distributing opportunity costs. If the rich have a lot of money that is not in circulation
(in the national economy), and the government taxing that money to "pay for" its spending
will do nothing to control inflation or distribute opportunity costs. Removing money that is
not circulating has no effect on prices. It seems theoretically possible to balance the
budget financially but still see price-level inflation.
I haven't done any specific investigation into the GND, but it seems uncontroversial that
it will involve allocating substantial real resources to the creation of a nonpolluting
power, transportation, and agricultural infrastructure. However, the effect on the real
economy and the price level seems uncontroversially complicated. Some of the real resources
will be previously unallocated, and we will simply be transferring demand from
welfare-supported to work-supported, with no effect on the price level. Some of the demand
created will indirectly cause an increase in private production, putting unused industrial
capacity to work; the increase in circulating money will cause a corresponding increase in
real private production, and again have no net effect on the price level. And some of the
real resources will indeed be transferred from private production with no corresponding
offset; taxes, "enforced" borrowing, and other monetary interventions will be needed to keep
price inflation manageable.
I don't know of (and, like Lee A. Arnold above, would very much like to see) a model
showing what effect something like the GND would have on the real economy. Under
normal circumstances, the fiscal impact is a good proxy for the real impact. But
circumstances are far from normal, so think that the fiscal impact is no longer a valuable
proxy for modeling the real impact.
"The ultimate constraint on money creation is inflation. That hasn't been a problem lately
and (as I'll argue in more detail later) the world is in need of a fair bit of inflation,
probably at an annual rate of about 4 per cent for the foreseeable future. It's unclear how
much expansion of the monetary base would generate this outcome, while avoiding the risk of a
resurgence of inflation like that of the 1970s"
I don't agree that this is the problem: IMO the direct cause of [keynesian] inflation is
the wage-price spiral, and not money creation per se (this also implies a problem, which is
that if we want an high level of employment because we want an higer bargaining power for
workers we can't really avoid wage-price spirals and therefore inflation).
Money creation by itself creates wealth, not income, and the kind of economic policies we
had in recent decades caused an increase in the wealth/income ratio (or in other words the
creation of a lot of fictitious capital) more than inflation.
So the real problem of "money creation" today is that it generates financial bubbles, rather
than inflation.
The difference between money printing and government debt, from this point of view, is just
that money is a 0% interest financial asset, whereas bonds bear at least some interest, so
money creation pushes the general interest rate down more than bond creation, but this again
is a consequence of the increase of the wealth/income ratio (since more wealth extracts
profits from the same quantity of income).
"Substantial reductions in private consumption and investment will be needed to make room
for the required public expenditure, and that can only be achieved through a combination of
taxation and debt."
In my view the problem is that taxation is needed to avoid bubbles, and therefore what we
need is to tax income from wealth and wealth itself (in order to push down the wealth/income
ratio).
To put it in more familiar keynesian terms, the problem is that the ex-ante saving rate is
too high, so that currently we need an increase in debt levels (bubbles) to ricycle ex-ante
savings into consumption; we need taxation to push down the ex-ante saving rate.
But, the problem is, is it possible to have a capitalist economy running without economic
crises while the wealth/income ratio goes down (which means that a lot of people see their
relative wealth go down)?
IMO this is really difficult, and also explains the political problem for policieswhose
purpose is to push down the wealth/income ratio, since these policies look like just some way
to be mean against wealth owners, without an immediate economic reason, and when the bubble
pops everyone blames the banks and the financial sector, not the excessively high ex-ante
saving rate, that is instead perceived as a virtue.
Recent quantitative easing of only 2% of GDP doesn't provide much of a bound on how much
can be tolerated without causing too much inflation. Inflation is still up against the zero
lower bound, and it seems plausible that we could get more than a factor of two more money
creation. Which does get us into the green new deal range.
@1 The Green part is (comparatively) easy and low cost. It's the New Deal (free college
tuition, Job Guarantee, single-payer health etc) that will require a bit transfer of
resources.
@6 Transfers of real resources or financial resources? Single-payer requires an expansion
of suppliers in the healthcare sector to meet the uncovered demand, and those suppliers will
be new taxpayers. College learning will be going more on-line, a tendency accelerated by this
pandemic and anticipating the next pandemic, so we need, not many more buildings, but more
professors, but they too will be new taxpayers. The jobs guarantee could be structured to
generate sector expansions, not merely makework. So couldn't all of these eventuate in
expanded sectors, ergo more taxes? Government investment at rock-bottom interest rates?
Only too much is enough, we want to print and spend enough to change expectations.
Currently, the dollar is the reserve currency I think largely for "safe haven" reasons,
i.e. the oligarchs who have all the assets believe the US will be the last place to inflate,
devalue, or elect an expropriating left-wing gov't.
After 40+ years of capital share gains and worker immiseration in terms of real and social
wages and labour solidarity, and assuming we have under President S Kelton control only of
printing and spending but no ability to raise progressive redistributive taxes how much MMT
financed spending will it take to have the average worker believe that her real wages, social
wages, standard of living, opportunities etc will improve relative to capital and the rich
for the next forty years? And have the oligarchs also believe it?
That's how much.
Alan White 07.19.20 at 1:21 am (no link)
John, what say you about US/global military spending, which if cut and reallocated in the
low double digits could transform society? Do you think it's just politically untouchable? If
the US cut its military budget by say 25% it would still be formidable, especially given its
nuclear deterrent. For the life of me I can never understand why military budgets are
sacrosanct. Is it just WW2 and Cold War hangover? Couldn't the obvious effects of climate
change and the fragility of the economy subject to natural threats like the pandemic change
attitudes about overfunding the military (like the debacle of the F-35 program)?
@Tim Worstall: The political poles shifted, but less than you might think. Southern pols
were overwhelmingly opposed, and nearly all of them were D (the entire old Confederacy had
only 11 R Reps and only 1 R Senator). Northern pols, including Dirksen, were overwhelmingly
in favor, and they were split between the two parties. But if you break it down by party
and region, a larger percentage of Ds than Rs voted for the bill within each region.
https://www.theguardian.com/commentisfree/2013/aug/28/republicans-party-of-civil-rights
An interesting example of Simpson's paradox.
I don't know about the Democratic Party, but there was an important shift in the
Republican Party: the thing is, that shift took place in the nineteenth century, not the
twentieth. At the end of the Civil War, the Republican Party really was the party of civil
rights, with champions of equality prominent within it; after the end of the Reconstruction
this ceased to be true. Of course the Republican Party has changed further since then,
because everything changes; but it hasn't changed as rapidly since the late nineteenth
century as it did after the Civil War.
Alan White @13 Military spending is about 3.4 per cent of US GDP, compared to 2 per cent
or less most places. So that's a significant and unproductive use of resources that could be
redirected to better effect. But the income of the top 1 per cent is around 20 per cent of
total income. If that was cut in half, there would be little or no reduction in the
productive services supplied by this group. If you want big change, that's where you need to
look.
I think some of the reluctance to cut military spending in the US is the extent to which
it acts as a politically unassailable source of fiscal stimulus and "welfare" in a country
where such things are otherwise anathema. Well, that and all of the grift it represents for
the donor class.
As Joe Biden tries to split the difference between the midwestern swing-state voters and the
Sanders faithful,
he's released an economic plan - a plan that bears the imprimatur of his one-time foe
Bernie Sanders - that, in its attempt to be everything to every one, effectively promises
everything to every one.
Buy American. Green New Deal. Corporate tax hikes. Trillions of dollars spent on
infrastructure to install the latest eco-nonsense with money that should be going to roads,
bridges, rails and airports. Docks and highways. Things people actually need and use. And who
knows? Depending on his running mate, maybe we'll get a massive student-debt jubilee, too. All
on the federal government's tab.
Now that MMT has gone from fringe idea to mainstream, making Stephanie Kelton, a
cryptomarxist who believes that the link between value and money can be completely severed, so
long as we tax the wealthiest among us enough to keep inflation low. It doesn't take a genius
to suspect that an 'economic theory' grounded in the idea that governments can take on
unlimited amounts of debt and never stick anybody with the tab sounds absurd - even
dangerous.
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We say dangerous because Kelton's greatest sin is offering pandering politicians more cover
to encourage their spendthrift ways. During a recent interview with Macro Hive, former Central
Bank of India Governor and University of Chicago Professor Raghuram Rajan delivered a succinct
and insightful explanation of why MMT is so dangerous.
"We talked about sustainability and one of the big topics in markets at least is this
whole idea of QE MMT infinity, the ability of sovereigns to borrow. Now in developed
countries, they have historical capital they've built up and credibility," Rajan's
interviewer began. "But you're starting to also see this idea...you're starting to see more
emerging market countries experiment with it, including Indonesia and several others."
But at the same time "yields are very low, and if you look at emerging market spreads,
they're very low...so markets are telling you that they aren't worried. Yet we know debt levels
are high, and there's more talk in debt markets of QE and MMT."
Does the fact that markets seem content with the status quo (at least for now) validate
Kelton's argument?
Of course not, Rajan explained. Because while the complexities of the global financial
system, and the dollar's role within it, have allowed the Fed to spearhead this great monetary,
as the veteran central banker explained, there's no such thing as a free lunch.
"We know that markets can be complacent until a certain point and then they turn on a
time. We are at this point in a benign phase supported by an enormous amount of central bank
liquidity emanating from the primary reserve currencies, the euro area, the US Fed and to
some extent the Bank of Japan and the Bank of England."
"But we must also recognize is that there are no free lunches. If there's one statement
you want to keep to pound into the head of every policy maker, it's that there are no free
lunches. If you borrow today, there is a presumption that it will be repaired at some point,
so you are in a sense taking away resources from somebody else in the future."
" Now it may be a generation or two down the line will be on the hook for this ...whether
they can pass it on to their children is an open question...but you're definitely taking away
their ability to borrow by borrowing today."
.While burdening future generations doesn't seem to come up much in cryptomarxist essays
about the moral imperative of expansive fiscal spending - some have gone so far as to argue
that the federal government has a moral obligation to forgive student debt - Rajan acknowledges
that the idea is "seductive" for all the wrong reasons.
"So the idea that there are free lunches...which certainly is what the lay person takes
away from MMT...is very sort of attractive, seductive - but it's absolute nonsense."
If that's the message that's going to be communicated, then that's wrong.
Asked to elaborate, he continued...
"There are times when you can spend a little bit more, but you are still making a trade off
and evaluating this trade off well...I think that's the right thing to do. If that's the
message from MMT, then I'm fine with that. There are periods where you have more leeway."
"The message can't be 'Don't Worry, Be Happy' it has to be 'yes take advantage of periods
when you have a little more spending capacity but use it wisely, because there's no such thing
as a free lunch and you will have to repay it at some point... that's what any sensible
economic theory will tell you, and I think that's what we understand now."
"When banks aren't lending, when inflation is low, it is possible for the central bank to
expand its balance sheet somewhat ...and finance more activities that the government wants to
undertake. That doesn't mean it's free debt it's equivalent to debt issued by the government -
think of the central bank issuing debt as the same as the government issuing debt: it's the
consolidated balance sheet you're looking at."
"Somebody is responsible for payment, it's either the central bank or the government."
"At low interest rates it doesn't really matter who it is, but as inflation picks ups it
does matter a little more who it is because the central bank often is financing itself with
effectively forced loans from the banking sector, and there's a limit to how much the banking
sector is willing to do that, especially as economic activity picks up."
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"So my sense is yes there is some room now but it doesn't mean the debt level doesn't matter
and it doesn't mean that we should just keep spending without thought of who's going to repay.
And I think the big philosophical issues are how much are you going to bail out companies...why
should Joe Schmoe...why should his taxes go to bail out a capital owner? After all, neither of
them saw the pandemic coming...neither is responsible for the pandemic...so why should one bail
out the property rights of another?"
"It strikes me these guys who want to open up the government wallet and spend to protect
everybody from the consequences of the pandemic don't realize that there's one person who's
bearing the hit: it may not be you, but it might be your children."
"And the question is: Why do they have to pay when they have no part in this?"
Remember: As Rajan explains, we must recognize that our resources are limited and use them
wisely. Keep that in mind when Democratic politicians are trying to spend trillions of dollars
of public money to outfit private buildings with solar panels or whatever 'Green New Deal'
infrastructure travesty AOC & Co come up with.
The Fed is just following the Congressional mandate of supporting the people who fund our
political system.
It should be clear that the stock market doesn't care about Main Street when you see it
still going up with massive levels of unemployment.
MMT states that the Fed can create these funds that are handed out to business by the
trillions but that is not what MMT 'policy' would want.
Most MMT people are actually against handouts to people in the form of a basic guaranteed
income.
A major cornerstone of MMT policy though is a Job Guarantee. In times like these they
would very much like to see employment supported by these government funds. Not only the
basic job pool of a minimum wage job but also supporting more highly paid skilled employment
such as supervising infrastructure projects etc.
MMT is more concerned with resources than money per se. It doesn't help to have money if
people aren't making stuff, providing food and services etc.
Some will know who Hyman Minsky was, some won't. Hudson gives him the primary credit for
providing the foundation for Modern Monetary Theory, and he gets praise from Keen, Wolfe and
many others too. On the occasion of his 100th birthday, here's a
long essay that seeks the following:
"But the question still stands: Was Minsky in fact a communist? Of course not. But, a
century after his birth, it is useful to clarify often neglected aspects of his intellectual
biography."
Since Minsky's referenced so often by Hudson particularly, I think this piece will be
helpful for those of us following the serious economic issues now in play. I'd reserve an
hour for a critical read.
MMT is brilliant and it's really embarrassing that it took The Deadliest Pandemic™ for
some folks to come round to it. We all collectively print an extra bit of money - and give it
to each other!
There are historic examples documented of successful applications of the concept, look no
further than to the earnest witness of Baron Munchausen pulling himself out of a swamp by his
own hair. https://en.wikipedia.org/wiki/Baron_Munchausen
Hudson also has another video posted to
his site , "An interview on the Radical Imagination: Imagining How Financial Parasites
and Debt Bondage Are Destroying Us," which is based on his book Killing the Host .
It's a recent video interview that's @50 minutes long prefaced by the Occupy Wall Street
Anthem and introduction.
One aspect of MMT that must be made clear is it advocates the use of public banking or the
Treasury to pump capital in the form of money into the productive economy , not the
parasitic economy the Fed supports--the difference is huge and vital. For MMT to succeed
within the Outlaw US Empire, the Fed must be liquidated. For more, please read the essay I
linked to @35.
Musburger @ 3 : "What do you folks think about MMT?"
Re-inflation of a depressed economy can be achieved by government spending into:
public investment
employment
income transfers
income support
labour
tangible capital
infrastructure.
This is "good" MMT.
"Bad" MMT, or fake MMT, is government spending into WallStreet, handouts to:
the banks
large corporations
speculators
bondholders.
The March 2020 CAREs Act is bad MMT as was the 2008 bailout. This one is same as that one
but "on steroids."
Both bailouts further empower(ed):
rentiers (the landlord class),
monopolies,
the financial creditor class
and cast most of the rest of the US population into reduced circumstances, poverty and/or
debt servitude. They burden the working economy with overhead and debt that cannot be paid.
Bad MMT.
While the MMT school has a healthy diversity within it, USG applications have flipped the
theory on its head, says Hudson. See below for link.
(Remember Cheney's, "We are all Keynesians now"? )
Worse, Bad MMT does more than simply bailout the top 1%. It also increases the parasitic
power of financialization on the real economy. As we have repeatedly seen, now most
dramatically, the financial sector is incapable of planning for anything other than its own
fictional valorization.
Libertarians' freedom from government dogma excoriates against centralized planning and
yet, ironically, the end result of their "government is bad" path forced upon us in USA led
directly to central 'planning' by default -- by parasitic-on-the real-economy privatized
finance sector, a form of fascism not democracy or liberty.
USA'ns public health crisis occurs as states, which are required by law to not run
deficits, face huge costs that will force more austerity on their populations. More callous,
they are forced to compete against each other as they purchase essential equipment and
technology (from for-profit privateers) to deal with the highly infectious novel virus, and
the fed indemnifies the privateer mask makers!!!
What is the root of inequality today? Debt and the monopolization of real estate.
What are solutions?
Wipe out and roll back debt overhead on production and consumption.
This is "good" MMT.
Bad MMT furthers the debt burden on society, concentrates monopolization and cements in
central planning by parasitic private finance sector.
"... The budget deficit is simply a ruse to make you believe that government funding is limited when in reality they create money on demand with a few keystrokes. ..."
"... Thus there is always money for corporate welfare, the military, tax relief and benefits for the oligarchy but never money for health care, education, infrastructure, etc. ..."
In the broadest sense the US deficit is a measure of how much money the govt has created (not entirely accurate as the creation
of money - really debt - has been largely outsourced to private banks). If the national debt was 'paid off' It would suck all
the money out of society and the economy would collapse.
The Fed doesn't need taxes as revenue as it just creates whatever money it needs. The budget deficit is simply a ruse to
make you believe that government funding is limited when in reality they create money on demand with a few keystrokes.
Thus there is always money for corporate welfare, the military, tax relief and benefits for the oligarchy but never money
for health care, education, infrastructure, etc. The deficit is 1/2 of a balance sheet, the deficit on the govt side is balanced
by a surplus (money in circulation) in the economy. Note that states are revenue constrained and depend on taxes and federal outlays
to operate as they cannot create their own money on demand.
But what about inflation? Too much money in circulation lowers its value. Taxes are the real federal economic regulatory mechanism.
When there is inflation, higher taxes directly remove money from circulation. The disinformation campaign is that interest rates
control inflation, which has a) repeatedly been demonstrated false and b) is simply another system of rewards for the banking
cartel.
The best metaphor is a sink. The faucet is the creation of money, the basin is the economy, and the drain is taxes. When the
sink starts to overflow (inflation) the solution is to open up the drain (raise taxes).
Note also that this is for a sovereign economy, one that is controlled by the government. The EU has effectively destroyed
all the sovereign economies in Europe with its central bank. Thus Greece, Italy, Spain, etc. have no control of their own economies
and as such are unable to economically regulate themselves and subject to foreign predatory forces.
[.]
While it is still popular to claim that the United States has never defaulted on its debt,
this is a myth. The US has been forced to default a couple of times throughout history, the
last of which being when Richard Nixon&rsquo closed the gold window. By cutting the
ability of foreign governments to redeem US dollars for gold, America was allowed to pay
back past debt with devalued fiat money. This form of default has long been a popular
option for governments with debt obligations it can't or won't honor.
Of course, as Peter Klein wrote last week, even Trump's suggestion of the US
restructuring its debt isn't the doomsday scenario CNBC talking heads have made it out to
be, noting that:
[T]he idea that the US can never restructure or even repudiate the national debt -- that
US Treasuries must always be treated as a unique and magical "risk-free" investment -- is
wildly speculative at best, preposterous at worst.
Murray Rothbard himself advocated for outright repudiating the national debt,
arguing:
The government is an organization, so why not liquidate the assets of that organization
and pay the creditors (the government bondholders) a pro-rata share of those assets? This
solution would cost the taxpayer nothing, and, once again, relieve him of $200 billion in
annual interest payments. The United States government should be forced to disgorge its
assets, sell them at auction, and then pay off the creditors accordingly.
Trump himself has even touched on the possibility of selling of assets held by the
Federal government as a form of debt reduction.[.]
c1ue dear friend, the current level of US debt is unsustainable. Never mind the happy
cheerleaders promoting mighty U.S. is the wealthiest nation on earth. Have no fear our dollar
is good as gold, backed by the full faith and credit of Uncle Sam.
Here is a brief history of U.S.defaults starting with year 1790- LINK
"... Authored by Ryan McMaken via The Mises Institute, ..."
"... "Washington is treating the EU as an adversary. It is dealing the same way with Mexico, Canada, and with allies in Asia. This policy will provoke counter-reactions across the world." ..."
"... The National Interest ..."
"... Treasury's War: The Unleashing of a New Era of Financial Warfare ..."
"... "We must increase Europe's autonomy and sovereignty in trade, economic and financial policies ... It will not be easy, but we have already begun to do it." ..."
When the US places financial sanctions one one country, it de facto sanctions many
other countries as well -- including many of its allies.
This is because not all countries and firms are interested in participating in the US
sanctions-based foreign policy.
Sanctions, after all, have become a favorite go-to strategy for American policymakers who
seek to isolate or punish foreign states that don't cooperate with US international policy
goals.
In recent years, the US has been most active in imposing new sanctions on Russia and Iran,
with many consequences for US allies who are still open to doing business with both of those
countries.
The US can retaliate against organizations that violate US sanctions in a variety of ways.
In the past, the US has sued firms such as the Netherlands' ING Groep and Switzerland Credit
Suisse. Both firms have paid hundreds of millions of dollars in fines in the past. The US has
been known to
go after individuals .
US bureaucrats like to remind firms that penalties await them, should then not buckle under
US sanctions plan. In November 2018, for example, US Secretary of State Michael Pompeo
announced :
I promise you that doing business in Iran in defiance of our sanctions will ultimately be
a much more painful business decision than pulling out of Iran.
Fear of sanctions has caused some firms to stop work mid project, such as
when Swiss pipe-laying company Allseas Group abandoned a $10 billion pipeline that was
nearing completion.
Not surprisingly, these firms -- who employ people, pay taxes, and contribute to economic
growth -- have put pressure on their governments to protest the mounting interference from the
US into private trade.
As a result, some European politicians are increasingly looking for ways
to get around US sanctions . In a tweet last week, Germany's deputy foreign minister Niels
Annen wrote "Europe needs new instruments to be able to defend itself from licentious
extraterritorial sanctions."
Another "senior German government official" concluded, "Washington is treating the EU as
an adversary. It is dealing the same way with Mexico, Canada, and with allies in Asia. This
policy will provoke counter-reactions across the world."
But how is the US so easily able to sanction so much of the world, including companies in
huge and influential countries like Germany?
The answer lies in the fact the US dollar and the US economy remain at the center of the
international trade system.
SWIFT: How the US Sanctions the World
By the waning days of the Cold War, the US dollar had become the dominant currency in the
non-communist world, thanks to the Bretton Woods agreement, the petrodollar, and the sheer size
of the US economy.
Once the Communist Bloc collapsed, the dollar was poised to grow even more in importance,
and the world's financial institutions searched for a way to make global trade and investing
even faster and easier.
Henry Farrell at The National Interestdescribes
what came next:
Financial institutions wanted to communicate with other financial institutions so that
they could send and receive money. This led them to abandon inefficient
institution-to-institution communications and to converge on a common solution: the financial
messaging system maintained by the Society for Worldwide Interbank Financial
Telecommunication (SWIFT) consortium, based in Belgium. Similarly, banks wanted to make
transactions in the globally dominant currency, the U.S. dollar. ... In practice, the
physical infrastructure, for a variety of efficiency reasons, tended to channel global flows
through a small number of central data cables and switch points.
At the time, Europe was still years away from creating the euro, and it only seemed natural
that a centralized dollar-transfer system be developed for all the world.
SWIFT personnel have always maintained their organization is apolitical, neutral, and only
interested in providing a service. But geopolitical realities have long intervened. Farrell
continues:
The centralizing tendencies meant that the new infrastructure of global networks was
asymmetric: some nodes and connections were far more important than others. ... What this
meant was that a few states -- most prominently the United States -- had the latent ability
to transform the global economic infrastructures ... into an architecture of global power and
information gathering.
By 2001, the power of this centralized system had become apparent. And in the wake of 9/11,
the US used the "War on Terror" and an opportunity to turn SWIFT into an enormous international
tool for surveillance and financial power.
In his book Treasury's War: The Unleashing of a New Era of Financial Warfare Juan Zarate shows
how the US Treasury officials pressured SWIFT and its personnel to provide the US government
with the means to use this international financial "plumbing" to deprive the US's enemies of
access to markets.
This started out slow, and SWIFT officials were concerned it would become widely known that
SWIFT was becoming politicized and largely a tool of the US and US allies. Nevertheless, the
American regime pressed its advantage, and by 2012 "for the first time ever, SWIFT unplugged
designated Iranian banks from its system, in accordance with a European directive and under the
threat of possible US legislation."
This only strengthened worries among both world regimes and the world's financial
institutions that the basic technical infrastructure of the international financial system was
really a political tool.
The World Searches for Alternatives
Naturally, Russia and China have been highly motivated to find alternatives to SWIFT. But
even perennial US allies have grown far more wary of leaving the financial system in a place
where it can be so easily dominated by the US regime. If Iranian banks can be "unplugged" so
easily from the global system, what's to stop the US from taking similar steps against German
banks, French banks, or Italian banks?
This, of course, is an implied threat behind US demands that European companies not try to
work around US sanctions or face "punishment." From the US perspective, if Germans refuse to
kowtow to US policy, then there's an easy solution: simply cut the Germans off from the
international banking system.
Consequently, Germany's Foreign Minister Heiko Maas announced
in 2008
"We must increase Europe's autonomy and sovereignty in trade, economic and financial
policies ... It will not be easy, but we have already begun to do it."
By late 2019, the UK, France, and Germany had put together a workaround called "INSTEX"
designed to facilitate continued trade with Iran without using the dollar and the SWIFT system
built upon it. Belgium, Denmark, Finland, the Netherlands, Norway and Sweden have joined the
system as well.
As of January 2020, however, the cumbersome system remains unused. But we remain in the very
early stages of European efforts to get a divorce from the dollar-dominated financial system.
The INSTEX system has been devised, for now, for a limited purpose. But there is no reason it
cannot be expanded in the future. The short-term prospects for a functional system are low.
Longer-term, however, things are different. The motivation for a long-term workaround is
growing. The Trump administration has embraced showmanship that looks good in a short-term news
cycle, but which encourages US allies to pull away. Farrell continues:
Unlike Obama, Donald Trump did not use careful diplomacy to build international support
for [new sanctions] against Iran. Instead, he imposed them by fiat, to the consternation of
European allies, who remained committed to the [Iran agreement put in place under Obama]. The
United States now threatened to impose draconian penalties on its allies' firms if they
continued to work inside the terms of an international agreement that the United States
itself had negotiated. The EU invoked a blocking statute, which effectively made it illegal
for European firms to comply with U.S. sanctions, but without any significant consequences.
SWIFT, for example, avoided the statute by never formally stating that it was complying with
U.S. sanctions; instead explaining that it was regrettably suspending relations with Iranian
banks "in the interest of the stability and integrity of the wider global financial
system."
All of this is viewed with alarm by not only Europe, but by China and Russia as well. The
near-constant stream of threats by the US administration to impose ever harsher limits and
sanctions on both China and Europe has pushed the rest of the world to accelerate plans to get
around US sanctions. After all, as of mid-2019, the US
had nearly 8,000 sanctions in place against various states and organizations and
individuals. The term now being used in reference to American sanctions is "
overuse ." It was one thing when the US imposed sanctions in some extreme cases. But now
the US appears increasingly fond of using and threatening sanctions regularly, without
consulting allies.
This makes continued US dominance in this regard less likely as allies the world pour more
and more resources into ending the US-SWIFT control of the system. In a 2018 report, "Towards a
Stronger International Role of the Euro," the European Commission described U.S. sanctions as "
wake-up call regarding Europe's economic and monetary sovereignty. "
The effort still has a long way to go, but perhaps not as far as many think.
The dollar remains far ahead of the euro in terms of the dollar's use as a reserve currency,
but the dollar and the euro are move evenly matched
when it comes to international payment transactions.
If the rest of the world remains sufficiently motivated, more can certainly be done to rein
in dollar-based sanctions. Indeed, in 2019, former US Treasury Secretary Jacob Lew
admitted :
the plumbing is being built and tested to work around the United States. Over time as
those tools are perfected, if the United States stays on a path where it is seen as going it
alone there will increasingly be alternatives that will chip away at the centrality of the
United States.
If the US finds itself not longer at the center of the global financial system, this will
bring significant disadvantages for the US regime and US residents. A decline in demand for the
dollar would also lead to less demand for US debt. This would put upward pressure on interest
rates and thus bring higher debt-payment obligations for the US regime. This would constrain
defense spending and the ability of the US to project its power to every corner of the globe.
At the same time, central bank efforts to drive interest rates back down would bring a greater
need to monetize the debt. The resulting price inflation in either consumer goods or assets
would be significant.
The fact none of this will become obvious next week or next month
doesn't mean it will never happen . But the US's enthusiasm for sanctions means the world
is already learning the price of doing business with the United States and with the dollar.
Took three months to pass the legislation to seize control of the Gold supply even though
they knew the U.S defaulted on the War debt of first world war and America was only partially
involved.
Better move fast. U.S has not declared War for real since Pearl Harbour.
Best way to avert it is to look at the economic calculations being made and slow what they
need for this extended and probably apocalyptic war to start.
They need man power for what is planned but I have a suspicion this time they are planning
for megadeath on all sides.
Nothing will be destroyed. Situations like this are about chipping away and crumbling.
Rome was not built in a day. People sit in wait to find a weak spot of the hegemon and if you
think that the US is a perfect and perpetual hegemon than you are as delusional as Obama.
He bragged in 2015 that he/they twisted arms of countries when they did not do what he
'needed' them to do. (See y-tube). Every country, every person who had arms twisted is
sitting in wait to hit back. Chisel away, apply needlepricks, obedience can be forced; desire
for revenge never dies.
You need to treat people well on your way up because you are meeting them all again on
your way down.
Will The US Obsession With Sanctions Destroy The Dollar?
Hopefully it will destroy the US BULLY TOO...
This saga of Sanctions all started with the Black Jesus Obama and Russia. It was a
disaster then, harmful to Russian women and children and never affect the oligarchs. It is
Stalingrad stuff.
Then along comes the pile of **** known as the Orange Jesus. Considering Trump's pretend
hatred of Obama, he sure loved the community organizers weaponizing of the Dollar Reserve...
So much so the orange ******* now has 40% of the world population under Dollar Reserve
Sanctions. More Stalingrad ****. And the world hates it.
So there is no question that nations will find ways around sanctions and the mother fking
pencil necked poodles that support this mfkirng ****. They can't comprehend that if TRUMP
does this to some country, he can do it to them.
The Dollar Reserve was intended to be apolitical a means of global commerce. At Bretton
Woods, Maynard Keynes addressed the Reserve Currency to avoid this. He recommended a
synthetic reserve currency composed of five of the world's leading currencies called the
BANCOR. He was voted down by the US delegation that only would accept the Dollar over the
Pound. Britain was too weak after the war to oppose the US. So that set up the Dollar Reserve
by intimidation and bullying. What else is new.
Now the US uses their 800 military bases to enforce their Sanctions and Dollar reserve
weaponizing.
This will come to an end. Europe is a larger economy than the US and Asia is larger than
the US and Europe Combined. So this dollar reserve weaponizing crap will end.
Interesting isn't it that the two most economically illiterate presidents in history, love
sanctions. I promise, the Dollar reserve as the primary currency of exchange is THE DEAD MAN
WALKING.... They are also the most RACIST presidents in US History.
Goldamn did a white paper on this... If the US loses the Dollar Reserve the GDP would tank
30%. So yeah... welcome to the the stone age and fighting in the streets. But to neutralize
the dollar Reserve damage only requires competition to the US Dollar.
So far the Yuan is not printed in enough quantity to compete in a big way. The Euro has
never shown the inclination to be anything but a poodle.
WWII has never ended. Look at NATO... who are they opposing... RUSSIA. Give it a rest.
Russia is not going to attack Europe. So this NATO military facade is about to crumble. Trump
attempting to get NATO to attack Iran and enter the Middle east is laughable and won't
happen. Only the British Poodles are stupid enough for that.
And why is Britain fking with anybody... Doesn't the Queen have enough RYSIST issues now
that Harry and Megan have called her a RYSIST? Love to see Britain go it alone but they are
real pussies and have filled the world with hatred so there will be consequences.
Sanctions use the same philosophy of the the Mafia and having to use it means the days of
the dollar hegemony are gradually ending. What goes around comes around. yin-yang.
YES but for the first time they are present. The Euro is a Reserve Currency but Europe has
never asserted its status. Likely due to Germany. Germany destroys Europe in so many way.
Merkel is pathetic.
Now the Yuan as of 2016 is a reserve currency and they are trading Iron ore from Australia
and Brazil in Yuan. Also China has a 24 Trillion dollar internal commodities market that
trades in Yuan. So the mechanics of massive Trade are already set in place in China and
Asia.
Traditionally the largest trading nation had the reserve currency. The US is no longer the
largest trading nation. They are the largest debtor nation however.
This only Bretton woods post World War II rules. Back in the old days gold was trusted
because people who had it actually hd to produce or trade for it. War economy is always pure
fiat even if it means killing your own soldiers and robbing their families.
If it gets dirty everyone is going to have to play the game. Why do you think they are
still dealing with Afghanistan like its the centre of the universe for the last 20 years.
PTSD and ******** propaganda on young men is enough to push them over the edge. Same thing
for the nasty **** that happens to women.
All these currencies are pure fiat floating against perceived demand and ********
technocrats. People want to die in these situations they are going to monetize human misery.
The opiate epidemics in the 60s pushed the U.S of the Gold standard. Where do you think the
French got all those U.S dollars from straight after the war.
Ever heard of this little thing called cryptocurrency? It can't be weaponized like a CB
currency because there is no centralized authority and no need for a trusted third party. It
can cross international borders at the speed of light and cheaply to boot. It's quite clever.
I imagine it will become all the rage in the next couple years.
I dont think you understand the concept of war. They napalmed kids to heard their parents
into concentration camps. That was the Pentagon. Theyre not going to spare your internet
service provider in the name of free trade and libertarian finance.
Bit coin can be used the same way as the military script just by switching off your
computer and forcing you to adopt another currency. They did it every few months in Vietnam.
IBM ran the analytics with a super computer and they still didnt beat the Tet Offensive which
was just people letting of steam for lunar new year by killing anyone who worked with the
Americans.
Hedge. Iodine for fallout. Water purification tablets. Toilet Paper and Sanitary wipes and
shoes. Batteries. You wont be allowed to grow food when it starts.
Economic sanctions, sanctions of any kind, are like pepper: use cautiously, sparingly, and
only when the recipe calls for it. Don't inhale, either. Massive sneeze attacks can follow
and the dish can be ruined.
signed by Trump in 2017 means we have essentially entered into a world where the American
regime is weaponizing sanctions to dominate the planet.
Of course, karma is a law, which cannot be avoided, and this article is right. It is only a
matter of time. Moreover, he is right in that when we lose this status our ability to wage
endless wars throughout the planet will stop. I hope to see that day.
It is my feeling that the primary reason we are not in a major war at this moment is that
our "adversaries" have noted our decline, as well have many astute and not so astute ZH
members have, and are waiting us out. The other is that our military is not as good as we
claim and some of us know it.
GOLD should be trading currently at least at 4,800 and SILVER should be trading today
at triple digits -- The Federal Reserve and PPT like to manipulate the precious metals, stop
manipulating the PM morons.
Let's take a look at the SILVER chart:
SILVER -- TF = Daily -- SILVER --time frame is daily-- has developed a very well known
technical pattern CUP and HANDLE -- SILVER STRONG BUY -- https://invst.ly/pie5l
"Donny Appleseed" send$ his tiding$ to the American lemming... counting all those "0"s
that are only gettin bigger with each sweep of the EST "second hand".
Still allowed to be "alive" after all that damage and all these years!
I just attended a China - US conference. The chinese fund managers who spoke there said
that China's economy is at a standstill and now is the time for "VULTURE" funds to be active
acquiring heavily discounted firms which are over-leveraged. Not the sounds of a ready for
prime time currency. And the market know as less than 2% of global reserves are Yuan as in
the chart and Chinese dollar reserves are 30% of what they were years ago.
Germany's deputy foreign minister Niels Annen wrote "Europe needs new instruments to be
able to defend itself from licentious extraterritorial sanctions."
The BIG problem with the US dollar is not only the data but it is also the staggering
amounts of printing, printing, printing and QE4ever that totally destroy the purchasing power
of the US Dollar. Only GOLD and SILVER are the real 'store of value'.
Let's take a look at the US Dollar chart:
US DOLLAR Index -- TF = 4H -- ROUNDED TOP suggesting much lower levels ahead -- US DOLLAR
STRONG SELL -- https://invst.ly/pj042
Like how in the 80's everybody assumed flying cars were "near future", people who think
the dollar will lose (or already lost) reserve status are delusional.
It will take a long long time to ween the world off of the entire banking complex,
literally made by and through the dollar.
Multiple reasons, primarily:
1) US gov still a strong presence around the world militarily and financially
2) US dollar still the #1 currency used in transactions between major firms
3) US banking system has, in its pockets, about 80% of the worlds billionaire class, which
conversely, makes most of the major decisions around the world
4) SWIFT system and World Bank both huge institutions that literally hold most 3rd world
countries economics (see Venezuela for examples of a 3rd world country trying to NOT do what
the US wants)
In a static geopolitical environment, your points are valid. After all, it's been this way
for a very long time. You would - and perhaps will be however, amazed at just how fast the
dynamics of your 4 points can change when two near equally (and in some cases superior)
military and economic world powers are geopolitically pushed to a limit they will no longer
accept. And guess what? That's coming a whole lot sooner than most think.
EVERY ******* in Washington needs to go and be replace with people who have an interest in
the well being of the country rather than their personal power plays. The world HATES the
Washington assholes almost as much as the US citizens hate the bastards.
Sanctions are used to force another nation into compliance.
Bombs are used to force another nation into compliance.
Anyone still think the treasury and Fed aren't the biggest warmongers around? They have to
be, otherwise the US dollar would be toast, as there is nothing but a military holding it up.
A nation with 5% of the global population, full of fat walmart shoppers, does not have the
productive means to force their will without the war machine. Ironically, that same war
machine is fully funded by the foreigners the bankers bomb, as using the USD means you must
hold dollar reserves. It is a grand racket.
The Russia and Ukraine scandals leading to impeachment are nonsense but Trump should be
impeached for hastening the demise of our reserve currency. Weaponizing the dollar was the
dumbest strategy he ever came up with. Russia and China are gaining friends and influence
every day while the U.S. is becoming an outcast. They are using the Carrot while all Trump
knows is the Stick.
The US UK Israel petrodollar system collapsed overnight with the US military having no
credible response to having its base bombed. A credible response is for the US to have dealt
death from the skies, destroying and severely deteriorating Iran's ballistic launch
capabilities or at the least a strike on its major oil refineries. That did not happen.
Why?
The US & UK airforce are outdated....in fact any conventional air force that relies on
drones or stealth jets to deliver bomb payloads are outdated!
The purpose of an air-force is to bomb targets from the sky. Iranians have shown you can
do it with ultra-cheap short medium range ballistic missiles which are nothing more than crap
aluminum tubes filled with propellant, a low cost cell phone GPS guidance system and a big
payload. You can make millions for the cost of one stealth jet!
IRAN has all US, Israel and Saudi targets mapped and gave a demo of what they can do. By
the time the shitty F35s start their engines on a runway of a worthless aircraft carrier,
thousands of these missiles will be launched by Iran destroying all targets within minutes of
declaration of TOTAL WAR!
THE PURPOSE OF STEALTH has been defeated. There is no deterrence against ballistic
missiles which are faster then aircraft! So by the time the first wave of stupid burger
planes reach IRAN, all BURGER bases in Saudi Arabia, Iraq, Israel and aircraft carriers will
have been destroyed! So the USA cant protect anything without losing everything!
TOTAL WAR even with a weak power like Iran means TOTAL BALLISTIC MISSILE WAR in which case
everybody's base gets destroyed and who ever pushes the button fastest gets to destroy the
targets fastest and everything is over in less than an hour! Since burgers dont have magic
hollywood space lasers, just piece of **** F35s and outdated carriers....burgers cant defend
anything! Burgers have no deterrence for TOTAL BALLISTIC MISSILE WARFARE. There is no time to
start your engines and take off on a runway, the missiles are already on their way and will
hit bases and aircraft carriers within 10 to 20 minutes of declaration of TOTAL WAR.
Trump killed a rook (solemani) in the game of geopolitical chess (which the Persians
invented) and the mullahs in Tehran checkmated the USA and Israel by making redundant the
view that only very very expensive stealth jets can accurately deliver bombs with precision!
No brainer right there...a plane requires life support, complex systems just to support the
idiot who is flying it to the target...a missile requires no stealth technology, its fast,
accurate and deadly with no deterrent! In one stroke the mullahs revealed that the entire US
air-force is obsolete against TOTAL short/ medium range ballistic missile war!
We should have had ballistic missile carriers but we dont because greedy defense
contractor boomers think they are the smartest defense planners when in fact they just loved
to build planes instead of realizing short range ballistic GPS guided precision missiles can
do the same thing! But not much profit in that of course..
US air-force outdated = US ground troops outdated because they rely on US air-force for
back up. So you have to withdraw = NO PETRODOLLAR.
As of today the US cannot defend its bases in Iraq, Israel or Saudi Arabia....
US/UK/Israel/Saudis combined cannot protect anything without losing everything!
That is called check-mate my friends. The petrodollar age has ended and the AGE OF THE
PETROYUAN has begun. China copies everything the US does, they wanted their Saudi Arabia and
they got all of IRAN and IRAQ.
Now Trump has to sign trade deal after trade deal because the world holds a massive amount
of US securities and we have to supply real goods and services...opening up oil fields for
export, everything. Burgers have to become a land of farmers and oil workers to satisfy all
the US dollar holdings out there because TRUMP LOST THE PETRODOLLAR by DESTROYING US CREDIBLE
MILITARY DETERRENCE for the whole world to see...the ability to provide 'SEGURIDY' AS HENRY
KISSINGER would say.
Everybody now knows the US is just another power only burgers have their head up their
asses. A big crash is coming our way and this time we DO NOT HAVE THE PETRODOLLAR FOR
RECOVERY LIKE WE HAD IN 2008!
TRUMP LOST THE WESTERN PETRODOLLAR HEGEMON....HE LITERALLY LOST THE WEST!
THE PETRODOLLAR AGE OF PROSPERITY HAS ENDED! BECAUSE DRUMPF, KUSHNER AND NETANYAHU!
The EVANGELICAL BIBLICAL APOCALYPSE has come and gone! The GREAT SATAN as the mullahs
would call them have been revealed to have no power to price oil in the middle east anymore!
The military humiliation and withdrawal comes next...its a Greek tragedy in modern
times...
Paraphrasing Thucydides
"A society that divides its warriors and scholars will have its wars planned by cowards
and fought by fools"
Trump knocked out a rook and a couple bishops, and ignored opportunities on several pawns.
By not taking the bait, escalations fall onto Iran's shoulders and will be increasingly hard
to justify.
Eventually their retaliation actions blur into the smoke of their terrorist proxies. Then
they fulfill the role thst Trump claims they occupy. Then action on them will be easily
justified. Even now Iran is shredding the JCPOA, that document that they acted like was so
dear to them - thus giving the rest of the world the finger. Hey, you couldn't play their
part worse if you tried...
There is no deterrence against ballistic missiles which are faster then aircraft! So by
the time the first wave of stupid burger planes reach IRAN, all BURGER bases in Saudi
Arabia, Iraq, Israel and aircraft carriers will have been destroyed! So the USA cant
protect anything without losing everything!
That's what Hitler thought, Saddam tried it as well, the theory proved to be wrong.
The purpose of an air-force is to bomb targets from the sky. Iranians have shown you can
do it with ultra-cheap short medium range ballistic missiles which are nothing more than
crap aluminum tubes filled with propellant, a low cost cell phone GPS guidance system and a
big payload. You can make millions for the cost of one stealth jet!
This was particularly hilarious. If that were the case the USA and its allies would be
doing that. Do you not realize the US has had rocket artillery for the past 70 years? The
larger the rocket, and the longer its range, the larger and heavier the transport TEL vehicle
and support base and storage must be. The industrial and technical support base as well. And
the crews to man and employ them get larger as well, as does their training equipping and
paying of them.
That's in fact very expensive, and you run out of rockets real fast.
But stealth jets come back every day, for months, or years, and drop big-*** bombs on your
missile factories, and its industrial support base, it's electricity supply, its fuel supply,
its chemical factories, its bases, bunkers, sensors comms, personnel, ports and the entire
industrial economic infrastructure of the entire country.
then why didnt you boomer? Because Iran's missiles will hit your base anyway..stealth or
no stealth that is the point! The US was supposed to wage such a death match war against
China or Russia...not a 4th rate shithole like IRAN. You boomers literally have your head up
your asses. The 90s is over boomers! The boomer run US armed forces is totally obsolete
because we have been humiliated and the boomers are so shameless they are behaving like
'colored peoples of poor upbringing'.
Hold me back or ill......hold me back or ill.... you will do what? Nothing! No one held
burger boy trump back. Burger boy held himself back because he and his son in law and the
prime brains behind losing the petrodollar, Netanyahu would lose Israel also along with Saudi
Arabia and all burger bases!
oh so I must be a muslim if I said Israel lost the petrodollar because the joke is on you
clowns. Lose the petrodollar boomers lose their 401k and Israel has to negotiate with Iran to
exist...win win if you ask me...cant wait to watch you flip burgers in your 80s.
The fact that you want us to use WWII Japan as comparison completely nullifies your rant.
Furthermore, revisionism and hyped up ability does no good in the real world. We don't need
to ask Hitler or Saddam. Had Saddam moved in on Saudi Arabia rather than allowing forces to
amass it's been a different story. Regarding Hitler, you cinta had little to no hand in the
matter. Case in point.
Looks like Iran is Catch22 for the USA: it can destroy it, but only at the cost of losing empire and dollar hegemony...
Notable quotes:
"... The United States is now turning on the screws demanding that other countries sacrifice their growth in order to finance the U.S. unipolar empire. In effect, foreign countries are beginning to respond to the United States what the ten tribes of Israel said when they withdrew from the southern kingdom of Judah, whose king Rehoboam refused to lighten his demands (1 Kings 12). They echoed the cry of Sheba son of Bikri a generation earlier: "Look after your own house, O David!" The message is: What do other countries have to gain by remaining in the US unipolar neoliberalized world, as compared to using their own wealth to build up their own economies? It's an age-old problem. ..."
"... The dollar will still play a role in US trade and investment, but it will be as just another currency, held at arms length until it finally gives up its domineering attempt to strip other countries' wealth for itself. However, its demise may not be a pretty sight. ..."
"... Conflict in the ME has traditionally almost always been about oil [and of course Israel]. This situation is different. It is only partially about oil and Israel, but OVERWHHEMINGLY it is about the BRI. ..."
"... The salient factor as I see it is the Oil for Technology initiative that Iraq signed with China shortly before it slid into this current mess. ..."
"... This was a mechanism whereby China would buy Iraq oil and these funds would be used directly to fund infrastructure and self-sufficiency initiatives and technologies that would help to drag Iraq out of the complete disaster that the US war had created in this country. A key part of this would be that China would also make extra loans available at the same time to speed up this development. ..."
"... "Iraq's Finance Ministry that the country had started exporting 100,000 barrels per day (bpd) of crude oil to China in October as part of the 20-year oil-for-infrastructure deal agreed between the two countries." ..."
"... "For Iraq and Iran, China's plans are particularly far-reaching, OilPrice.com has been told by a senior oil industry figure who works closely with Iran's Petroleum Ministry and Iraq's Oil Ministry. China will begin with the oil and gas sector and work outwards from that central point. In addition to being granted huge reductions on buying Iranian oil and gas, China is to be given the opportunity to build factories in both Iran and Iraq – and build-out infrastructure, such as railways – overseen by its own management staff from Chinese companies. These are to have the same operational structure and assembly lines as those in China, so that they fit seamlessly into various Chinese companies' assembly lines' process for whatever product a particular company is manufacturing, whilst also being able to use the still-cheap labour available in both Iraq and Iraq." ..."
"... Hudson is so good. He's massively superior to most so called military analysts and alternative bloggers on the net. He can clearly see the over arching picture and how the military is used to protect and project it. The idea that the US is going to leave the middle east until they are forced to is so blind as to be ridiculous. ..."
"... I'd never thought of that "stationary aircraft carrier" comparison between Israel and the British, very apt. ..."
"... Trump et al assassinated someone who was on a diplomatic mission. This action was so far removed from acceptable behavior that it must have been considered to be "by any means and at all costs". ..."
"... This article, published by Strategic Culture, features a translation of Mahdi's speech to the Iraqi parliament in which he states that Trump threatened him with assassination and the US admitted to killing hundreds of demonstrators using Navy SEAL snipers. ..."
"... This description provided by Mr Hudson is no Moore than the financial basis behind the Cebrowski doctrine instituted on 9/11. https://www.voltairenet.org/article ..."
"... "The leading country breaking up US hegemony obviously is the United States itself. That is Trump's major contribution The United States is now turning on the screws demanding that other countries sacrifice their growth in order to finance the U.S. unipolar empire." ..."
"... The US govt. have long since paid off most every European politician. Thusly, Europe, as separate nations that should be remain still under the yolk of the US Financial/Political/Military power. ..."
"... In any event, it is the same today. Energy underlies, not only the military but, all of world civilization. Oil and gas are overwhelmingly the source of energy for the modern world. Without it, civilization collapses. Thus, he who controls oil (and gas) controls the world. ..."
"... the link between the US $$$ and Saudi Oil, is the absolute means of the American Dollar to reign complete. This payment system FEEDS both the US Military, but WALL STREET, hedge funds, the US/EU oligarchs – to name just a few entities. ..."
Introduction: After posting Michael Hudson's article "America
Escalates its "Democratic" Oil War in the Near East" on the blog, I decided to ask
Michael to reply to a few follow-up questions. Michael very kindly agreed. Please see our
exchange below.
The Saker
-- -- -
The Saker: Trump has been accused of not thinking forward, of not having a long-term
strategy regarding the consequences of assassinating General Suleimani. Does the United States
in fact have a strategy in the Near East, or is it only ad hoc?
Michael Hudson: Of course American strategists will deny that the recent actions do not
reflect a deliberate strategy, because their long-term strategy is so aggressive and
exploitative that it would even strike the American public as being immoral and offensive if
they came right out and said it.
President Trump is just the taxicab driver, taking the passengers he has accepted –
Pompeo, Bolton and the Iran-derangement syndrome neocons – wherever they tell him they
want to be driven. They want to pull a heist, and he's being used as the getaway driver (fully
accepting his role). Their plan is to hold onto the main source of their international revenue:
Saudi Arabia and the surrounding Near Eastern oil-export surpluses and money. They see the US
losing its ability to exploit Russia and China, and look to keep Europe under its control by
monopolizing key sectors so that it has the power to use sanctions to squeeze countries that
resist turning over control of their economies and natural rentier monopolies to US buyers. In
short, US strategists would like to do to Europe and the Near East just what they did to Russia
under Yeltsin: turn over public infrastructure, natural resources and the banking system to
U.S. owners, relying on US dollar credit to fund their domestic government spending and private
investment.
This is basically a resource grab. Suleimani was in the same position as Chile's Allende,
Libya's Qaddafi, Iraq's Saddam. The motto is that of Stalin: "No person, no problem."
The Saker: Your answer raises a question about Israel: In your recent article you only
mention Israel twice, and these are only passing comments. Furthermore, you also clearly say
the US Oil lobby as much more crucial than the Israel Lobby, so here is my follow-up question
to you: On what basis have you come to this conclusion and how powerful do you believe the
Israel Lobby to be compared to, say, the Oil lobby or the US Military-Industrial Complex? To
what degree do their interests coincide and to what degree to they differ?
Michael Hudson: I wrote my article to explain the most basic concerns of U.S. international
diplomacy: the balance of payments (dollarizing the global economy, basing foreign central bank
savings on loans to the U.S. Treasury to finance the military spending mainly responsible for
the international and domestic budget deficit), oil (and the enormous revenue produced by the
international oil trade), and recruitment of foreign fighters (given the impossibility of
drafting domestic U.S. soldiers in sufficient numbers). From the time these concerns became
critical to today, Israel was viewed as a U.S. military base and supporter, but the U.S. policy
was formulated independently of Israel.
I remember one day in 1973 or '74 I was traveling with my Hudson Institute colleague Uzi
Arad (later a head of Mossad and advisor to Netanyahu) to Asia, stopping off in San Francisco.
At a quasi-party, a U.S. general came up to Uzi and clapped him on the shoulder and said,
"You're our landed aircraft carrier in the Near East," and expressed his friendship.
Uzi was rather embarrassed. But that's how the U.S. military thought of Israel back then. By
that time the three planks of U.S. foreign policy strategy that I outlined were already firmly
in place.
Of course Netanyahu has applauded U.S. moves to break up Syria, and Trump's assassination
choice. But the move is a U.S. move, and it's the U.S. that is acting on behalf of the dollar
standard, oil power and mobilizing Saudi Arabia's Wahabi army.
Israel fits into the U.S.-structured global diplomacy much like Turkey does. They and other
countries act opportunistically within the context set by U.S. diplomacy to pursue their own
policies. Obviously Israel wants to secure the Golan Heights; hence its opposition to Syria,
and also its fight with Lebanon; hence, its opposition to Iran as the backer of Assad and
Hezbollah. This dovetails with US policy.
But when it comes to the global and U.S. domestic response, it's the United States that is
the determining active force. And its concern rests above all with protecting its cash cow of
Saudi Arabia, as well as working with the Saudi jihadis to destabilize governments whose
foreign policy is independent of U.S. direction – from Syria to Russia (Wahabis in
Chechnya) to China (Wahabis in the western Uighur region). The Saudis provide the underpinning
for U.S. dollarization (by recycling their oil revenues into U.S. financial investments and
arms purchases), and also by providing and organizing the ISIS terrorists and coordinating
their destruction with U.S. objectives. Both the Oil lobby and the Military-Industrial Complex
obtain huge economic benefits from the Saudis.
Therefore, to focus one-sidedly on Israel is a distraction away from what the US-centered
international order really is all about.
The Saker: In your recent article you wrote: " The assassination was intended to escalate
America's presence in Iraq to keep control the region's oil reserves ." Others believe that
the goal was precisely the opposite, to get a pretext to remove the US forces from both Iraq
and Syria. What are your grounds to believe that your hypothesis is the most likely one?
Michael Hudson: Why would killing Suleimani help remove the U.S. presence? He was the
leader of the fight against ISIS, especially in Syria. US policy was to continue using ISIS to
permanently destabilize Syria and Iraq so as to prevent a Shi'ite crescent reaching from Iran
to Lebanon – which incidentally would serve as part of China's Belt and Road initiative.
So it killed Suleimani to prevent the peace negotiation. He was killed because he had been
invited by Iraq's government to help mediate a rapprochement between Iran and Saudi Arabia.
That was what the United States feared most of all, because it effectively would prevent its
control of the region and Trump's drive to seize Iraqi and Syrian oil.
So using the usual Orwellian doublethink, Suleimani was accused of being a terrorist, and
assassinated under the U.S. 2002 military Authorization Bill giving the President to move
without Congressional approval against Al Qaeda. Trump used it to protect Al Qaeda's
terrorist ISIS offshoots.
Given my three planks of U.S. diplomacy described above, the United States must remain in
the Near East to hold onto Saudi Arabia and try to make Iraq and Syria client states equally
subservient to U.S. balance-of-payments and oil policy.
Certainly the Saudis must realize that as the buttress of U.S. aggression and terrorism in
the Near East, their country (and oil reserves) are the most obvious target to speed the
parting guest. I suspect that this is why they are seeking a rapprochement with Iran. And I
think it is destined to come about, at least to provide breathing room and remove the threat.
The Iranian missiles to Iraq were a demonstration of how easy it would be to aim them at Saudi
oil fields. What then would be Aramco's stock market valuation?
The Saker: In your article you wrote: " The major deficit in the U.S. balance of payments
has long been military spending abroad. The entire payments deficit, beginning with the Korean
War in 1950-51 and extending through the Vietnam War of the 1960s, was responsible for forcing
the dollar off gold in 1971. The problem facing America's military strategists was how to
continue supporting the 800 U.S. military bases around the world and allied troop support
without losing America's financial leverage. " I want to ask a basic, really primitive
question in this regard: how cares about the balance of payments as long as 1) the US continues
to print money 2) most of the world will still want dollars. Does that not give the US an
essentially "infinite" budget? What is the flaw in this logic?
Michael Hudson: The U.S. Treasury can create dollars to spend at home, and the Fed can
increase the banking system's ability to create dollar credit and pay debts denominated in US
dollars. But they cannot create foreign currency to pay other countries, unless they willingly
accept dollars ad infinitum – and that entails bearing the costs of financing the U.S.
balance-of-payments deficit, getting only IOUs in exchange for real resources that they sell to
U.S. buyers.
This is the situation that arose half a century ago. The United States could print dollars
in 1971, but it could not print gold.
In the 1920s, Germany's Reichsbank could print deutsche marks – trillions of them.
When it came to pay Germany's foreign reparations debt, all it could do was to throw these
D-marks onto the foreign exchange market. That crashed the currency's exchange rate, forcing up
the price of imports proportionally and causing the German hyperinflation.
The question is, how many surplus dollars do foreign governments want to hold. Supporting
the dollar standard ends up supporting U.S. foreign diplomacy and military policy. For the
first time since World War II, the most rapidly growing parts of the world are seeking to
de-dollarize their economies by reducing reliance on U.S. exports, U.S. investment, and U.S.
bank loans. This move is creating an alternative to the dollar, likely to replace it with
groups of other currencies and assets in national financial reserves.
The Saker: In the same article you also write: " So maintaining the dollar as the world's
reserve currency became a mainstay of U.S. military spending. " We often hear people say
that the dollar is about to tank and that as soon as that happens, then the US economy (and,
according to some, the EU economy too) will collapse. In the intelligence community there is
something called tracking the "indicators and warnings". My question to you is: what are the
economic "indicators and warnings" of a possible (probable?) collapse of the US dollar followed
by a collapse of the financial markets most tied to the Dollar? What shall people like myself
(I am an economic ignoramus) keep an eye on and look for?
Michael Hudson: What is most likely is a slow decline, largely from debt deflation
and cutbacks in social spending, in the Eurozone and US economies. Of course, the decline will
force the more highly debt-leveraged companies to miss their bond payments and drive them into
insolvency. That is the fate of Thatcherized economies. But it will be long and painfully drawn
out, largely because there is little left-wing socialist alternative to neoliberalism at
present.
Trump's protectionist policies and sanctions are forcing other countries to become
self-reliant and independent of US suppliers, from farm crops to airplanes and military arms,
against the US threat of a cutoff or sanctions against repairs, spare parts and servicing.
Sanctioning Russian agriculture has helped it become a major crop exporter, and to become much
more independent in vegetables, dairy and cheese products. The US has little to offer
industrially, especially given the fact that its IT communications are stuffed with US
spyware.
Europe therefore is facing increasing pressure from its business sector to choose the non-US
economic alliance that is growing more rapidly and offers a more profitable investment market
and more secure trade supplier. Countries will turn as much as possible (diplomatically as well
as financially and economically) to non-US suppliers because the United States is not reliable,
and because it is being shrunk by the neoliberal policies supported by Trump and the Democrats
alike. A byproduct probably will be a continued move toward gold as an alternative do the
dollar in settling balance-of-payments deficits.
The Saker: Finally, my last question: which country out there do you see as the most capable
foe of the current US-imposed international political and economic world order? whom do you
believe that US Deep State and the Neocons fear most? China? Russia? Iran? some other country?
How would you compare them and on the basis of what criteria?
Michael Hudson: The leading country breaking up US hegemony obviously is the United States
itself. That is Trump's major contribution. He is uniting the world in a move toward
multi-centrism much more than any ostensibly anti-American could have done. And he is doing it
all in the name of American patriotism and nationalism – the ultimate Orwellian
rhetorical wrapping!
Trump has driven Russia and China together with the other members of the Shanghai
Cooperation Organization (SCO), including Iran as observer. His demand that NATO join in US oil
grabs and its supportive terrorism in the Near East and military confrontation with Russia in
Ukraine and elsewhere probably will lead to European "Ami go home" demonstrations against NATO
and America's threat of World War III.
No single country can counter the U.S. unipolar world order. It takes a critical mass of
countries. This already is taking place among the countries that you list above. They are
simply acting in their own common interest, using their own mutual currencies for trade and
investment. The effect is an alternative multilateral currency and trading area.
The United States is now turning on the screws demanding that other countries sacrifice
their growth in order to finance the U.S. unipolar empire. In effect, foreign countries are
beginning to respond to the United States what the ten tribes of Israel said when they withdrew
from the southern kingdom of Judah, whose king Rehoboam refused to lighten his demands (1 Kings
12). They echoed the cry of Sheba son of Bikri a generation earlier: "Look after your own
house, O David!" The message is: What do other countries have to gain by remaining in the US
unipolar neoliberalized world, as compared to using their own wealth to build up their own
economies? It's an age-old problem.
The dollar will still play a role in US trade and investment, but it will be as just another
currency, held at arms length until it finally gives up its domineering attempt to strip other
countries' wealth for itself. However, its demise may not be a pretty sight.
The Saker: I thank you very much for your time and answers!
Another one that absolutely stands for me out is the below link to a recent interview of
Hussein Askary.
As I wrote a few days ago IMO this too is a wonderful insight into the utterly complicated
dynamics of the tinderbox that the situation in Iran and Iraq has become.
Conflict in the ME has traditionally almost always been about oil [and of course Israel].
This situation is different. It is only partially about oil and Israel, but OVERWHHEMINGLY it
is about the BRI.
The salient factor as I see it is the Oil for Technology initiative that Iraq signed with
China shortly before it slid into this current mess.
This was a mechanism whereby China would buy Iraq oil and these funds would be used
directly to fund infrastructure and self-sufficiency initiatives and technologies that would
help to drag Iraq out of the complete disaster that the US war had created in this country. A
key part of this would be that China would also make extra loans available at the same time
to speed up this development.
In essence, this would enable the direct and efficient linking of Iraq into the BRI
project. Going forward the economic gains and the political stability that could come out of
this would be a completely new paradigm in the recovery of Iraq both economically and
politically. Iraq is essential for a major part of the dynamics of the BRI because of its
strategic location and the fact that it could form a major hub in the overall network.
It absolutely goes without saying that the AAA would do everything the could to wreck this
plan. This is their playbook and is exactly what they have done. The moronic and
extraordinarily impulsive Trump subsequently was easily duped into being a willing and
idiotic accomplice in this plan.
The positive in all of this is that this whole scheme will backfire spectacularly for the
perpetrators and will more than likely now speed up the whole process in getting Iraq back on
track and working towards stability and prosperity.
Please don't anyone try to claim that Trump is part of any grand plan nothing could be
further from the truth he is nothing more than a bludgeoning imbecile foundering around,
lashing out impulsively indiscriminately. He is completely oblivious and ignorant as to the
real picture.
I urge everyone involved in this Saker site to put aside an hour and to listen very
carefully to Askary's insights. This is extremely important and could bring more clarity to
understanding the situation than just about everything else you have read put together. There
is hope, and Askary highlights the huge stakes that both Russia and China have in the
region.
This is a no brainer. This is the time for both Russia and China to act and to decisively.
They must cooperate in assisting both Iraq and Iran to extract themselves from the current
quagmire the one that the vicious Hegemon so cruelly and thoughtlessly tossed them into.
Also interesting is what Simon Watkins reports in his recent article entitled "Is Iraq About
To Become A Chinese Client State?"
To quote from the article:
"Iraq's Finance Ministry that the country had started exporting 100,000 barrels per day
(bpd) of crude oil to China in October as part of the 20-year oil-for-infrastructure deal
agreed between the two countries."
and
"For Iraq and Iran, China's plans are particularly far-reaching, OilPrice.com has been
told by a senior oil industry figure who works closely with Iran's Petroleum Ministry and
Iraq's Oil Ministry. China will begin with the oil and gas sector and work outwards from that
central point. In addition to being granted huge reductions on buying Iranian oil and gas,
China is to be given the opportunity to build factories in both Iran and Iraq – and
build-out infrastructure, such as railways – overseen by its own management staff from
Chinese companies. These are to have the same operational structure and assembly lines as
those in China, so that they fit seamlessly into various Chinese companies' assembly lines'
process for whatever product a particular company is manufacturing, whilst also being able to
use the still-cheap labour available in both Iraq and Iraq."
and
"The second key announcement in this vein made last week from Iraq was that the Oil
Ministry has completed the pre-qualifying process for companies interested in participating
in the Iraqi-Jordanian oil pipeline project. The U$5 billion pipeline is aimed at carrying
oil produced from the Rumaila oilfield in Iraq's Basra Governorate to the Jordanian port of
Aqaba, with the first phase of the project comprising the installation of a
700-kilometre-long pipeline with a capacity of 2.25 million bpd within the Iraqi territories
(Rumaila-Haditha). The second phase includes installing a 900-kilometre pipeline in Jordan
between Haditha and Aqaba with a capacity of 1 million bpd. Iraq's Oil Minister – for
the time being, at least – Thamir Ghadhban added that the Ministry has formed a team to
prepare legal contracts, address financial issues and oversee technical standards for
implementing the project, and that May will be the final month in which offers for the
project from the qualified companies will be accepted and that the winners will be announced
before the end of this year. Around 150,000 barrels of the oil from Iraq would be used for
Jordan's domestic needs, whilst the remainder would be exported through Aqaba to various
destinations, generating about US$3 billion a year in revenues to Jordan, with the rest going
to Iraq. Given that the contractors will be expected to front-load all of the financing for
the projects associated with this pipeline, Baghdad expects that such tender offers will be
dominated by Chinese and Russian companies, according to the Iran and Iraq source."
Hudson is so good. He's massively superior to most so called military analysts and
alternative bloggers on the net. He can clearly see the over arching picture and how the
military is used to protect and project it. The idea that the US is going to leave the middle
east until they are forced to is so blind as to be ridiculous.
They will not sacrifice the
(free) oil until booted out by a coalition of Arab countries threatening to over run them and
that is why the dollar hegemonys death will be slow, long and drawn out and they will do
anything, any dirty trick in the book, to prevent Arab/Persian unity. Unlike many peoples
obsession with Israel and how important they feel themselves to be I think Hudson is correct
again. They are the middle eastern version of the British – a stationary aircraft
carrier who will allow themselves to be used and abused whilst living under the illusion they
are major players. They aren't. They're bit part players in decline, subservient to the great
dollar and oil pyramid scheme that keeps America afloat. If you want to beat America you have
to understand the big scheme, that and the utter insanity that backs it up. It is that
insanity of the leites, the inability to allow themselves to be 'beaten' that will keep
nuclear exchange as a real possibility over the next 10 to 15 years. Unification is the only
thing that can stop it and trying to unite so many disparate countries (as the Russians are
trying to do despite multiple provocations) is where the future lies and why it will take so
long. It is truly breath taking in such a horrific way, as Hudson mentions, that to allow the
world to see its 'masters of the universe' pogram to be revealed:
"Of course American strategists will deny that the recent actions do not reflect a
deliberate strategy, because their long-term strategy is so aggressive and exploitative that
it would even strike the American public as being immoral and offensive if they came right
out and said it."
Would be to allow it to be undermined at home and abroad. God help us all.
Clever would be a better word. Looking at my world globe, I see Italy, Greece, and Turkey on
that end of the Mediterranean. Turkey has been in NATO since 1952. Crete and Cyprus are also
right there. Doesn't Hudson own a globe or regional map?
That a US Admiral would be gushing about the Apartheid state 7 years after the attempted
destruction of the USS Liberty is painful to consider. I'd like to disbelieve the story, but
it's quite likely there were a number of high-ranking ***holes in a Naval Uniform.
The world situation reminds us of the timeless fable by Aesop of The North Wind and the Sun.
Trump et al assassinated someone who was on a diplomatic mission. This action was so far
removed from acceptable behavior that it must have been considered to be "by any means and at
all costs".
Perhaps the most potent weapon Iran or anyone else has at this critical juncture, is not
missiles, but diplomacy.
"Therefore, to focus one-sidedly on Israel is a distraction away from what the US-centered
international order really is all about."
Thank you for saying this sir. In the US and around the world many people become
obsessively fixated in seeing a "jew" or zionist behind every bush. Now the Zionists are
certinly an evil, blood thirsty bunch, and certainly deserve the scorn of the world, but i
feel its a cop out sometimes. A person from the US has a hard time stomaching the actions of
their country, so they just hoist all the unpleasentries on to the zionists. They put it all
on zionisim, and completly fail to mention imperialism. I always switced back and forth on
the topic my self. But i cant see how a beachead like the zionist state, a stationary
carrier, can be bigger than the empire itself. Just look at the major leaders in the
resistance groups, the US was always seen as the ultimate obstruction, while israel was seen
as a regional obstruction. Like sayyed hassan nasrallah said in his recent speech about the
martyrs, that if the US is kicked out, the Israelis might just run away with out even
fighting. I hate it when people say "we are in the middle east for israel" when it can easily
be said that "israel is still in the mid east because of the US." If the US seized to exist
today, israel would fall rather quickly. If israel fell today the US would still continue
being an imperalist, bloodthirsty entity.
The Deeper Story behind the Assassination of Soleimani
This article, published by Strategic Culture, features a translation of Mahdi's speech to
the Iraqi
parliament in which he states that Trump threatened him with assassination and the US
admitted
to killing hundreds of demonstrators using Navy SEAL snipers.
This description provided by Mr Hudson is no Moore than the financial basis behind the
Cebrowski doctrine instituted on 9/11.
https://www.voltairenet.org/article
I wish the Saker had asked Mr Hudson about some crucial recent events to get his opinion
with regards to US foreign policy. Specifically, how does the emergence of cryptocurrency
relate to dollar finance and the US grand strategy? A helpful tool for the hegemon or the
emergence of a new currency that prevents unlimited currency printing? Finally, what is
global warming and the associated carbon credit system? The next planned model of continuing
global domination and balance of payments? Or true organic attempt at fair energy production
and management?
With all due respect, these are huge questions in themselves and perhaps could to be
addressed in separate interviews.
IMO it doesn't always work that well to try to cover too much ground in just one giant
leap.
I have never understood the Cebrowski doctrine. How does the destruction of Middle Eastern state structures allow the US to control Middle
East Oil? The level of chaos generated by such an act would seem to prevent anyone from controlled
the oil.
Dr. Hudson often appears on RT's "Keiser Report" where he covers many contemporary topics
with its host Max Keiser. Many of the shows transcripts are available at Hudson's website . Indeed, after the two Saker items,
you'll find three programs on the first page. Using the search function at his site, you'll
find the two articles he's written that deal with bitcoin and cryptocurrencies, although I
think he's been more specific in the TV interviews.
As for this Q&A, its an A+. Hudson's 100% correct to playdown the Zionist influence
given the longstanding nature of the Outlaw US Empire's methods that began well before the
rise of the Zionist Lobby, which in reality is a recycling of aid dollars back to Congress in
the form of bribes.
Nils: Good Article. The spirit of Nihilism.
Quote from Neocon Michael Ladeen.
"Creative destruction is our middle name, both within our own society and abroad. We tear
down the old order every day, from business to science, literature, art, architecture, and
cinema to politics and the law. Our enemies have always hated this whirlwind of energy and
creativity, which menaces their traditions (whatever they may be) and shames them for their
inability to keep pace. Seeing America undo traditional societies, they fear us, for they do
not wish to be undone. They cannot feel secure so long as we are there, for our very
existence -- our existence, not our politics -- threatens their legitimacy. They must attack
us in order to survive, just as we must destroy them to advance our historic mission."
@NILS As far as crypto currency goes it is a brilliant idea in concept. But since during the
Bush years we have been shown multiple times, who actually owns [and therefore controls] the
internet. Many times now we have also been informed that through the monitoring capability's
of our defense agency's, they are recording every key stroke. IMO, with the flip of a switch,
we can shut down the internet. At the very least, that would stop us from being able to trade
in crypto, but they have e-files on each of us. They know our passwords, or can easily access
them. That does not give me confidence in e=currency during a teotwawki situation.
One thing that troubles me about the petrodollar thesis is that ANNUAL trade in oil is about
2 trillion DAILY trade in $US is 4 trillion. I can well believe the US thinks oil is the
bedrock if dollar hegemony but is it? I see no alternative to US dollar hegemony.
The lines that really got my attention were these:
"The leading country breaking up US hegemony obviously is the United States itself. That
is Trump's major contribution The United States is now turning on the screws demanding that
other countries sacrifice their growth in order to finance the U.S. unipolar empire."
That is so completely true. I have wondered why – to date – there had not been
more movement by Europe away from the United States. But while reading the article the
following occurred to me. Maybe Europe is awaiting the next U.S. election. Maybe they hope
that a new president (someone like Biden) might allow Europe to keep more of the
"spoils."
If that is true, then a re-election of Trump will probably send Europe fleeing for the
exits. The Europeans will be cutting deals with Russia and China like the store is on
fire.
The critical player in forming the EU WAS/IS the US financial Elites. Yes, they had many
ultra powerful Europeans, especially Germany, but it was the US who initiated the EU.
Purpose? For the US Financial Powerhouses & US politicians to "take Europe captive."
Notice the similarities: the EU has its Central Bank who communicates with the private
Banksters of the FED. Much austerity has ensued, especially in Southern nations: Greece,
Italy, etc. Purpose: to smash unions, worker's pay, eliminate unions, and basically allowing
US/EU Financial capital to buy out Italy, most of Greece, and a goodly section of Spain and
Portugal.
The US govt. have long since paid off most every European politician. Thusly, Europe, as
separate nations that should be remain still under the yolk of the US
Financial/Political/Military power.
I have a hard time wrapping my head around this but it sounds like he is saying that the U.S.
has a payment deficit problem which is solved by stealing the world's oil supplies. To do
this they must have a powerful, expensive military. But it is primarily this military which
is the main cause of the balance deficit. So it is an eternally fuelled problem and solution.
If I understand this, what it actually means is that we all live on a plantation as slaves
and everything that is happening is for the benefit of the few wealthy billionaires. And they
intend to turn the entire world into their plantation of slaves. They may even let you live
for a while longer.
I didn't know this until I read a history of World War I.
As you know, World War One was irresolvable, murderous, bloody trench warfare. People
would charge out of the trenches trying to overrun enemy positions only to be cutdown by the
super weapon of the day – the machine gun. It was an unending bloody stalemate until
the development of the tank. Tanks were immune to machine gun fire coming from the trenches
and could overrun enemy positions. In the aftermath of that war, it became apparently that
mechanization had become crucial to military supremacy. In turn, fuel was crucial to
mechanization. Accordingly, in the Sykes Picot agreement France and Britain divided a large
amount of Middle Eastern oil between themselves in order to assure military dominance. (The
United States had plenty of their own oil at that time.)
In any event, it is the same today. Energy underlies, not only the military but, all of
world civilization. Oil and gas are overwhelmingly the source of energy for the modern world.
Without it, civilization collapses. Thus, he who controls oil (and gas) controls the
world.
That is one third of the story. The second third is this.
Up till 1971, the United States dollar was the most trusted currency in the world. The
dollar was backed by gold and lots and lots of it. Dollars were in fact redeemable in gold.
However, due to Vietnam War, the United States started running huge balance of payments
deficits. Other countries – most notably France under De Gaulle – started cashing
in dollars in exchange for that gold. Gold started flooding out of the United States. At that
point Nixon took the United States off of the gold standard. Basically stating that the
dollar was no longer backed by gold and dollars could not be redeemed for gold. That caused
an international payments problem. People would no longer accept dollars as payment since the
dollar was not backed up by anything. The American economy was in big trouble since they were
running deficits and people would no longer take dollars on faith.
To fix the problem, Henry Kissinger convinced the Saudis to agree to only accept dollars
in payment for oil – no matter who was the buyer. That meant that nations throughout
the world now needed dollars in order to pay for their energy needs. Due to this, the dollars
was once again the most important currency in the world since – as noted above –
energy underlies everything in modern industrial cultures. Additionally, since dollars were
now needed throughout the world, it became common to make all trades for any product in
highly valued dollars. Everyone needed dollars for every thing, oil or not.
At that point, the United States could go on printing dollars and spending them since a
growing world economy needed more and more dollars to buy oil as well as to trade everything
else.
That leads to the third part of the story. In order to convince the Saudis to accept only
dollars in payments for oil (and to have the Saudis strong arm other oil producers to do the
same) Kissinger promised to protect the brutal Saudi regime's hold on power against a restive
citizenry and also to protect the Saudi's against other nations. Additionally, Kissinger made
an implicit threat that if the Saudi's did not agree, the US would come in and just take
their oil. The Saudis agreed.
Thus, the three keys to dominance in the modern world are thus: oil, dollars and the
military.
Thus, Hudson ties in the three threads in his interview above. Oil, Dollars, Military.
That is what holds the empire together.
Thank you for thinking through this. Yes, the link between the US $$$ and Saudi Oil, is the
absolute means of the American Dollar to reign complete. This payment system FEEDS both the
US Military, but WALL STREET, hedge funds, the US/EU oligarchs – to name just a few
entities.
I should make one note only to this. That "no man, no problem" was Stalin's motto is a myth.
He never said that. It was invented by a writer Alexei Rybnikov and inserted in his book "The
Children of Arbat".
Wow! Absolutely beautiful summation of the ultimate causes that got us where we are and, if
left intact, will get us to where we're going!
So, the dreamer says: If only we could throw-off our us-vs-them BS political-economic
ideology & religious doctrine-faith issues, put them into live-and-let-live mode, and see
that we are all just humans fighting over this oil resource to which our modern economy (way
of life) is addicted, then we might be able to hammer out some new rules for interacting, for
running an earth-resource sustainable and fair global economy We do at least have the
technology to leave behind our oil addiction, but the political-economic will still is
lacking. How much more of the current insanity must we have before we get that will? Will we
get it before it's too late?
Only if we, a sufficient majority from the lowest economic classes to the top elites and
throughout all nations, are able to psychologically-spiritually internalize the two
principles of Common Humanity and Spaceship Earth soon enough, will we stop our current slide
off the cliff into modern economic collapse and avert all the pain and suffering that's
already now with us and that will intensify.
The realist says we're not going to stop that slide and it's the only way we're going to
learn, if we are indeed ever going to learn.
Thank you for this excellent interview. You ask the kind of questions that we would all like
to ask. It's regrettable that Chalmers Johnson isn't still alive. I believe that you and he
would have a lot in common.
Naxos has produced an incredible, unabridged cd audiobook of
Gibbon's Decline and Fall of the Roman Empire. One of Gibbon's observations really resonates
today: "Assassination is the last resource of cowards". Thanks again.
I agree that, today, protecting the Dollar Standard is the main national security
objective of the USA. That is so because issuing the universal fiat currency is a
conditio sine qua non of keeping the financial superpower status.
I also agree that the Petrodollar is the base that sustains the Dollar Standard.
But I disagree with the rest:
1) the Cold War didn't begin in 1945, but in 1917 - right after the October Revolution.
There's overwhelming documental evidence of that and, in fact, the years of 1943-1945 was the
only break it had. Until Stalingrad, the Western allies were still waiting to see if the USSR
and the Third Reich could still mutually anihilate themselves (yes, it is a myth the Allies
were really allies from 1939, but that's not a very simple demonstration);
2) in the aftermath of WWII, the USA emerged as both the industrial and financial
superpower in the capitalist world (i.e. the West). But this was an accidental - and very
unlikely - alignment of events. The USA always had imperial ambitions from its foundation
(the Manifest Destiny), but there's no evidence it was scheming to dominate the world before
1945. The American ascension was more a fruit of the European imperial superpowers destroying
themselves than by any American (or Jewish, as the far-right likes to speculate) design;
3) the USSR had nothing to do with Bretton Woods. BW was a strictly capitalist affair. And
it could not be any difference: the USSR was a socialist country, therefore, it didn't have
money-capital (money in the capitalist system has three functions: reserve of value, means of
exchange and means of payment). The only way it had to trade with the capitalist half of the
world was to exchange essential commodities (oil) for hard currency, with which it bought
what it needed for its own development (mainly, high technological machines which it could
copy and later develop on). So, the USSR didn't "balk" at BW - it was literally impossible
for it to pertain to the agreement.
Michael Hudson is not the only one who's come to understand that maintaining the
reserve-currency status of the US dollar (the "dollar hegemony") is the primary goal of US
foreign policy. Indeed, it's been the primary goal of US foreign policy since the end of
World War II, when the Bretton Woods agreement was put into effect. Notably, the Soviets
ended up balking at that agreement, and the Cold War did not start until afterwards. This
means that even the Cold War was not really about ideology - it was about money.
It's also important to note that the point of the "petrodollar" is to ensure that
petroleum - one of the most globally traded commodities and a commodity that's fundamental to
the global economy - is traded primarily, if not exclusively, in terms of the US dollar.
Ensuring that as much global/international trade happens in US dollars helps ensure that the
US dollar keeps its reserve-currency status, because it raises the foreign demand for US
dollars.
I agree that, today, protecting the Dollar Standard is the main national security
objective of the USA. That is so because issuing the universal fiat currency is a
conditio sine qua non of keeping the financial superpower status.
I also agree that the Petrodollar is the base that sustains the Dollar Standard.
But I disagree with the rest:
1) the Cold War didn't begin in 1945, but in 1917 - right after the October Revolution.
There's overwhelming documental evidence of that and, in fact, the years of 1943-1945 was the
only break it had. Until Stalingrad, the Western allies were still waiting to see if the USSR
and the Third Reich could still mutually anihilate themselves (yes, it is a myth the Allies
were really allies from 1939, but that's not a very simple demonstration);
2) in the aftermath of WWII, the USA emerged as both the industrial and financial
superpower in the capitalist world (i.e. the West). But this was an accidental - and very
unlikely - alignment of events. The USA always had imperial ambitions from its foundation
(the Manifest Destiny), but there's no evidence it was scheming to dominate the world before
1945. The American ascension was more a fruit of the European imperial superpowers destroying
themselves than by any American (or Jewish, as the far-right likes to speculate) design;
3) the USSR had nothing to do with Bretton Woods. BW was a strictly capitalist affair. And
it could not be any difference: the USSR was a socialist country, therefore, it didn't have
money-capital (money in the capitalist system has three functions: reserve of value, means of
exchange and means of payment). The only way it had to trade with the capitalist half of the
world was to exchange essential commodities (oil) for hard currency, with which it bought
what it needed for its own development (mainly, high technological machines which it could
copy and later develop on). So, the USSR didn't "balk" at BW - it was literally impossible
for it to pertain to the agreement.
Correction: the three functions of money in capitalism are reserve/store of value, means
of exchange and unit of account . I basically wrote "means of exchange" twice in the
original comment.
Hello! Michael Hudson first set forth the methodology of the Outlaw US Empire's financial
control of the world via his book Super Imperialism: The Economic Strategy of American
Empire in 1972. In 2003, he issued an updated edition which you can download for free
here .
If you're interested, here's an interview he gave while in China that's autobiographical
. And here's his most recent Resume/CV/Bibliography , although it doesn't
go into as much detail about his recent work as he does in and forgive them their debts:
Lending, Foreclosure, and Redemption From Bronze Age Finance to the Jubilee Year , which
for me is fascinating.
His most recent TV appearances are here and here .
Bingo! You're the first person here to make that connection aside from myself. You'll note
from Hudson's
assessment of Soleimani's killing he sees the Outlaw US Empire as using the Climate
Crisis as a weapon:
"America's attempt to maintain this buttress explains U.S. opposition to any foreign
government steps to reverse global warming and the extreme weather caused by the world's
U.S.-sponsored dependence on oil. Any such moves by Europe and other countries would reduce
dependence on U.S. oil sales, and hence on the U.S's ability to control the global oil spigot
as a means of control and coercion. These are viewed as hostile acts.
"Oil also explains U.S. opposition to Russian oil exports via Nordstream. U.S. strategists
want to treat energy as a U.S. national monopoly. Other countries can benefit in the way that
Saudi Arabia has done – by sending their surpluses to the U.S. economy – but not
to support their own economic growth and diplomacy. Control of oil thus implies support for
continued global warming as an inherent part of U.S. strategy....
"This strategy will continue, until foreign countries reject it. If Europe and other
regions fail to do so, they will suffer the consequences of this U.S. strategy in the form of
a rising U.S.-sponsored war via terrorism, the flow of refugees, and accelerated global
warming (and extreme weather)."
@Cynica #38
Financially, the US dollar as reserve currency is enormously beneficial to the US
government's ability to spend.
And oil has historically been both a tactical and a strategic necessity; when the US was
importing half its oil, this is a lot of money. 8 million bpd @ $50/barrel = $146B. Add in
secondary value add like transport, refining, downstream industries, etc and it likely
triples the impact or more - but this is only tactical.
Worldwide, the impact is 10X = $1.5 trillion annually. Sure, this is a bit under 10% of the
$17.7T in world trade in 2017, but it serves as an "anchor tenant" to the idea of world
reserve currency. A second anchor is the overall role of US trade, which was $3.6T in 2016
(imports only).
If we treat central bank reserves as a proxy for currency used in trade, this means 60%+ of
the $17.7T in trade is USD. $3.6T is direct, but the $7 trillion in trade that doesn't impact
the US is the freebie. To put this in perspective, the entire monetary float of the USD
domestically is about $3.6T.
USD as world reserve currency literally doubles (at least) the float - from which the US
government can issue debt (money) to fund its activities. In reality, it is likely a lot more
since foreigners using USD to fund trade means at least some USD in Central Banks, plus the
actual USD in the transaction, plus corporate/individual USD reserves/float.
Again, nothing above is formally linked - I just wanted to convey an idea of just how
advantageous the petrodollar/USD as world trade reserve currency really is.
"U.S.
Economic Warfare and Likely Foreign Defenses" provides numerous methods besides simply
the cessation of dollar use for international commercial transactions. Along with watching
the "Debt Wish 2020" vid linked above, I also suggest reading/watching this program . And lastly, I
suggest reading this analysis
here , although it only tangentially deals with your question.
America's tariffs against China are already showing signs of undermining the global economy
and will create a funding crisis for the Federal Government when it leads to foreigners no
longer buying US Treasury debt and selling down their existing dollar holdings. A subversive
attempt by America to divert global portfolio investment from China by destabilising Hong Kong
will force China into a Plan B to fund its infrastructure plans, which could involve actively
selling down her dollar reserves and hastening the introduction of a new crypto-based trade
settlement currency.
The US budget deficit will then be financed entirely by monetary inflation. Furthermore, the
turn of the credit cycle, made more destructive by trade tariffs, is driving the global and US
economy into a slump , further accelerating all indebted governments' dependency on
inflationary financing. The end result is America's trade policies have been instrumental in
hastening the end of the dollar as the world's reserve currency, ultimately leading to its
destruction.
Introduction
For almost two years President Trump has imposed various tariffs on imported Chinese goods.
He advertised his tactics as hardball from a tough president who knows the art of the deal,
taking his business acumen and applying it to foreign affairs. He even proudly described
himself as a tariff man.
His opening gambit was to impose tariffs on some goods to get leverage over the Chinese,
with the threat that if they didn't cooperate, then further tariffs would be introduced. The
Chinese declined to be cowed by threats, introducing tariffs themselves on US imports,
particularly agricultural products, to bring pressure to bear in turn on President Trump.
Egged on by his trade adviser Peter Navarro and Commerce Secretary Wilbur Ross, Trump has
continued to intensify his tariff policies, oblivious to the damage being done to the global
economy. Putting aside Panglossian statistics, both America and China are now heading for a
recession that is increasingly likely to deepen significantly. America's consumer-driven
economy is yet to reflect much of a slow-down, though producer countries dependent on either or
both economies, such as Germany, are already descending into a manufacturing slump. China's GDP
is registering a growth rate of about 6%, low by Chinese standards, but being no more than a
money total this is just a reflection of the quantity of money still being pumped into the
Chinese economy by the authorities.
As the world descends into an economic contraction, it will not be reflected in government
statistics, because all economies are having increasing quantities of fiat money pumped into
them. Financial market participants naively believe that changes in GDP indicate an economy's
condition. If that was the case, the German economy in 1918-23 was an economic miracle and not
the disaster history has led us to believe. The impoverishment of the masses, just like today's
reported impoverishment of Venezuelans and Zimbabweans must have been misreported, because
nominal GDP was increasing ten or a hundredfold. Then there is the deflator. Ah, the deflator:
a concoction by statisticians who appear to be under a government cosh to keep it as low as
possible. That's easy to deal with: introduce price controls across the board and use those
official prices as a basis for the CPI. Infinite GDP growth is then assured.
That is the ultimate logic of perennial bulls and the errors should be obvious. At some
stage, market participants beholden to the system will awaken to the lie that GDP, nominal or
adjusted, has any statistical value, even in respectable jurisdictions. Banks will be rescued,
and unemployment will rise, but GDP will continue to inflate - sorry, grow. The effect on
prices so far has been subdued. At least, if you believe the official CPI version. Tariffs will
end up blowing a hole in inflation targets while the global economy slumps and borrowing costs
will then rise inexorably.
It's time to discover why the America-China financial war and trade war will end up
undermining the dollar.
US's deep state strategy is stuck in the cold war era
Besides President Trump's policy on tariffs, the permanent staff in the intelligence and
military complexes are the driving force behind Cold War 2 against China and Russia. Russia has
been in their sights since Yalta. Control of the Middle East along with Libya and Afghanistan
have been key objectives. The Western alliance, comprising the US and its European handmaidens,
has been focusing on oil, but at its root is the justification of US military spending. US
taxpayers have been told that the Middle East, North Africa and more recently the Ukraine are
important to stop Russia either dominating global energy supplies or pursuing territorial
ambitions.
Russia's military power is not as strong as projected by US military propagandists. It has
excellent nuclear capability but an underequipped out-of-date military. Who can forget the
sight of Russia's one aircraft carrier, the Admiral Kuznetsov, chugging from the Baltic to the
Mediterranean to come to Syria's aid, breaking down and emitting clouds of black smoke, needing
tugs to nurse it along? It is the naval equivalent of the ghastly Trabant motor car of the
1980s. The most egregious example of Russia's non-nuclear might perhaps, but indicative,
nonetheless.
The same is broadly true of Russia's army. Its capability is limited, and American battle
failures in the field are their own. Russia does not even try to punch above its weight,
choosing to dance round the ring and tire out its opponent that way. Despite its superior
equipment and battlefield technology, America usually then succumbs to its own errors.
As an adversary, China is in a different league to Russia altogether. At least America's
military complex knows not to take China on. Instead, more subversive tactics are deployed, and
this is why Hong Kong has become the pressure point against China, destroying the investment
link for international funds investing in Chinese infrastructure projects.
Logically, America should have accommodated China long ago, recognizing the dollar's role as
the supreme fiat currency would not then be challenged. But that would have led to the entire
military complex being downsized over time: peace is not good for the war business. Without
doubt it would have been economically beneficial for everyone other than the military. American
corporations were happily running manufacturing operations in China and South East Asia as
high-quality processors in their supply chains. Trump's simple world, where China steals
American jobs was never the case.
US Government's developing funding crisis
The statistics in Table 1 summarise America's financial problem.
These figures tell us that since the turn of the millennium 94% of America's accumulated
budget deficit is covered by the accumulated balance of payments deficit. In other words,
almost all the budget deficit is financed directly or indirectly by inward capital flows, and
very little can be attributed to genuine demand for US Treasuries by America's savers.
This result is to be expected, since it reflects an accounting identity at the national
level. The accounting identity tells us that unless there is an increase in national savings, a
budget deficit will be financed by capital arising from the trade deficit. We can also say the
money to cover the budget deficit in the absence of capital inflows and an increase in savings
can only be through monetary inflation. In other words, through the debasement of the currency
substituting for genuine savings.
In practice, foreign-owned dollars do not all go into US Treasuries, and investment outflows
must be taken into account as well. Since 2000, according to Treasury TIC figures these are
approximately $9 trillion, while total investment inflows at about $16 trillion leaves us with
net inflows of $7 trillion, implying that foreign-owned cash and deposits in the US banks will
have expanded to fill the gap between investment flows and the total balance of payments
deficit. And indeed, we find that these balances amount to $4.3 trillion, accounting almost
entirely for the gap between net inflows and the accumulated budget deficit in Table 1.
Obviously, there are other flows involved, but they are not material to the point. In the
absence of an increase in savings, a budget deficit will always lead to a balance of payments
deficit. How it is covered, by a combination of net inward capital flows and monetary inflation
is a separate, but important consideration to which we will return later.
Now that the US faces a recession, the budget deficit will rise due to lower than forecast
tax receipts and higher than expected welfare costs. The deeper the recession, the greater the
deficit, which before the recessionary effect is factored in was forecast by the Congressional
Budget Office to be just over one trillion dollars for the current fiscal year, which is two
months in. It will obviously be somewhat higher, requiring funding by a combination of inward
capital flows and monetary expansion.
If the foreigners don't play ball, funding the budget deficit will be entirely down to
monetary inflation. Worse, if they reduce their dollar holdings, not only will monetary
expansion have to make up the funding difference for the government, but it will also have to
address net foreign sales of existing treasuries and other US dollar assets as well. At
end-June 2018 the total value of those assets including those held before 2000 were recorded at
$19.4 trillion, plus bank deposits and short-term assets of $4.3bn, taking the total to $23.7
trillion.[i] This is the same approximate size as the US Government's total debt and slightly
more than US GDP.
Will foreigners sell US assets?
Naturally, dollar-based capital markets believe in the dollar and its hegemonic status. This
extends to a belief that foreigners in financial trouble will always demand dollars and the
more their trouble the greater their demand for dollars is likely to be. It is a mantra that
ignores the fact that foreigners are up to their eyes in dollars already.
Look at it from China's point of view. The bulk of her foreign reserves of $3.1 trillion are
in dollars, with about one third of it in US Government debt. She is helping America to finance
its military, which aims to contain and crush China. It's rather like giving the school bully
your baseball bat and inviting him to hit you with it. Furthermore, China's military
strategists have their own view of how America uses her currency's hegemonic status, and it is
not a casual one. They know, or think they know why America has stirred up Hong Kong, and that
is to prevent global portfolio flows being invested in China, because America is desperate to
have them instead.
It leaves China with a serious problem. She had expected inward global portfolio flows to
help finance her infrastructure projects, and the Americans have effectively succeeded in
closing down the Hong Kong Shanghai-connect link, through which foreign investment was to be
directed. She is now in a position whereby she may have no alternative but to put her plans on
hold or use her own dollar reserves to that end. Besides her US Treasury holdings, she is
likely to have a further trillion or so in short-term instruments and bank deposits to draw
on.
A decision to actively reduce her holdings of US Treasuries would not be taken lightly by
China. The response from America would likely be an intensification of the financial war,
perhaps including an emergency power to stop China selling her Treasury stock. If that
happened, China would have no option but to respond, and a dollar crisis would almost certainly
ensue. While outcomes with a rational opponent are theoretically predictable, President Trump's
actions and how they mesh with the deep state are less so, making the consequences of any
action taken by China deeply unpredictable.
We shall have to wait to see how this next stage plays out. Meanwhile, the inflationary
outlook in America is already deteriorating.
FMQ confirms a reacceleration of monetary
inflation
After pausing in its headlong growth since the Lehman crisis, the fiat money quantity surged
into record territory at $15,812bn at the beginning of October (Figure 1).
FMQ is the sum of Austrian true money supply and bank reserves held at the Fed. The reason
for its renewed growth is the Fed's easing by injecting money into the system through its
repurchase agreements. FMQ for the beginning of November is likely to be higher still.
Something is amiss systemically, which appears to require continual monetary injections to
prevent a financial crisis. The US economy having been already flooded with money following
Lehman, this development is deeply worrying and possibly marks a countdown to the next credit
crisis.
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and try again.Price inflation will get out of control
To independent analysts, it should be clear by now that the world is probably teetering on
the edge of a cyclical credit crisis, which this time is coupled with the destructive synergy
of trade tariffs. Equally, it is obvious that while central bankers and politicians suspect
something is wrong, they are clueless about the forces involved, otherwise they would not have
implemented monetary policies that led to the situation today.
In the short-term, as we saw with the Lehman crisis when a credit crisis hits, there will
probably be a panic into safety. But for the eventual outcome we must look beyond any initial
effect. America and its dollar are central to how events will evolve. As already shown in this
article the dollar is over-owned by foreigners, relative to ownership of foreign currencies by
Americans. The basis of both categories of ownership is commercial assumptions about current
and future prospects for international trade. For this reason a slump will cause demand for all
currencies to contract, which in the dollar's case will need to net selling greater than any
repatriation of capital from abroad. Even though most dollars are actually held by foreign
governments and their agencies, their strategic reserve decisions are ultimately driven by
economic factors.
Assuming the global economic slump deepens over the next few years, at a time when the
American budget deficit will be increasing rapidly foreigners will be sellers of dollars and
underlying US assets, including US Treasuries. Unless private sector actors in America increase
their propensity to save, the budget deficit will have to be financed instead entirely by
inflationary means.
Broadly, other than intertemporal factors there are two ways in which monetary inflation can
translate into higher prices: a relative desire to reduce possession of the currency relative
to goods either by domestic users or by foreigners. The two preceding paragraphs describe why
foreigners are likely to turn sellers for reasons of trade, to which we can add the further
consideration that over the last year a combination of a rising dollar and falling US Treasury
yields have been immensely profitable for them, an experience which might not be repeated next
year. So, while domestic users may be slow to see the dollar's purchasing power accelerate in
its decline, the push to a weakening dollar is likely to come from abroad, at least
initially.
All holders of dollars will find that their ownership of dollars relative to goods will be
increasing rapidly, due to inflationary financing to cover a rising budget deficit. Instead of
consumers and other economic actors associated with Main Street, the banks owe the bulk of
their balances and deposits to other financial entities and foreigners. Therefore, the domestic
monetary system is potentially more footloose than in the past. The risk to the Fed is that
this deposit cohort is more likely to take its cue from factors such as the foreign exchanges,
the price of gold and even cryptocurrencies, speeding up the fall in the dollar's purchasing
power once it begins to slide.
It is a long time since we have seen it, but when the smart money begins to view things
negatively, everything the Fed does with monetary policy, or the executive does fiscally, leads
to failure. A falling dollar leads to rising interest rates in the markets, and the
government's funding crisis will be laid bare for all to see. And with the Fed and the US
Treasury staffed with neo-Keynesians, a policy reversal to stabilise the currency by making it
sound will be the last thing that happens.
A world driven to trade isolationism
American trade policy under President Trump is isolationist and at odds with the role of a
reserve currency. His mantra of "Make America Great Again" and his determination to build a
wall on the Mexican border are testament to his thinking. If anything, America's introspection
towards Russia and China has strengthened their partnership as joint Asian hegemons. Their
decision to progress their economies without America and its dollars was taken by America for
them. Russia has already turned most of her dollars into gold and continues to do so. China's
plans to evolve her economy into a more consumer oriented one are underway, but she is still
too dependent on export-oriented trade to disregard ties with her Western trading partners.
Consequently, China can be expected to accelerate plans for her vision of a consumer-driven
middle class. In order to do so she will dispose of the dollar for trade purposes as much as
possible. At the meeting of the BRICS nations in Brazil earlier this month, a common
cryptocurrency was discussed, ostensibly to reduce currency volatility, but in reality, to
eliminate the dollar as a common settlement medium between BRICS members.
So far, China has seen the redundancy of the dollar as a gradual evolutionary process. But
America's policy of diverting global portfolio flows from China is likely to lead to China
drawing down on her foreign reserves, particularly her holdings of US dollars, to replace
expected capital inflows. She will still be dependent on imports of raw materials, for which
some dollars will be needed; but so long as she has a trade surplus, and she insists on her
preferences for trade settlement by other means, China's dollar requirements will be
minimised.
China can probably weather the political consequences of a collapse in international trade,
because for the population American aggression is clearly to blame. While China has had to
amend its plans and is resisting precipitative action, there can be no doubt her determination
to do away with the dollar is more urgent. Together with Russia, the other BRICS members and
the Shanghai Cooperation Organisation as well as her trade counterparties in sub-Saharan
Africa, China's policies for trade settlement without the dollar will affect more than half the
world's population.
And when you get establishment figures in the Western banking system, such as Mark Carney,
openly speculating at Jackson Hole last August about a replacement for the dollar in
international trade, you know the dollar's jig is finally up.
Hal,
Could you please comment on Dylan Ratigan's comment about $128
Billion being automatically pumped into the banker's hands without
public comment by Dodd Frank?
Is it the same thing as a repo? I'm a non-economist, just a
simple fellow, that's getting the hang of this con game.
I watched the Ratigan video on your recommendation and agree
it is a fundamental retelling that pulls the elements together
better than anything I'd previously seen. And I completely
agree with his assessment that this was the biggest theft in
mankind's history.
The Fed's highest stated purpose is "the integrity and
stability of the banking system". Problem is, that mission
justifies anything and everything beneath it. They are not in
the business of ensuring a bank obeys the law, and if they
break the law, even the "business law" of making terrible
business decisions, all the Fed thinks they are required to do
is make them whole.
So you have a radically anti-capitalist structure at the
tippy top of a supposedly "capitalist" system. And that's even
before you even get to any discussion of secrecy, subterfuge or
malfeasance.
Why are we not allowed to know who the recipients were of
the *$21 trillion* (GAO number) of free Fed money after 2009?
All we can do is follow the bread crumbs: we do know, for
example, that 2/3rds of those dollars went to European
institutions, including non-bank corporations. Huh? Q: That
benefits the Main St U.S. economy how, again? A: It doesn't.
This means you can pay no attention whatsoever to the ancillary
Fed "missions" around U.S. employment and economic growth.
The $128B Ratigan mentions re Dodd-Frank is just a trickle
in the tsunami of funds reaching bank coffers. Free money of
course is funding massive share buybacks, the *only* cause of
stock "rises" since 2009, but what completely infuriates me is
what banks are doing around buybacks. It's one thing if
buybacks benefit *all* shareholders, but the latest trick (esp
by Jamie Dimon) is to take free money, buy back JPM shares,
*but those shares are only given to Jamie himself and his top
managers*.
(Of course until 1982 companies borrowing money to buy back
their own shares was completely illegal since it's effect is
stock price manipulation).
Repo is just a shorter term version of all of these other
diverted flows. Completely under all radars, with no
Congressional hearings or public scrutiny or oversight.
I always love to be wrong because it means I get to
be right again. I'm not a funding market expert either,
but I hope you're just correctlng Ratigan's views on
the $128B, not the entirety of my ramble? Thx Yves
I don't write about the repo mess because the commentary on it
is generally terrible. This is not "monetizing debt". This is
"providing liquidity to the money markets" which is what the Fed is
supposed to do!!!
The Fed got itself into a corner with super low rates and QE. It
also stupidly decided to manage short term rates via interest on
reserves. Prior to 2008, the Fed intervened in the repo markets
every bloody day to hit the target rate and no one cared.
The Fed drained liquidity too fast. It's been caught out and has
had to go into reverse big time. Its refusal to admit that is why
everyone is overreacting to the liquidity injections.
Yes, MMT proponents oppose a UBI (or BGI). They want a Job
Guarantee. They argue that setting a floor on the price of labor is a
much more important way to regulate the economy than diddling with
interest rates, plus it increases the productive capacity of an
economy, which increases prosperity.
The will accept a UBI that is lower than a JG as a sort of
disability income.
Thank you for that link. It certainly sounds like real life, and they say their
models predict inequality in various countries to within 1%. Any single agent in this economy could have become the oligarch -- in fact, all
had equal odds if they began with equal wealth. In that sense, there was equality
of opportunity. But only one of them did become the oligarch, and all the others
saw their average wealth decrease toward zero as they conducted more and more
transactions. To add insult to injury, the lower someone's wealth ranking, the
faster the decrease. once we have some variance in wealth, however minute, succeeding transactions
will systematically move a "trickle" of wealth upward from poorer agents to richer
ones, amplifying inequality until the system reaches a state of oligarchy. If the
economy is unequal to begin with, the poorest agent's wealth will probably decrease
the fastest. Where does it go? It must go to wealthier agents because there are no
poorer agents. Things are not much better for the second-poorest agent. In the long
run, all participants in this economy except for the very richest one will see
their wealth decay exponentially.
the presence of symmetry breaking puts paid to arguments for the justness of wealth
inequality that appeal to "voluntariness" -- the notion that individuals bear all
responsibility for their economic outcomes simply because they enter into
transactions voluntarily -- or to the idea that wealth accumulation must be the
result of cleverness and industriousness. It is true that an individual's location
on the wealth spectrum correlates to some extent with such attributes, but the
overall shape of that spectrum can be explained to better than 0.33 percent by a
statistical model that completely ignores them.
It will be interesting to see how China responds in reality to the naked hegemony of the US
law just passed and signed by Trump about HK. Is China ready to stand up to the bully of dying
empire or be cowed into slicing their response even thinner and thinner but not saying NO
MORE!
We do live in interesting times.
Transferring my post to this thread, about the decline of US fertility rates:
As we all know, constant population growth is essential for the survival of
capitalism, since it is one of the main factors that slow down its tendency of the profit
rate to fall. The article seems to agree with this:
Birthrates have been trending downward overall since 2005, sparking concern about
potential economic and cultural ramifications. Keeping the number of births within a
certain range, called the "replacement level," ensures the population level will remain
stable. A low birthrate runs the risk that the country will not be able to replace the
workforce and have enough tax revenue, while a high birthrate can cause shortages of
resources.
Another related article approaches the issue from another angle:
Virginia Commonwealth University professor Dr. Steven H. Woolf and Eastern Virginia
Medical School student Heidi Schoomaker analyzed life expectancy data for the years
1959-2016 and cause-specific mortality rates for 1999-2017. The data shows that the
decline in life expectancy is not a statistical anomaly, but the outcome of a
decades-long assault on the working class.
So, this is not an "anomaly". If it isn't, then there's an underlying cause, which the
same article hypothetizes:
Obamacare was part of a deliberate drive by the ruling class to lower the life
expectancy of working people. As far as the strategists of American capitalism are
concerned, the longer the lifespan of elderly and retired workers, who no longer
produce profits for the corporations but require government-subsidized medical care to
deal with health issues, the greater the sums that are diverted from the coffers of the
rich and the military machine.
A 2013 paper by Anthony H. Cordesman of the Washington think tank Center for
Strategic and International Studies (CSIS) frankly presented the increasing longevity
of ordinary Americans as an immense crisis for US imperialism. "The US does not face
any foreign threat as serious as its failure to come to grips with the rise in the cost
of federal entitlement spending," Cordesman wrote, saying the debt crisis was driven
"almost exclusively by the rise in federal spending on major health care programs,
Social Security, and the cost of net interest on the debt."
Meanwhile, conditions for the rich have never been better. This is reflected in the
growing life expectancy gap between the rich and the poor. The richest one percent of
men live 14 years longer than the poorest one percent, and the richest one percent of
women 10 years longer than the poorest.
I wasn't aware of this CSIS report. If true, then this is indeed a very interesting
hypothesis.
--//--
The thing I don't understand in the WSWS article linked above is this:
The first nodal point, in the early 1980s, corresponds to the initiation of the social
counterrevolution by the administration of Ronald Reagan, which involved union busting,
strikebreaking, wage-cutting and plant closings on a nationwide scale, combined with cuts
in education, health care and other social programs.
So, Ronald Reagan did a "counterrevolution". That means there was a revolution before
him, which I suppose is the post-war "Keynesian consensus", the "golden age of
capitalism" of 1945-1975.
I really can't understand the logic behind the Trotskyists: they condemn the USSR and
China as "stalinists", i.e. as counterrevolutionaries. But Harry Truman was a
revolutionary? Dwight Eisenhower was a revolutionary? Clement Attlee was a revolutionary?
De Gaulle was revolutionary?
What kind of nonsense is this?
What is most funny is that these same Trotskyists from the same WSWS website use the
rise of labor strikes in China to argue China is a capitalist empire -- but uses the same
strikes as evidence there was a revolution in the West during the post-war (by negative,
since Reagan's "counterrevolution" was characterized by "union busting, strikebreaking,
wage-cutting and plant closings on a nationwide scale, combined with cuts in education,
health care and other social programs").
I think Trotskyism is having an identity crisis. They don't know if they are
essentially a movement whose objective is essentially to tarnish Stalin's image or if
they are closeted social-democrats. They forgot Trotsky fought for the revolution, not
personal vendetta.
One thing I don't understand in all this talk of a replacement reserve currency for the world
is why there is no mention of the IMF's Special Drawing Rights (SDR) currency. This is a
basket of currencies fashioned to act as a global reserve currency at some, currently
unknown, point in the future. Both the USD and Yuan are in the basket - China doesn't want to
be the reserve currency, but she wants adequate voting rights over the SDR, and this is a
continuing negotiation, to downgrade the US's legacy majority vote.
And although I haven't studied Carney's proposal well, I get the point that while the US
is at most 15% of global GDP, more than half of all trades are closed in USD. So he's looking
for ways to close some of those trades in alternative currencies. Russia and China and I
think Iran are helping this by trading directly in each other's currencies, but I suspect
that such things for most companies would be very unwieldy with today's global supply
chains.
The fact is that, still today, the US Dollar is a damn useful currency to trade in. Are
the sanctions worth it? Obviously, increasingly not. But I can't imagine trying to go outside
of it without a very strong platform to switch to.
vk with your comments about the USD as reserve currency (Triffin Paradox) and for pointig out
global capitalist exploitation is unrelated to nationalism....exactly correct and right on. I
make this same point once in awhile. Lol. But not nearly as well explained as you do here.
This is the non-sequitor behind the Brexit fallacy as well, that rejecting the EU for a
nationalist trade and economic policy will somehow make Britain Great again. Pure nonsense
and not a coincidence that Mercer/Bannon created this policy like Trump's policies with
outright lies through a complicit media/political campaign.
The sad fact of the matter is Britain can't even feed itself. So, Brexiteers, welcome to a
steady diet of overpriced sovereignty on a bun after the October 31st crash out.
And yes of course Keynes was correct about the need for a neutral global reserve currency
for trade rather than a national currency serving as world reserve currency. As james and b
suggest has great utility for the wealthiest Amerikkkans, while NC correctly views the strong
dollar as the reason for the hollowing of the Amerikkkan blue collar worker.
And bet your bottom dollar (pun intended) China has no desire for the yuan to become the
world reserve currency. That is the entire point of their global currency strategy: to
maintain the yuan subordinate to the USD.
Said differently: The U.S. abuses is 'exorbitant privilege'. The hope is that China would be
less inclined to do so.
The real solution though is a different system with some global exchange medium that can
not be manipulated by one country or a block of selfish countries.
b @20
I agree that US abuses, but that is what hegemony always does. Power corrupts and has
always done so. If there ever was a hegemony less inclined to do so, the history certainly
shows not to expect that from China or Communists. Hence, I would not wish to desire outcome
in which China gets close to hegemony.
I agree that a different system would be the solution. Currently, such option does not yet
exist? Or at least function? For that reason, it would seem safe to say that other countries
have no reason to de-couple from the least bad master of all bad ones available.
Perhaps it has already been stated in this thread, but once the US dollar was decoupled
from gold in 1971, it gave the Fed and the banksters the ability to create an infinite number
of digital and paper dollars. The US used this power to build 1000 military bases around the
world and use its sanctions to freeze dollars to anyone who challenged its policies and
power.
The call to replace the fiat dollar with some other form of bankster digital fiat should
be a non-starter. Only commodity-based currencies, which have intrinsic value and cannot be
created out of thin air, are the only viable form money for a world which could be free of
endless war paid for by endless debt and economic slavery.
It is astonishing to see how British Imperialism, from before Hobbes wrote Leviathan to
the present day, has fooled everyone by teaching us to focus on the particulars and our
physical senses instead of taking in the bigger picture and registering the totality and
spirit of what is occurring.
This is the beginning of dividing the world into two spheres. A Multi-Polar sphere, led by
China and Russia, and a U.S. led sphere.
In the current world order, the U.S. has lost its place of leadership. Militarily it has
been surpassed by Russia and economically it has been surpassed by China.
In terms of the economy, China's GDP (PPP basis) is some 20% larger than the U.S. In terms
of what counts, producing useful products, the difference is much larger than that. In fact
the U.S. hasn't produced the value of products that it consumes for more than 30 years, and
is currently running a trade deficit of more than 2% of GDP. The accumulated foreign debt,
resulting from these on-going trade deficits is a major strategic threat.
Not only has the U.S. lost its position of leadership, its perspectives are rapidly
deteriorating. 30+ years of Globalization has destroyed its industrial base, and without an
industrial base it cannot compete either economically or militarily.
To stop the on-going loss of its leadership position, the U.S. must redevelop its
industrial base. But it cannot do so in world of open borders in which it has to compete with
China. Thus, the U.S. is seeking to create its own sphere, accompanied by its loyal vassals,
where it can redevelop its industrial base and ultimately recover its industrial strength and
leadership, isolated from its competitors.
This, in my opinion, is the strategic intent of Trump's economic and trade policies. He is
not looking to achieve a trade deal with China, but rather to shut down trade between China
(and the Multi-Polar sphere in general), and a U.S. led economic sphere, which consists of
the U.S. and its vassal states. He is also looking to limit or harm the Multi-Polar sphere in
every way, short of all out war, in order to ensure the loyalty of as many vassals as
possible.
Posted by: dh-mtl | May 23, 2019 1:15:10 PM | 39
It seems to me that this comment is quite pertinent to this thread.
Regarding the US dollar as a reserve currency: This reserve currency status and the
resulting overpricing of the U.S. dollar has been a windfall to the global elites, but has
been devastating to the United States itself, being a major factor in the destruction of the
U.S. as an industrial economy.
In addition, the fact that the U.S. dollar has a dual purpose, as the currency of the U.S.
and as the reserve currency of the world, has resulted in considerable financial instability.
When the U.S. adjusts its monetary policy based on domestic needs, resulting wild swings in
the exchange rate send shock waves around the world.
A world reserve currency is used as a reference for other currencies and must be stable. A
domestic currency must be able to adjust based on the monetary policy required for the
domestic economy. These two separate functions are incompatible.
Over the past five decades the U.S. dollar has been anything but stable. In this sense
Mark Carney's analysis is spot on.
I believe that the Chinese, Russians, etc. recognize this situation and have long been
looking for an alternative to the U.S. dollar as a world reserve currency. The recent
weaponization of the dollar for geo-political purposes has only made the situation more
urgent.
I believe that what is required is a world reserve currency that is separate from any
domestic currency, similar to what Carney is calling for. However, my bet is that this world
reserve currency will take the form of a crypto-currency backed by gold. Only with the
backing of gold will the currency have the transparency required to be a world reference
currency, acceptable to all.
Carney's plan just creates a stronger coupling to the Empire by transforming a system that
uses the dollar as reserve currency into a system that uses what might be termed the
'e-dollar' for everything.
The proposal likely leads to a revived TPP because global currency requires
"harmonization" of regulatory regimes.
Most importantly: European poodles will be on an even shorter lease. (No gas from
Russia!)
Western globalist elites have already de-coupled from nation-states. The e-dollar makes
would force everyone to catch-up.
An exorbitant privilege" is likely to continue in one form or another. They will not give
up the ability to use currency as a tax without real pressure (which is currently
nonexistent).
Bonus: "the Russians hacked our currency!" is the perfect way for the in-group to crush
resistance by stealing from their critics.
ADKC - careful here. Don't over subscribe Chinese elitist propaganda for the truth just
because their government says so. The BRI to date isn't a proven winner, far from it, except
for the Chinese who insist on imperialistic control over these ventures both for their
companies and imported Chinese workers. Proof of benefits to the foreign countries has yet to
be determined.
In fact, there is evidence that at least in some respects
BRI looks to be an empty boondoggle like the empty skyscrapers in the Chinese urban
skyline.
China is sending empty freight trains to Europe through one of its key Belt and Road
Initiative (BRI) projects: the China-Europe Railway Express. The bizarre phenomenon caught
the attention of Depth Paper (等深线), a Chinese online news platform. In
a rare move by a Chinese media outlet in today's media environment, Depth Paper probed
critically into one of the BRI's most visible "connectivity" projects, uncovering the
perverse incentives that are luring China's local governments and companies to create huge
"bubbles" of ostensibly flourishing rail routes that run tens of thousands of kilometers
across the vast landmass of Eurasia.
The revelation partly confirms what some observers have suspected all along: that
China's central government lacks the ability to keep BRI strategically tight and
coordinated. Sub-national stakeholders, as they do in other policy areas, have the
incentives to bend the initiative to their own narrowly defined interests and in the
process undermine the overarching strategy, if such a strategy indeed exists at all. The
curious case uncovers some important dynamics playing out among Belt and Road's diverse
stakeholders.
Yes, Barflies, there are also downsides to central government planning even in the Zen
Master Paradiso, which of course is 100% free of corruption and perverse incentives:
The elevation of the freight service in political importance created powerful incentives
for players to "rig the game". Depth Paper reveals two groups of schemers in the game:
Provincial and local governments: As the number of freight trips to and from Europe
become a measurable indicator, local governments, particularly those sitting at key railway
hubs, saw a clear opportunity to boost their visibility under the BRI (and probably to the
leadership). At their disposal were subsidies to lower the cost of freight services and
make them competitive with cargo ships.
The Ministry of Finance provides a guiding subsidy ceiling of
0.8USD/container/kilometer. But ambitious local governments circumvent it by inventing all
kinds of additional rewards to lure businesses to their train terminals, sometimes even
compensating for the extra mileage of truck transportation to bring containers from
thousands of kilometers away. According to a chart collated by Sino Trade and Finance, many
municipal government offer around 3000USD per container for a one-way Europe bound trip and
a whole train could receive a total of 123,000USD worth of subsidies per trip. These local
governments also use tax rebate and land use subsidies to sweeten the deal for freight
service companies.
International railway service companies : Competition with each other and
pressure from local governments eager for BRI visibility has incentivized the companies who
actually run the numerous rail routes to Europe to increase the number of train trips.
Every month these companies have to book planned trips from the railway regulators and get
what is called a "route slip" that permits them to run those trains. The ratio of actual
trips to the applied number is called "realization rate" that regulators use to monitor
rail capacity utilization.
The interplay of these incentives drives both groups to boost indicators that make them
look good in this game, creating scenes that are outright bizarre. The government of Xi'an
is one of the most active players starting from 2018. The city, 1000 kilometers to the west
of Beijing and the former capital of Tang Dynasty more than a millennium ago, considers
itself the "starting point of the ancient Silk Road" and strives to restore its glory in
the Belt and Road era. With full support from its provincial bosses, it is the most
generous with subsidies, dwarfing other provinces by a wide margin. "Subsidized per
container transportation price from Xi'an is constantly below RMB 8500, while it costs over
20000 RMB from Shandong," a trade agent told Depth Paper.
The subsidies are of the scale that they bend the gravity of trade. In the most extreme
cases, traders in the far west Xinjiang Autonomous Region, which already borders Central
Asia and is itself a Belt and Road rail hub, would move their cargo thousands of kilometers
to the east to capitalize on the Xi'an government's free handouts before transporting west
across the Eurasian continent. Similarly, traders in coastal Shandong provinces would truck
their goods all the way to Xi'an and load them onto trains, as it is cheaper even after
taking into account the 5000 RMB per container transportation cost by truck (for which the
Xi'an government also partially remunerates). The result is that Europe-bound freight train
trips from Xi'an grew by a whopping 536.6% in just one year from 2017 to 2018.
The railway service companies, on the other hand, blow up their trip numbers even when
they have very little to ship. Before Xi'an arrived on the scene in 2018, the competition
between Chongqing and Chengdu, two nearby cities, was so fierce that the two cities would
refuse to merge cargo loads back from Germany despite neither being able to fill a whole
train themselves. When the pressure (and reward) to be the top railway service company
facilitating "Belt and Road" trips to Europe becomes huge, the companies simply start
loading empty containers to their trains. They must ensure that each train meets the
regulator's 40-container minimum before it leaves the station, but there is no obligation
and no ability (for lack of demand) to fill those containers.
In the most extreme case, one train carried 40 empty containers and just one full
container all the way to Europe. This makes the China Railway Express's impressive growth
number highly dubious, and most certainly a "bubble". Even with all their tricks, companies
can barely fulfill their promise to regulators: they have overbooked railway resources. In
Q2 of 2019, Chongqing's "realization rate" dipped to as low as 64% for some routes.
China will unquestionably need even more infrastructure if it's to accommodate all the
additional migrants McKinsey anticipates. But just because China needs things that haven't
yet been built, that doesn't mean that everything that gets built is truly needed. Even the
casual observer driving around China can see that something is wrong. You can see it in the
industrial parks that are empty except for a small handful of factories, and in the
government buildings that are so large it seems impossible that they will ever fill in with
civil servants, and in the airports that only sporadically host an arriving plane, and in
the glut of exhibition centres and museums that every town seems compelled to build.
Urbanisation – the construction of new housing and infrastructure – has been
the driving force behind the Chinese economy for close to two decades. It has created
demand for massive volumes of steel, cement, and glass; for the ships that bring iron ore
from overseas; for the power plants and coal mines needed by the steel mills; and for the
machinery that is needed on construction sites.
But this constant and nonstop building has become an addiction for local governments.
it's a way of stimulating the local economy and maintaining growth, all loosely justified
by the needs of migrants. The World Bank calls urbanisation an "enabling parallel [process]
in rapid growth"; in other words, urbanisation can support growth, but it can't drive it.
China has put the cart before the horse, and the result is waste on an epic scale.
Tieling's story is one of how ambition and a lack of restraint by local governments,
masquerading as planning for the future, have laid the foundation for financial problems
that have been replicated throughout China – and how the promise of further migration
isn't going to fix them.
I see many many people have bought into anti-China propaganda. So the MSM lies about Israel
and Russia and Syria and WMD and Iran but when it comes to China it tells the truth. Gotcha.
ADKC , Aug 25 2019 0:04 utc |
59vk , Aug
25 2019 0:05 utc |
60
@ Posted by: donkeytale | Aug 24 2019 23:29 utc | 53
But it is not us, alleged "pro-China propagandists" who are "buying into Chinese elite
propaganda". It is its main enemy -- the USA -- that
is stating China is a superpower (the term "great power" is used + subliminar message of
the document).
As a famous philosopher once said: the best way to know yourself is to know your
enemy.
And, by knowing its enemy and by assessing the evidence on the field available to us, it
leaves us to believe that the Chinese socialist system has been -- with all its virtues and
flaws -- a monumental success: so far, it's the only Third World country to ascend to
superpower status; it's also the first really big country (1.4 billion people) to have found
a way to material prosperity (mutatis mutandis) to the totality of its population (which
breaks with the post-war Western European social-democrat myth that states only small
countries can be prosperous).
And we have corruption here in the (capitalist) Third World too. Corruption is not an
invention of socialism. If I could, I would choose the Chinese system for my country in a
heartbeat.
First : Good articles from B always get responded by astroturfers / paid trolls in the first
few comments , that mean B's MoA already in priority watch list of TPTB drones
Second : Rather surprised by people that got surprised of the decoupling plan , as it been
the goal all along and any china watcher knew this right from the start. Trump is not the
instigator of this , he acted like moron on twitter but the machination for the decoupling
have been ongoing even during obama years (TPP anyone ?) The whole trump trade deal promise
with china are not about trade deals , it is a list of demand from US to make china bow to US
or face decoupling. China of course refused and here we are today. US overplayed their hands
as china better prepared for the decoupling.
Third : HK violent protests are in fact designed to make china over react and send in
security forces into HK , the debacle then will be used as US and push EU allies to support
decoupling with china. But the awaited china HK crackdown never happened and the western plan
go ahead anyway with the choreographed western leader's comments on china action toward HK
even when theres no action.
To the trolls like Nemesis Calling and his sock puppet accounts , it would be wiser if you
notice the people coming to MoA are not random ignorant citizen of USA or EU. Such blatant
pro US narrarive from you instantly got recognized and laughed at.
SHC idea is BS. I don't want to even think about all the hidden tricks the City is planning
to build into it. There's no need to because there's no need for SHC itself.
It used to be hard to maintain accounts in multiple currencies, as well as settle such
accounts when trading internationally, so the trade (and, therefore, insurance, short-term
credit, and trade reserves) inevitably coalesced around a few main currencies. With the
computation capabilities available today, there's nothing preventing banks and companies from
having accounts in dozens of currencies. There's nothing preventing all kinds of currency
pairs (thousands, even tens of thousands of combinations) to be traded automatically by
market-making algorithms, thus providing the necessary liquidity.
This is what the non-Empire countries should be working towards: a decentralized system of
currency exchanges and settling systems built upon a common standard for maximum
interoperability. No blockchain currencies are necessary: simple correspondent accounts at
the central banks will do. The trick is to adopt a common tech standard and simplify legal
procedures, so that a bank can easily open accounts in the currencies of dozens of countries
and easily exchange these currencies on a currency exchange of its choosing.
Trump singled out China in a memo to U.S. Trade Representative Robert Lighthizer, saying
that "the United States has never accepted China's claim to developing-country status, and
virtually every current economic indicator belies China's claim." In response, China said
that it's still a developing nation and needs flexibility and policy room, according to
state broadcaster CCTV.
That's because you look at the empty cities from a western (particularly Hayek economics)
perspective. There are at least the following factors that you have ignored:
1. That the US/West requested China to support the world economy post 2008 by
spending.
2. That the West has wasted far greater resources with quantitative easing &
non-performing investments.
3. That China adopted a Keynesian approach to keep their economy moving.
4. That the cities were all planned anyway and build was just brought forward to support
the world and Chinese economy.
5. That most of these cities are still not complete and not ready yet for mass
residence.
I can see the argument that these cities might turn out to be a waste but so was the
western approach to the 2008 crash and what we are left with is continuing austerity, huge
amounts of money that has been wasted by pouring it straight into the pockets of the ultra
rich, and another pending crash. What China is left with is money that went to the workers,
an economy that continued to develop and assets (cities) that may well be very useful in the
future.
After the Global Financial Crisis Zhou Xiaochuan, Governor of the Bank of China announced,
"The world needs an international reserve currency that is disconnected from individual
nations and able to remain stable in the long run, removing the inherent deficiencies caused
by using credit-based national currencies."
He proposed Special Drawing Rights, SDRs, that derive their value from a basket of world
currencies. Nobelists C. Fred Bergsten, Robert Mundell and Joseph Stieglitz, were supportive,
"The creation of a global currency would restore a needed coherence to the international
monetary system, give the IMF a function that would help it to promote stability and be a
catalyst for international harmony."
To demonstrate the scheme's stability China began valuing its own currency, the RMB,
against a basket of dollars, euros, yen and pounds sterling and, almost immediately
complaints about RMB valuation ceased. The IMF made its first SDR loan in 2014, the World
Bank issued the first SDR bond in 2016, Standard Chartered Bank issued the first commercial
SDR notes in 2017 and the world's central banks began stating reserves in SDRs in 2019.
While few noticed the advent of SDRs, the creation of the Asian Infrastructure Investment
Bank, AIIB, in 2015 was a sensation. Former US Treasury Secretary Larry Summers called it,
"The moment the United States lost its role as the underwriter of the global economic system.
I can think of no event since Bretton Woods comparable to the combination of China's
effort to establish a major new institution–and the failure of the US to persuade
dozens of its traditional allies, starting with Britain–to stay out of it."
The AIIB's one hundred member countries account for eighty percent of the world's total
population and two-thirds of global GDP. It guarantees a trillion dollars annually in long
term, low interest loans for regional infrastructure, poverty reduction, growth and climate
change mitigation and allows Eurasia's four billion savers to mobilize local savings that
previously had few safe or creative outlets.
U.S. Decoupling From China Forces Others To Decouple From
U.S.
The U.S. is decoupling itself from China. The effects of that process hurt all global
economies. To avoid damage other countries have no choice but to decouple themselves from the
U.S.
Today's Washington Post front page leads with a highly misleading headline:
It was China, not Trump, which retaliated. Trump reacted to that with a tweet-storm and by
intensifying
the trade war he started . The piece under the misleading headline
even says that :
President Trump demanded U.S. companies stop doing business with China and announced he would
raise the rate of tariffs on Beijing Friday, capping one of the most extraordinary days in
the long-running U.S.-China trade war.
...
The day began with Beijing's announcement that it would impose new tariffs on $75 billion in
goods, including reinstated levies on auto products, starting this fall. It came to a close
Friday afternoon with Trump tweeting that he would raise the rate of existing and planned
tariffs on China by 5 percentage points.
Beijing's tariff retaliation was delivered with strategic timing, hours before an
important address by Powell, and as Trump prepared to depart for the G-7 meeting in
Biarritz.
After Trump's move the stock markets had a sad. Trade wars are, at least in the short term,
bad for commerce. The U.S. and the global economy are still teetering along, but will soon be
in recession.
The Trump administration is fine with that. (As is Dilbert creator Scott Adams
(vid).)
U.S. grand strategy is to prevent other powers from becoming equals to itself or to even
surpass it. China, with with a population four times larger than the U.S., is the country ready
to do just that. It already built itself into an economic powerhouse and it is also steadily
increasing its military might.
China is thus a U.S. 'enemy' even though Trump avoided, until yesterday, to use that
term.
Over the last 20+ years the U.S. imported more and more goods from China and elsewhere
and diminishes its own manufacturing capabilities. It is difficult to wage war against another
country when one depends on that country's production capacities . The U.S. must first
decouple itself from China before it can launch the real war. Trump's trade war with China is
intended to achieve that. As Peter Lee wrote
when the trade negotiations with China failed:
The decoupling strategy of the US China hawks is proceeding as planned. And economic pain is
a feature, not a bug.
...
Failure of trade negotiations was pretty much baked in, thanks to [Trump's trade negotiator]
Lightizer's maximalist demands.
And that was fine with the China hawks.
Because their ultimate goal was to decouple the US & PRC economies, weaken the PRC,
and make it more vulnerable to domestic destabilization and global rollback.
If decoupling shaved a few points off global GDP, hurt American businesses, or pushed the
world into recession, well that's the price o' freedom.
Or at least the cost of IndoPACOM being able to win the d*ck measuring contest in East
Asia, which is what this is really all about.
Trump does not want a new trade deal with China. He wants to decouple the U.S. economy
from the future enemy. Trade wars tend to hurt all involved economies. While the decoupling
process is ongoing the U.S. will likely suffer a recession.
Trump is afraid that a downturn in the U.S. could lower his re-election chances. That is
why he wants to use the Federal Reserve Bank to douse the economy with more money without
regard for the long term consequences. That is the reason why the first part of his tweet storm
yesterday was
directed at Fed chief Jay Powell:
In his order for U.S. companies to withdraw from China, some close to the administration saw
the president embracing the calls for an economic decoupling made by the hawks inside his
administration.
The evidence of the shift may have been most apparent in a 14-word tweet in which Trump
appeared to call Xi an "enemy."
"My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?" he said in a
Tweet posted after Powell gave a speech in Jackson Hole that contained implicit criticism of
Trump's trade policies and their impact on the U.S. and global economies.
Jay Powell does not want to lower the Fed interest rate. He does not want to increase bond
buying, i.e. quantitative easing. Interest rates are already too low and to further decrease
them has its own danger. The last time the Fed ran a too-low interest rate policy it caused the
2008 crash and a global depression.
Expect Trump to fire Powell should he not be willing to follow his command. The U.S. will
push up its markets no matter what.
From Powell's perspective there is an additional danger in lowering U.S. interest rates.
When the U.S. runs insane economic and monetary policies U.S. allies will also want decouple
themselves - not from China but from the U.S. The 2008 experience demonstrated that the U.S.
dollar as the global reserve and main trade currency is dangerous for all who use it. Currently
any hickup in the U.S. economy leads to large scale recessions elsewhere.
That is why even long term U.S. ally Britain warns of such danger and looks for a way
out :
Bank of England Governor Mark Carney took aim at the U.S. dollar's "destabilising" role in
the world economy on Friday and said central banks might need to join together to create
their own replacement reserve currency.
The dollar's dominance of the global financial system increased the risks of a liquidity
trap of ultra-low interest rates and weak growth, Carney told central bankers from around the
world gathered in Jackson Hole, Wyoming, in the United States.
...
Carney warned that very low equilibrium interest rates had in the past coincided with wars,
financial crises and abrupt changes in the banking system.
...
China's yuan represented the most likely candidate to become a reserve currency to match the
dollar, but it still had a long way to go before it was ready.
The best solution would be a diversified multi-polar financial system, something that
could be provided by technology, Carney said.
Carney speaks of a "new Synthetic Hegemonic Currency (SHC)" which, in a purely electronic
form, could be created by a contract between the central banks of most or all countries. It
would replace the dollar as the main trade currency and lower the risk for other economies to
get infected by U.S. sicknesses (and manipulations).
Carney did not elaborate further but is an interesting concept. The devil will be, as
always, in the details. Will one be able to pay ones taxes in that currency? How will the value
of each sovereign currency in relation to SHC be determined?
That the U.S. dollar is used as a global reserve currency under the Bretton Woods system
is, in the words of the former French Minister of Finance Valéry Giscard d'Estaing, an
"exorbitant privilege". It if wants to keep that privilege it will have to go back to sane
economic and monetary policies. Otherwise the global economy will have no choice but to
decouple from it.
Posted by b on August 24, 2019 at 19:22 UTC |
Permalink
A Weak Dollar Could Help the US. Getting One
Isn't So Easy. https://nyti.ms/33j7eFe
NYT - Matt Phillips - August 6
President Trump has made no secret of his
frustration that the United States dollar
has strengthened against other currencies.
The trade war between Washington and Beijing took an unexpected turn this week as China
let its currency drop sharply and the United States responded by officially designating the
country a currency manipulator.
The confrontation underscored the Trump administration's focus on weakness in foreign
currencies -- and the corresponding strength of the dollar -- as a drag on the American
economy.
Now, investors are gaming out the prospect that the United States could actively intervene
in the financial markets, in a significant break from a decades-long commitment to
free-floating currencies.
"It's a big deal because I think it would mark a new sort of phase in how the U.S.
approaches the international economy," said Michael Feroli, chief United States economist
with JPMorgan Chase.
But while the president might want a weaker dollar, engineering one is complicated. Here's
the context you need to understand the United States' changing approach to the dollar.
Why would the U.S. benefit from a weaker dollar?
A weaker currency makes a country's exports cheaper for buyers overseas, giving a country
a competitive advantage. For years, an artificially weak renminbi underpinned China's growth
as a manufacturing base for the rest of the world.
The Trump administration's tariffs on imports of Chinese-made goods are meant to raise the
price of those products once they land in the United States, discouraging Americans from
buying them.
But one way for China to respond is to weaken the renminbi and undermine the impact of
those tariffs by making those products cheaper.
That's why when China allowed its closely controlled renminbi to depreciate sharply
against the dollar on Monday, it was taken as a sign that the trade war between the United
States and China was getting worse.
The currency has since strengthened, easing this tension somewhat, but China isn't the
only trading partner the president has a problem with.
For instance, in June, after the European Central Bank said it might restart stimulus
programs to bolster the economy, Mr. Trump accused it of pushing down the value of the euro,
"making it unfairly easier for them to compete against the USA."
"They have been getting away with this for years, along with China and others," he said on
Twitter.
A weaker dollar has other benefits. For instance, it could also bolster corporate
earnings. Roughly 40 percent of the revenue of the biggest American companies now comes from
overseas, and a weaker dollar means those foreign sales make a bigger contribution to the
bottom line. Those higher earnings can help give the stock market a lift.
None of this is a secret. But in the past, governments have shied away from weakening
their currencies, in part because they were afraid it would also lead to an ugly bout of
inflation, which was traditionally viewed as the big risk of a weak currency. These days,
inflation around the world is incredibly low and shows little sign of rising.
"You have almost the perfect macro backdrop for policymakers to encourage currency
weakness," said Alan Ruskin, chief international strategist at Deutsche Bank in New York.
How did this become a political issue?
Foreign exchange markets are a zero-sum game: If China's currency weakens against the
dollar, the dollar, by definition, strengthens.
So whether China is deliberately lowering the value of the renminbi, or the euro is
tumbling because currency traders are worried about the region's growth, the ultimate impact
is that the dollar is stronger.
Strong currencies tend to weaken a country's exports and bolster the consumption of
foreign products. That can lead to larger trade deficits.
President Trump has made reducing the trade deficit with China a crucial focus of his
administration and a crucial goal of the tariff war that began in 2018.
But that effort has had mixed results. The United States' goods deficit with China
initially widened to a record $43 billion in October before shrinking significantly since
then. It is now hovering around $30 billion a month.
In theory, if the dollar weakened against the Chinese currency, it could do more to cut
that trade deficit than a tariff battle, potentially offering the president a chance for a
political victory going into the 2020 election.
If other countries can weaken their currency, why doesn't the United States do the
same?
In theory, it can. But in practice it isn't easy.
In part, that's just because the currency markets are so big. Every day, more than $5
trillion changes hands in those markets, and more than $4 trillion of those trades involve
the dollar.
China controls the renminbi because it can use the bottomless buying power of its central
bank, which publishes an official price for the currency every day around which it allows a
certain amount of trading.
The People's Bank of China has the ability to print renminbi to weaken the currency if the
exchange rate gets too high. On the flip side, Beijing has $3 trillion in reserves it can
deploy to keep the currency from getting too weak.
Right now, the United States doesn't operate that way.
It has some capacity to intervene in financial markets by using the Exchange Stabilization
Fund, a vehicle under the control of the Treasury secretary, with about $100 billion of
buying power.
"Unless Congress gives Treasury authority to beef up the Exchange Stabilization Fund, it
just doesn't have enough firepower," said Joseph Gagnon, senior fellow at the Peterson
Institute for International Economics.
Last month, Larry Kudlow, director of the National Economic Council, said the White House
had considered an intervention to weaken the dollar before deciding against it. The same day,
however, Mr. Trump contradicted Mr. Kudlow, telling reporters that all options were on the
table.
"I could do that in two seconds if I wanted," Mr. Trump said. "I didn't say that I'm not
going to do something."
So in the past, when American politicians wanted to change the value of the dollar, they
had to coordinate efforts involving a number of countries. That's what happened in 1985, when
the United States engineered an agreement to weaken the dollar as part of an agreement known
as the Plaza Accord.
Of course, those countries were all strategic allies of the United States. Persuading
China to let its currency strengthen to help the United States is a different situation all
together.
"... The real concern is about the primacy of the dollar and US hegemony. When Krugman trumpeted 'free' trade with China back in 2000, falsely claiming that US labor would benefit, his main point was that it was good policy strategically. Krugman was woefully wrong, as China grew to be a geopolitical rival, not a US client state like Japan or Germany as the Clintonistas and the foreign policy borg had hoped. ..."
"... Folks, it ain't about US jobs and consumer prices, which will be affected at worst only marginally. What it's really about is the dominance of the empire and its enormous, tax-free profits overseas. ..."
What's at Risk if US Stumbles Into
a Currency War https://nyti.ms/2yKGPC1
NYT - Neil Irwin - August 7
... ... .. ...
The Trump administration has introduced a zero-sum approach to global currency policy --
envisioning a loser for every winner -- that violates the spirit of those rules.
In that sense, the latest moves risk upsetting a relatively stable order, creating
unpredictable ripple effects. When currencies swing wildly, they can pull along the economies
of some of the most powerful nations, such as by crushing entire sectors of the economy that
find themselves uncompetitive after a swing in global exchange rates.
And it could undermine the central role the United States has played in the international
financial system, especially if the accusations of manipulation are followed up with concrete
retaliation to try to artificially depress the value of the dollar.
"The dollar being the primary global currency has enormous benefits for the U.S., but with
the side effect that when the U.S. tries to depreciate, there are limits on how much it can
do that," said Adam Posen, president of the Peterson Institute for International Economics.
"But if the U.S. abuses its privilege too much by bullying, there will eventually be a
switch."
The decision to name China a currency manipulator does not, in and of itself, do much. But
it could be followed up with pressure on the International Monetary Fund and other nations to
make similar findings and lean on the Chinese to adjust their policies. Or it could lead to
direct intervention in foreign exchange markets by the United States Treasury.
This is not the first time President Trump has accused a major trading partner of using
currency policy to mistreat the United States.
... ... ...
A habit of the Trump administration has been to link seemingly unrelated items in its
dealings with other countries -- using tariff threats to try to influence Mexican immigration
policy, for example.
If the Trump administration continues down the path of using currency policy to try to
bludgeon China over trade, technology and national security issues, it will signal a
remarkable expansion into a policy area that has been a source of stability in recent
decades.
"It's dangerous to start a currency war because you don't know where it will end," said
Eric Winograd, chief U.S. economist at AllianceBernstein. "We've seen with the trade war that
it started in one place, and ended up much broader. There's every risk a currency war will do
the same."
"It could undermine the central role the United States has played in the
international financial system."
All the talk about hurting consumers and jobs is just noise that policy elites emit to win
support on false pretenses.
The real concern is about the primacy of the dollar and US hegemony. When Krugman
trumpeted 'free' trade with China back in 2000, falsely claiming that US labor would benefit,
his main point was that it was good policy strategically. Krugman was woefully wrong, as
China grew to be a geopolitical rival, not a US client state like Japan or Germany as the
Clintonistas and the foreign policy borg had hoped.
Now there is a real debate about global strategy going on. Trump wants to whack China back
into place, reduce it as a geopolitical threat. The other side is still wedded to the 2000
notion having China follow US global leadership and defending the exorbitant privileges of US
corporations, their banksters, and their profits. Their latest gambit is to raise a
potentially real issue--the primacy of the US dollar.
Folks, it ain't about US jobs and consumer prices, which will be affected at worst
only marginally. What it's really about is the dominance of the empire and its enormous,
tax-free profits overseas.
What's at Risk if US Stumbles Into
a Currency War https://nyti.ms/2yKGPC1
NYT - Neil Irwin - August 7
When the United States declared China a currency manipulator on Monday, long-building
trade tensions between the world's two largest economies spread to the combustible realm of
currencies -- with potentially huge consequences for the global financial system should the
escalation continue.
Did China allow the value of the yuan to fall against the dollar simply to allow it to
better match the nation's economic situation, as the country's leaders and many international
economists argue? Or was it, as President Trump contends, an effort to give Chinese exporters
an unfair advantage in trade?
That clash reflects Mr. Trump's rejection of the consensus of global economic
policymakers. That consensus says countries should be free to set monetary policies aimed at
generating sustained growth, even if that causes their currency to depreciate. And they
should be free to manage their exchange rates so long as they keep those rates broadly in
line with their economic fundamentals.
The conflict also reflects the president's singular focus on reducing trade deficits,
which he has argued make the United States a loser in the global trade system. But waging a
currency war could come at a big cost.
"I worry it further undermines the international framework that has supported decades of
faster growth," said Kristin Forbes, an economist at M.I.T. and a former official of the U.S.
Treasury and the Bank of England. "Exchange rates are the shock absorber in the global
economy."
There have been international strains over currency valuations for years, all the more so
in a world in which all the major economies are coping with sluggish growth. But the newest
currency frictions are different.
Up until now, countries have been focused on stimulating their domestic economies. In
particular, central banks have cut interest rates and taken other steps to pump money into
their financial systems. That tends to lower the value of their currency. After all,
investing in a currency with lower interest rates is less attractive, all else equal, than in
one with higher rates.
But the conventional wisdom among international economists is that this doesn't count as
currency manipulation. It's not a game in which one country's win means another must lose.
Lower interest rates should generate more economic activity, which makes the whole world
better off.
The Trump administration has introduced a zero-sum approach to global currency policy --
envisioning a loser for every winner -- that violates the spirit of those rules.
In that sense, the latest moves risk upsetting a relatively stable order, creating
unpredictable ripple effects. When currencies swing wildly, they can pull along the economies
of some of the most powerful nations, such as by crushing entire sectors of the economy that
find themselves uncompetitive after a swing in global exchange rates.
And it could undermine the central role the United States has played in the international
financial system, especially if the accusations of manipulation are followed up with concrete
retaliation to try to artificially depress the value of the dollar.
"The dollar being the primary global currency has enormous benefits for the U.S., but with
the side effect that when the U.S. tries to depreciate, there are limits on how much it can
do that," said Adam Posen, president of the Peterson Institute for International Economics.
"But if the U.S. abuses its privilege too much by bullying, there will eventually be a
switch."
The decision to name China a currency manipulator does not, in and of itself, do much. But
it could be followed up with pressure on the International Monetary Fund and other nations to
make similar findings and lean on the Chinese to adjust their policies. Or it could lead to
direct intervention in foreign exchange markets by the United States Treasury.
This is not the first time President Trump has accused a major trading partner of using
currency policy to mistreat the United States.
He assailed the European Central Bank for moving toward monetary stimulus in June --
complaining on Twitter that the resulting drop in the value of the euro was "making it
unfairly easier for them to compete against the USA."
The European Central Bank explained its stimulus as an effort to keep Europe from sliding
back into recession. When the central bank first undertook its "quantitative easing"
policies, it was with encouragement from the Obama administration, which believed a stronger
European economy was ultimately good for the U.S. economy, despite its effect on
currencies.
Similarly, the Trump administration's decision Monday to name China a currency manipulator
-- for allowing the value of its currency to fall -- does not align with how mainstream
economists view China's move.
With the economy slowing in China, in part because of the trade wars, market forces tend
to push its currency lower. But the People's Bank of China has defended the currency from big
drops, aiming to prevent capital from flowing out of the country or destabilizing the world
economy.
The "manipulation" that took place Monday morning wasn't artificially depressing the
Chinese currency to seize advantage with trade partners, but engaging in less manipulation in
order to allow it to fall closer to its market-determined rate.
There is a more nuanced case to be made against Chinese currency policy -- that it did
intervene for years to push down the value of its currency, ending in the early 2010s, and
that Chinese economic might was built on an unfair practice. But the Trump administration's
announcement focuses on the more recent actions, in which different economic rationales
apply.
There is also a paradox for President Trump. Because of the dollar's unique role as the
global reserve currency, when panic sets in overseas, money tends to flow into United States
Treasury bonds, which are viewed as the safest assets on earth. But that movement tends to
prop up the value of the dollar and push overseas currencies lower.
In other words, the more chaos he injects into the global economy by trying to pressure
China, Europe and others to depreciate their currencies, the more upward pressure there will
be on the dollar, undermining those efforts.
That is potentially the worst of both worlds. When the dollar rises on currency markets
because the United States economy is booming, it may be hard on American export industries,
but at least it takes place in the context of strong growth.
But for the dollar to surge because of a global economic troubles, it means exporters
suffer at the same time that the overall economy is under pressure. A particularly extreme
example of this happened in the fall of 2008, when the United States economy was in free fall
and yet the dollar rose because of the global financial crisis.
A habit of the Trump administration has been to link seemingly unrelated items in its
dealings with other countries -- using tariff threats to try to influence Mexican immigration
policy, for example.
If the Trump administration continues down the path of using currency policy to try to
bludgeon China over trade, technology and national security issues, it will signal a
remarkable expansion into a policy area that has been a source of stability in recent
decades.
"It's dangerous to start a currency war because you don't know where it will end," said
Eric Winograd, chief U.S. economist at AllianceBernstein. "We've seen with the trade war that
it started in one place, and ended up much broader. There's every risk a currency war will do
the same."
No we're talking turkey! "It could undermine the central role the United States has played in
the international financial system." All the talk about hurting consumers and jobs is just
noise that policy elites emit to win support on false pretenses.
The real concern is about the primacy of the dollar and US hegemony. When Krugman
trumpeted 'free' trade with China back in 2000, falsely claiming that US labor would benefit,
his main point was that it was good policy strategically. Krugman was woefully wrong, as
China grew to be a geopolitical rival, not a US client state like Japan or Germany as the
Clintonistas and the foreign policy borg had hoped.
Now there is a real debate about global strategy going on. Trump wants to whack China back
into place, reduce it as a geopolitical threat. The other side is still wedded to the 2000
notion having China follow US global leadership and defending the exorbitant privileges of US
corporations, their banksters, and their profits. Their latest gambit is to raise a
potentially real issue--the primacy of the US dollar.
Folks, it ain't about US jobs and consumer prices, which will be affected at worst only
marginally. What it's really about is the dominance of the empire and its enormous, tax-free
profits overseas.
I think that 10 years from now the biggest impact from Trump will be from his cancellation
of the Iran nuclear accord and unilateral imposition of strict sanctions which the Europeans
were not able to bypass in any meaningful way due the prevalence of the US dollar in global
transactions.
There is now significant motivation in Europe and even China in creating a real
alternative to the US dollar for international transactions which bypasses US banks. If this
happens to any significant degree, it would undercut the US dollar as the world's reserve
currency, resulting in a permanent drop in its value.
Without international support, US Government deficits and trade deficits will become
unsustainable, and there will be a significant drop in the American median standard of
living.
'Dr Doom' economist Nouriel Roubini in Bitcoin battle
3 July 2019
Outspoken economist Nouriel Roubini, nicknamed Dr Doom for his gloomy warnings, has caused a
stir with his latest attack on Bitcoin and its fellow cryptocurrencies.
Prof Roubini, who foresaw the financial crisis, says Bitcoin is "overhyped".
At a summit in Taiwan on Tuesday, he likened it to a "cesspool".
But his sparring partner at the event, who runs a cryptocurrency exchange, has angered the
professor by blocking the release of video of the event.
Arthur Hayes, the chief executive of the BitMex exchange, controls the rights to footage
of their debate, which took place during the Asia Blockchain Summit.
In a post on Twitter, Prof Roubini said he "destroyed" Mr Hayes in the debate and called him
a "coward" for not making it available...
Cryptocurrencies have given rise to an entire new criminal industry, comprising unregulated
offshore exchanges, paid propagandists, and an army of scammers looking to fleece retail
investors. Yet, despite the overwhelming evidence of rampant fraud and abuse, financial
regulators and law-enforcement agencies remain asleep at the wheel.
NEW YORK – There is a good reason why every civilized country in the world tightly
regulates its financial system. The 2008 global financial crisis, after all, was largely the
result of rolling back financial regulation. Crooks, criminals, and grifters are a fact of
life, and no financial system can serve its proper purpose unless investors are protected
from them...
*
[Go get 'em Doctor Doom. Does he know that this is a feature and not a bug?]
Wild traders are always here, as Doctor Doom points out. They are there when we use rocks,
when we used sea shells, when we used paper and now crypto, the wild traders remain.
Regulate as much as Dr. Doom thinks regulators should regulate. But do not deploy
government bean counters looking for stone age rocks under our matress, we are using digital
crypto instead.
Just yesterday Daimler announce a completely independent hard wallet for crypto use, in a
car. They are giving a car all the freedom to hold bearer assets in crypto form. The car
needs this to automate much of the car industry functions from gas taxes to used car sales.
So tell Dr. Doom to complain about car industry violating financial regulations.
The crypto casino was created so that speculators could profit from the money laundering
industry that provides investor liquidity to the back end of the human and illegal narcotics
trafficking industry. It was built on the anti-bank angst that emerged after the financial
crisis. It gives organized crime the legitimacy that they need to spend their enormous wealth
that is generated by so many ruined lives. Fools have always run with dicks. They just do not
know any better.
The crypto casinos were created to automate trading. Crypto insures that a bot trading obeys
the prior contract, and thus great simplifies transactions everywhere, from the Fed down to
you and me with significant savings, at least 1% increase in productivity.
We have a technology change happening. You get the wildcatters, they don't scare me, so
Dr. Doom is likely missing something here. More than likely he is short sided, looking at
this one thing and ignoring the fact that this is our 7th or 8th time we have changed money
tech. How did we do it last time? Wildcatters, hysterics, and failure to read history. Worked
fine then.
Crypto currencies are not money. They are just private scrip. Only demand give them exchange
value and only crooks and speculators have any demand for scrip born of the daughters of
ENIAC. To believe otherwise is to be a sovereign fool.
The Empire, in all its wisdom, has declared some countries as illegal, unworthy of using the
banking system. And then, sanctioned anyone who does business with those illegals. So, it is
illegals all the way down, in our ever-expanding WOE (War On Everyone).
This has generated interest in cryptocurrencies from some of those crooks and criminals
(aka "other countries").
You are too focused on the technology. Banks are not there just to conduct transactions, they
are there to track them and report to the government. They are required to know something
about the people behind the transactions.
Joe appears to miss the significance of underlying technology as much as anything else. Joe's
focus is directed somewhere inside his own mind that is separated from any reality that I am
aware of.
No, we are using cryptography everywhere, from cars to toys to wallets. Dr. Doom fails to see
this happening, happening as sure as we switched from metal to paper. Dr. Doom wants more
regulation of shadow banking, fine, why not say that out loud?
His ability to regulated shadow bankers has nothing to do with technology. Crypto is no
different than the embedded water mark on paper, same technology. Both regulators and
regulated have to adapt.
He has created a red Herring, a useless talking point to fool the delusionals, give them
some worthless talking point.
"Crypto insures that a bot trading obeys the prior contract, and thus great simplifies
transactions everywhere, from the Fed down to you and me with significant savings, at least
1% increase in productivity."
Huh?
How does crypto ensure that my wages producing a thousand meals as a food worker will
allow me to buy a thousand meals in the future? What I've seen is crypto turning a thousand
meals produced into a contracct that will buy two thousand one day, but only 500 the next
day.
Crypto really just wastes a bunch of computing power to solve a problem that only exists if
you are trying to hide illegal transactions from governments. Crypto currency is a solution
in search of problem unless you are engaged in laundering money, selling large quantities of
drugs/guns/people/animals/other illegal products, or buying same. Governments should make it
prosecutable wire fraud to use them.
Thanks. I referred to Judy Shelton's book for the reasons to support the gold standard. But,
I can list some of them here:
1) The gold standard was the core mechanism of Bretton-Woods that worked so well at keeping
world prices stable, promoting growth, and tying the money supply to the real economy.
2) Free market currencies have led to speculation taking over from market exchange rates to
support trade. Currency trading is ~100x the underlying trade in goods and services.
3) The exchange rates of currencies fluctuate far greater under a free market fiat currency
system than under the gold standard
4) Fiat currencies are always subject to political intervention.
5) gold can't be faked or conjured into existence.
6) The gold supply grows about 2%/year, which has been stable for many decades.
7) gold, as a real commodity, ties money to the real economy rather than the financial
markets.
2. This has what to do with the gold standard? There was lots of currency trading under
the gold standard. This is primarily a result of algorithmic trading.
3. True - but this is good. Why would this be bad?
4. This is why you have an independent central bank.
5. No but gold can also be hoarded. Please see Krugman's Baby Sitter Klatch article.
6. This is utterly absurd. Gold production stops when the price is too low, ramps up when
it is high.
7. How is gold a commodity? 99% of the gold in the world sits in a basement being guarded
by governments. It's only value is in making shiny things and the current supply is wildly
more than there is demand for said shiny things. Ohhhh, Shiny! does not make something a
commodity. If there were any large industrial applications for the metal maybe - but there
really isn't.
Thanks for the good points. Some clarification:
1) By world prices this means the exchange rate. Under Bretton-Woods the price of gold was
set at $35/oz and other currencies were pegged to the dollar.
2) If the purpose of currency exchange is to facilitate trade, then this is the tail wagging
the dog, and indicates a currency trading system that has become disconnected from its core
purpose.
3) Price stability is a core goal of money. So that tomorrow I will be confident of what that
money will be worth.
4) Independence is not disinterest. Central banking has shown itself to sway with political
winds such as the German central bank in the 1990s, and the US central bank under Nixon.
5) Hoarding of gold, in the sense of cornering the market, is essentially impossible because
of the wide distribution of gold in the world and because moving to gold in general would
indicate a loss of confidence in a currency, which is good. (as long as we're saying good v.
bad).
6) True. production is not that stable, but on average it is fairly constant. See Fig 1. :
https://pubs.usgs.gov/of/2002/of02-303/OFR_02-303.pdf
7) Not true. Again see the USGS publication. Most gold goes into jewelry, and so is held by
the public. Much of the other gold goes into industry, dental
The reason to prefer gold, besides the above, is that most money created since 1971 has
gone into the financial sector rather than the real economy. Thus, workers don't get a real
raise, but financial instruments just keep going up with no limit.
David,
tell me now, how did George Soros get so rich, and why was the Bretton Woods system
abandoned?
5. Shows that you don't understand the issue. Hoarding doesn't have to corner the market
to be an issue, it's just that rewards people who are creating a problem and so can create a
vicious circle.
P.S. 2% is way too low. Money needs to expand at least enough to match nominal GDP - and that
assumes that the rate of savings and circulation velocity are constant. And if prices are
absolutely constant how will people ever pay off debts. People have to pay back the nominal
capital of a loan. If income/head in nominal terms is relatively constant (in some countries
at some times there will be actual deflation) then compared to the current situation in
situations of absolute price stability delinquency rates will rise. You quote the 50/60s as a
golden - what were inflation rates like then (answer >2% with real growth of >5% so
>7% nominal GDP growth)?
Gold is not a great system for a money supply, but its the best one we have so far. Other
commodities could be used as the means of value and settlement, but they are far less
convenient and have other properties that are not as good as gold.
Perhaps a global crypto currency will take the place of gold in the future? It would need
to be of a fixed amount that does not change over time, and secure against hacking. So, maybe
not.
[Great answer inasmuch as changing the question is always the best answer when one has no
answer to some obvious questions.
OTOH, the US dollar based global reserve currency is a problem, although mostly for the US
in just general economic terms, but a problem for the entire world in terms of limiting the
use of carbon based fuels. Cheap oil is good for the dollar hegemon, but bad for supporting
continued human existence on Earth.
Internationally managed reserve currency and FOREX institutional arrangements along the
lines of Keynes's Bancor might be a better idea. Crypto currency is an invitation to black
market traffickers and hackers. Primary support is from drug and sex trafficking. So, what is
not to love?
The hard money crew in the US defeated Keynes's Bancor proposal at the Bretton Woods
conference and basically all of the problems that the gold bugs complain about today have
been the results of following their preferred policy path after WWII.]
How John Maynard Keynes' most radical idea could save the world
As the Second World War was drawing to a close, the economic experts of the Allies met in
a New Hampshire resort to try to hammer out an international monetary system that would help
prevent a recurrence of the Great Depression. The ensuing debate centered around two main
proposals, one from the British delegation and one from the American. John Maynard Keynes,
the greatest economist of the 20th century, presented the British case while Harry Dexter
White, one of FDR's key economic advisers, presented the American one.
Keynes lost on many key points. The result was the Bretton Woods system, named after the
small town in which the conference was held. As part of the agreement, it also created what
would later become the International Monetary Fund and the World Bank. That served as the
system of managing international trade and currencies for nearly three decades. Today the IMF
and World Bank survive, but Bretton Woods was broken in 1971 when Nixon suspended the
convertibility of the dollar into gold.
Yet most of the problems that spurred the creation of Bretton Woods have since returned in
only somewhat less dire form. It's worth returning to Keynes' original, much more ambitious
idea for an international institution to manage the flow of goods and money around the
globe.
The basic problem with international trade is that imbalances can develop: Some countries get
big export surpluses, while others necessarily develop big trade deficits (since the world
cannot be in surplus or deficit with itself). And because countries typically must borrow to
finance trade deficits, it's a quick and easy recipe for a crash in those countries when
their ability to take on more debt reaches its limit. It's not as bad for surplus countries,
since they will not have a debt crisis or a collapse in the value of their currency, but they
too will be hurt by the loss of export markets. This problem has haunted nations since well
before the Industrial Revolution.
Nations like Germany with a large export surplus often portray it as resulting from their
superior virtue and technical skill. But the fundamental reality of such a surplus is that it
requires someone to buy the exports. As Yanis Varoufakis points out in his new book, without
some sort of permanent mechanism to recycle that surplus back into deficit countries, the
result will be eventual disaster. It's precisely what caused the initial economic crisis in
Greece that is still ongoing.
Bretton Woods addressed this problem with a set of rather ad hoc measures. The dollar
would be pegged to a particular amount of gold, and semi-fixed exchange rates for other
currencies were to be fixed around that. In keeping with White's more orthodox economic
views, all trade imbalances were to be solved on the deficit side. There was no limit to the
surplus nations could build up (importantly, at the time the U.S. was a huge exporter), and
the IMF was tasked with shoring up countries having serious trade deficit problems by
enforcing austerity and tight money. (This would lead to repeated disaster for developing
countries.)
Keynes' idea, by contrast, was substantially more ambitious. He proposed an overarching
"International Clearing Union" that potentially every country in the world could join. It
would create a new reserve currency, the "bancor," that could only be used for settling
international accounts, and member nations would pay a membership quota in proportion to
their total trade. Countries in surplus would receive bancor credit, while those in deficit
would have a negative account.
The union was also explicitly aimed at facilitating increased trade overall (also unlike
Bretton Woods). And critically, it would incentivize nations to keep their trade balanced on
both sides -- surplus and deficit. Run too far into deficit, and a country would be required
to devalue to reduce imports. But run too far into surplus, and a country's currency would be
required to appreciate so as to increase imports. A bancor tax would also be levied at an
increasing rate on anyone with a large trade imbalance.
There's much more to the story, but the fundamental idea is fairly simple. As Keynes wrote in
his original proposal, the basic "principle is the necessary equality of credits and debits,
of assets and liabilities. If no credits can be removed outside the clearing system but only
transferred within it, the Union itself can never be in difficulties."
For the postwar generation, Bretton Woods worked tolerably well -- and it certainly was a
vast improvement on the prewar gold standard. But its mechanisms were far less legible, and
required constant good-faith efforts from various nations, particularly Germany and the U.S.,
to work properly. More importantly, it relied on large American surpluses to soak up the huge
aid that was being sent to Europe under the Marshall Plan, a goodly portion of which was used
to buy American-made exports. When the U.S. moved to deficit, the system broke down within
only a few years.
Keynes' plan, by contrast, would likely have had the flexibility to adapt to a massive 180
degree shift in the balance of trade. It is also far more transparent and comprehensible to
average people, perhaps disrupting the excessive pride of surplus countries to some extent.
And if it were to be created in the future, it would be under effective supervision from the
member states. The vast carnage inflicted by the unaccountable, supranational European
Central Bank is too stark to ignore.
It would undoubtedly take years and years to build and update Keynes proposal to where it
might be implemented. But the problems it is designed to address will always keep cropping
up. Perhaps after the eurozone implodes, the world will get another chance to do it
right.
*
[The rallying cry of the gold bugs is "Idiots of the world unite," which is very effective
given the considerable majority held by idiots in the electorates of republics and among
their controlling elites both public and private.]
Under Bretton-Woods no trade imbalances were possible because of the settlement mechanism in
gold. The deficit nations (that imported more than exported) would have to settle by
transferring gold out in the amount of the deficit. Thus, in effect selling the commodity of
gold for the excess imports. This all works well if the imbalances are periodically settled
by the gold transfers, which didn't happen as many countries simply held onto the currencies,
and if trade is balanced.
Balance of trade is the key to stable trade. All imbalances eventually come back into
balance. The question is: will this happen in a smooth orderly manner, like under
Bretton-Woods, or in a calamity where for example the dollar crashes?
"...This all works well if the imbalances are periodically settled by the gold transfers,
which didn't happen as many countries simply held onto the currencies, and if trade is
balanced..."
*
[You are getting warmer, but still no cigar and a whole lot of cart before the horse. What
happened under the original Bretton Woods agreement was that surplus traders held onto their
US dollar reserves while convertibility (more to silver than gold - which we hold) kept the
US dollar from becoming overvalued under the simultaneous pressures of what remained small US
trade deficits and growing foreign reserves of US dollars. This was not a gold standard per
se, but rather the establishment of the US dollar, the currency of the dominant global
economic power, as the global reserve currency for foreign held reserves and also the
dominant currency of international trade exchange. Trade remained relatively well balanced
because convertibility limited how overvalued the dollar could maintain itself under trade
deficits despite its broadly held status as the dominate global reserve currency.
The end of Bretton Woods US dollar convertibility saw growing US trade deficits with
simultaneous growth in US dollar denominated foreign reserves and an over-valued dollar which
just accelerated US trade deficits even further. Bigger US trade deficits just fed into even
larger USD foreign reserves. It was a vicious cycle of dollar over-valuation despite growing
US trade deficits because surplus partners had relatively secure means of holding large USD
reserves. The world's high demand for dollars was great for rentiers, arbitrage seekers, and
global corporations. Trading partners could hold USD reserves to keep their currencies
undervalued relative to the USD more successfully than with convertibility. OTOH, the US
gained cheap access to global oil reserves and also US multinational corporations gained
global price arbitrage advantages if they were willing to offshore much labor to countries
with currencies undervalued relative to the dollar or merely countries with lower standards
of living (i.e., real wages) and environmental protection standards for industrial
production. Winning all three together on the same US dollar capital flow was the global
price arbitrage trifecta. ]
The US could have had it both ways in the sense that it could have run budget deficits by
monetizing the dollar and causing inflation as it was starting to do in the late 1960s and
maintain the international exchange rate. The mechanism to do this is US tariffs. This would
have made imports to the US expensive and kept all those excess dollars from flowing
overseas. The rational is balance of trade. As long as the current account is balanced the
Bretton-Woods system would continue to function.
The US went all in on free trade and eliminating tariffs when it implemented the income tax
system to finance government operations spending in 1913. At the time the US dollar was
underpriced against most European currencies in FOREX, particularly the pound sterling, and
the US had a growing trade surplus which eventually contributed significantly to the
settlements crisis under the gold standard that was a major cause for precipitating the Great
Depression. Once that path was taken it became difficult to turn back since the wealthy build
their rentier and arbitrage systems upon the world that is rather than some world that might
be. Policy makers rely upon the stock of wealth both for campaign contributions and to raise
their miserable lives into something of elite significance because of who they hang out with
and in turn whose interests that they serve.
I understand it that if a frog had wings then it would not bump its ass every time that it
leaped.
The US consistently ran a trade surplus during the Bretton Woods period, but Bretton Woods
was based on US dollars. So the world was being drained of US dollars (or the rest of the
world of Gold). That is clearly not sustainable. There is a problem with unbalanced trade if
it is either direction. Under Bretton Woods there was no penalty for mercantilism. You just
need to know history to no that financial crises are nothing new and that a gold standard
didn't prevent them, but in fact exacerbated them. I don't where you get your ideas from, but
you should go back and read some history.
The real questions are:
1) During Bretton-Woods worker compensation grew with growth in productivity, but since the
withdrawal in 1971, worker compensation has been flat. Why? And how to re-mediate this?
2) Why has so much of GDP shifted to financial speculation and away from the productive
economy? And how to shift economic activity back to the productive sector?
3) Given our use of fiat currency, what limits the growth of the money supply in the
financial sector? That is, what prevents financial instruments that are disconnected from the
productive economy from creating an endless cycle of: new instruments drives new money to buy
them, rinse and repeat...
The second one in particular lays out the issue quite clearly. It literally forms an arrow
with the tip pointing to the divergent point where something major happened to create such a
stark and durable systematic change.
This is classical cargo cult thinking, these two things are correlated so one must have
caused the other. There were lots of things changed at that time, I was there, I followed the
debates (in which the world basically decided to follow some of what Milton Friedman said -
and ignored some other things that he said - like negative interest rates and that money
supply expansion should come mostly from expanding the central bank balance sheet - see also
Robert Waldmann's explanation that Lucas and Friedman are methodical opposites and yet both
belong to the "Chicago School"). You have to not only note a correlation, but also show the
mechanism and control for other factors. Get to it.
1. Other things happened at the same time (see tariffs, changes in laws related to unions,
containerization and also relaxation of capital controls and banking regulation). You went
from a world of relatively isolated economies (especially the US) to a world of tightly
integrated economies. Bretton Woods fall had almost nothing to do with it.
2. Washington consensus that budget deficits are bad and monetary policy (i.e. encouraging
private debt) are good. We need to expand the central bank balance sheet in line with nominal
GDP and reduce private indebtedness again.
True, but whatever the cause, to have such a sharp and clear divergence, one or more
significant changes had to happen in a short span of time. Do those things mentioned above
add up to enough of a cumulative durable change?
But it wasn't a SHARP divergence at all. I actually wish that Anne had done the chart in
terms of rates of change. Having it in terms of levels hides more than it shows. But think
about this - there was a reason that Bretton Woods was abandoned - it didn't happen in a
vacuum. Maybe you should ask why that happened.
And as commodities go gold has a number of advantages
Over say concrete blocks or diamonds
Lots of clever souls would like to use an exchange medium that
Wasn't subject to modern state financial casuistry
And usually they aren't overly focused on the existing
Unregulated market systems hitches and loops
and
Perversities
Cold mining costs have always tracked the monetary price of gold. Aka, the marginal price of
a new ounce is the monetary price.
To get the cost of mining goold down to $20 in the late 20s, food, housing prices had tlo
fall by slashing wages which cut demand for food forcing prices of food down by forcing wages
down, thus gold miners could eat enough food to mine an ounce of gold.
When FDR set the price government paid for gold to $35 dollars, the number of gold miners,
and gold ounces mined doubled in less than a year, and stayed up until government prohibited
gold mining to reallocate labor to the war industrial production.
What we don't see is the actual marginal costs of gold mining in either the short or long
run. The global gold mining cartel keeps all the data secret, eg, South Africa, Russia, which
produce about half the gold aannually. They can easily bankrupt a big corporation investing
in a new big mineing and refining operation by releasing some of their massive gold hoard at
prices just below the corporation marginal cost plus debt service. The big driver of gold
demand is Asia and Muslim consumption for gold hoops and rings so people, especially women
have their wealth with them at all times.
MULP made an assertion a couple of days ago that there were far more empty beds in the
country now that several decades ago. I questioned the assertion, since there was no
supporting data, but now I am finding the data in Census tracts and know MULP was correct.
Family and household sizes have been declining for decades.
Looks like the world order established after WWIII crumbed with the USSR and now it is again the law if jungles with the US as the
biggest predator.
Notable quotes:
"... The root cause is clear: After the crescendo of pretenses and deceptions over Iraq, Libya and Syria, along with our absolution of the lawless regime of Saudi Arabia, foreign political leaders are coming to recognize what world-wide public opinion polls reported even before the Iraq/Iran-Contra boys turned their attention to the world's largest oil reserves in Venezuela: The United States is now the greatest threat to peace on the planet. ..."
"... Calling the U.S. coup being sponsored in Venezuela a defense of democracy reveals the Doublethink underlying U.S. foreign policy. It defines "democracy" to mean supporting U.S. foreign policy, pursuing neoliberal privatization of public infrastructure, dismantling government regulation and following the direction of U.S.-dominated global institutions, from the IMF and World Bank to NATO. For decades, the resulting foreign wars, domestic austerity programs and military interventions have brought more violence, not democracy ..."
"... A point had to come where this policy collided with the self-interest of other nations, finally breaking through the public relations rhetoric of empire. Other countries are proceeding to de-dollarize and replace what U.S. diplomacy calls "internationalism" (meaning U.S. nationalism imposed on the rest of the world) with their own national self-interest. ..."
"... For the past half-century, U.S. strategists, the State Department and National Endowment for Democracy (NED) worried that opposition to U.S. financial imperialism would come from left-wing parties. It therefore spent enormous resources manipulating parties that called themselves socialist (Tony Blair's British Labour Party, France's Socialist Party, Germany's Social Democrats, etc.) to adopt neoliberal policies that were the diametric opposite to what social democracy meant a century ago. But U.S. political planners and Great Wurlitzer organists neglected the right wing, imagining that it would instinctively support U.S. thuggishness. ..."
"... Perhaps the problem had to erupt as a result of the inner dynamics of U.S.-sponsored globalism becoming impossible to impose when the result is financial austerity, waves of population flight from U.S.-sponsored wars, and most of all, U.S. refusal to adhere to the rules and international laws that it itself sponsored seventy years ago in the wake of World War II. ..."
"... Here's the first legal contradiction in U.S. global diplomacy: The United States always has resisted letting any other country have any voice in U.S. domestic policies, law-making or diplomacy. That is what makes America "the exceptional nation." But for seventy years its diplomats have pretended that its superior judgment promoted a peaceful world (as the Roman Empire claimed to be), which let other countries share in prosperity and rising living standards. ..."
"... Inevitably, U.S. nationalism had to break up the mirage of One World internationalism, and with it any thought of an international court. Without veto power over the judges, the U.S. never accepted the authority of any court, in particular the United Nations' International Court in The Hague. Recently that court undertook an investigation into U.S. war crimes in Afghanistan, from its torture policies to bombing of civilian targets such as hospitals, weddings and infrastructure. "That investigation ultimately found 'a reasonable basis to believe that war crimes and crimes against humanity." ..."
"... This showed that international finance was an arm of the U.S. State Department and Pentagon. But that was a generation ago, and only recently did foreign countries begin to feel queasy about leaving their gold holdings in the United States, where they might be grabbed at will to punish any country that might act in ways that U.S. diplomacy found offensive. So last year, Germany finally got up the courage to ask that some of its gold be flown back to Germany. U.S. officials pretended to feel shocked at the insult that it might do to a civilized Christian country what it had done to Iran, and Germany agreed to slow down the transfer. ..."
"... England refused to honor the official request, following the direction of Bolton and U.S. Secretary of State Michael Pompeo. As Bloomberg reported: "The U.S. officials are trying to steer Venezuela's overseas assets to [Chicago Boy Juan] Guaido to help bolster his chances of effectively taking control of the government. The $1.2 billion of gold is a big chunk of the $8 billion in foreign reserves held by the Venezuelan central bank." ..."
"... But now, cyber warfare has become a way of pulling out the connections of any economy. And the major cyber connections are financial money-transfer ones, headed by SWIFT, the acronym for the Society for Worldwide Interbank Financial Telecommunication, which is centered in Belgium. ..."
"... On January 31 the dam broke with the announcement that Europe had created its own bypass payments system for use with Iran and other countries targeted by U.S. diplomats. Germany, France and even the U.S. poodle Britain joined to create INSTEX -- Instrument in Support of Trade Exchanges. The promise is that this will be used only for "humanitarian" aid to save Iran from a U.S.-sponsored Venezuela-type devastation. But in view of increasingly passionate U.S. opposition to the Nord Stream pipeline to carry Russian gas, this alternative bank clearing system will be ready and able to become operative if the United States tries to direct a sanctions attack on Europe ..."
"... The U.S. overplaying its position is leading to the Mackinder-Kissinger-Brzezinski Eurasian nightmare that I mentioned above. In addition to driving Russia and China together, U.S. diplomacy is adding Europe to the heartland, independent of U.S. ability to bully into the state of dependency toward which American diplomacy has aimed to achieve since 1945. ..."
"... By following U.S. advice, countries have left themselves open to food blackmail – sanctions against providing them with grain and other food, in case they step out of line with U.S. diplomatic demands. ..."
"... It is worthwhile to note that our global imposition of the mythical "efficiencies" of forcing Latin American countries to become plantations for export crops like coffee and bananas rather than growing their own wheat and corn has failed catastrophically to deliver better lives, especially for those living in Central America. The "spread" between the export crops and cheaper food imports from the U.S. that was supposed to materialize for countries following our playbook failed miserably – witness the caravans and refugees across Mexico. Of course, our backing of the most brutal military dictators and crime lords has not helped either. ..."
"... But a few years ago Ukraine defaulted on $3 billion owed to Russia. The IMF said, in effect, that Ukraine and other countries did not have to pay Russia or any other country deemed to be acting too independently of the United States. The IMF has been extending credit to the bottomless it of Ukrainian corruption to encourage its anti-Russian policy rather than standing up for the principle that inter-government debts must be paid. ..."
"... It is as if the IMF now operates out of a small room in the basement of the Pentagon in Washington. ..."
"... Anticipating just such a double-cross, President Chavez acted already in 2011 to repatriate 160 tons of gold to Caracas from the United States and Europe. ..."
"... It would be good for Americans, but the wrong kind of Americans. For the Americans that would populate the Global Executive Suite, a strong US$ means that the stipends they would pay would be worth more to the lackeys, and command more influence. ..."
"... Dumping the industrial base really ruined things. America is now in a position where it can shout orders, and drop bombs, but doesn't have the capacity to do anything helpful. They have to give up being what Toynbee called a creative minority, and settle for being a dominant minority. ..."
"... Having watched the 2016 election closely from afar, I was left with the impression that many of the swing voters who cast their vote for Trump did so under the assumption that he would act as a catalyst for systemic change. ..."
"... Now we know. He has ripped the already transparent mask of altruism off what is referred to as the U.S.-led liberal international order and revealed its true nature for all to see, and has managed to do it in spite of the liberal international establishment desperately trying to hold it in place in the hope of effecting a seamless post-Trump return to what they refer to as "norms". Interesting times. ..."
"... Exactly. He hasn't exactly lived up to advanced billing so far in all respects, but I suspect there's great deal of skulduggery going on behind the scenes that has prevented that. ..."
"... To paraphrase the infamous Rummy, you don't go to war with the change agent and policies you wished you had, you go to war with the ones you have. That might be the best thing we can say about Trump after the historic dust of his administration finally settles. ..."
"... Yet we find out that Venezuela didn't managed to do what they wanted to do, the Europeans, the Turks, etc bent over yet again. Nothing to see here, actually. ..."
"... So what I'm saying is he didn't make his point. I wish it were true. But a bit of grumbling and (a tiny amount of) foot-dragging by some pygmy leaders (Merkel) does not signal a global change. ..."
"... Currency regime change can take decades, and small percentage differences are enormous because of the flows involved. USD as reserve for 61% of global sovereigns versus 64% 15 years ago is a massive move. ..."
"... I discovered his Super Imperialism while looking for an explanation for the pending 2003 US invasion of Iraq. If you haven't read it yet, move it to the top of your queue if you want to have any idea of how the world really works. ..."
"... If it isn't clear to the rest of the world by now, it never will be. The US is incapable of changing on its own a corrupt status quo dominated by a coalition of its military industrial complex, Wall Street bankers and fossil fuels industries. As long as the world continues to chase the debt created on the keyboards of Wall Street banks and 'deficits don't matter' Washington neocons – as long as the world's 1% think they are getting 'richer' by adding more "debts that can't be repaid (and) won't be" to their portfolios, the global economy can never be put on a sustainable footing. ..."
"... In other words, after 2 World Wars that produced the current world order, it is still in a state of insanity with the same pretensions to superiority by the same people, to get number 3. ..."
"... Few among Washington's foreign policy elite seem to fully grasp the complex system that made U.S. global power what it now is, particularly its all-important geopolitical foundations. As Trump travels the globe, tweeting and trashing away, he's inadvertently showing us the essential structure of that power, the same way a devastating wildfire leaves the steel beams of a ruined building standing starkly above the smoking rubble." ..."
"... He's draining the swamp in an unpredicted way, a swamp that's founded on the money interest. I don't care what NYT and WaPo have to say, they are not reporting events but promoting agendas. ..."
"... The financial elites are only concerned about shaping society as they see fit, side of self serving is just a historical foot note, Trumps past indicates a strong preference for even more of the same through authoritarian memes or have some missed the OT WH reference to dawg both choosing and then compelling him to run. ..."
"... Highly doubt Trump is a "witting agent", most likely is that he is just as ignorant as he almost daily shows on twitter. On US role in global affairs he says the same today as he did as a media celebrity in the late 80s. Simplistic household "logics" on macroeconomics. If US have trade deficit it loses. Countries with surplus are the winners. ..."
"... Anyhow frightening, the US hegemony have its severe dark sides. But there is absolutely nothing better on the horizon, a crash will throw the world in turmoil for decades or even a century. A lot of bad forces will see their chance to elevate their influence. There will be fierce competition to fill the gap. ..."
"... On could the insane economic model of EU/Germany being on top of global affairs, a horribly frightening thought. Misery and austerity for all globally, a permanent recession. Probably not much better with the Chinese on top. I'll take the USD hegemony any day compared to that prospect. ..."
"... Former US ambassador, Chas Freeman, gets to the nub of the problem. "The US preference for governance by elected and appointed officials, uncontaminated by experience in statecraft and diplomacy, or knowledge of geography, history and foreign affairs" https://www.youtube.com/watch?annotation_id=annotation_882041135&feature=iv&src_vid=Ge1ozuXN7iI&v=gkf2MQdqz-o ..."
"... Michael Hudson, in Super Imperialism, went into how the US could just create the money to run a large trade deficit with the rest of the world. It would get all these imports effectively for nothing, the US's exorbitant privilege. I tied this in with this graph from MMT. ..."
"... The Government was running a surplus as the economy blew up in the early 1990s. It's the positive and negative, zero sum, nature of the monetary system. A big trade deficit needs a big Government deficit to cover it. A big trade deficit, with a balanced budget, drives the private sector into debt and blows up the economy. ..."
The end of America's unchallenged global economic dominance has arrived sooner than expected, thanks to the very same Neocons
who gave the world the Iraq, Syria and the dirty wars in Latin America. Just as the Vietnam War drove the United States off gold
by 1971, its sponsorship and funding of violent regime change wars against Venezuela and Syria – and threatening other countries
with sanctions if they do not join this crusade – is now driving European and other nations to create their alternative financial
institutions.
This break has been building for quite some time, and was bound to occur. But who would have thought that Donald Trump would become
the catalytic agent? No left-wing party, no socialist, anarchist or foreign nationalist leader anywhere in the world could have achieved
what he is doing to break up the American Empire. The Deep State is reacting with shock at how this right-wing real estate grifter
has been able to drive other countries to defend themselves by dismantling the U.S.-centered world order. To rub it in, he is using
Bush and Reagan-era Neocon arsonists, John Bolton and now Elliott Abrams, to fan the flames in Venezuela. It is almost like a black
political comedy. The world of international diplomacy is being turned inside-out. A world where there is no longer even a pretense
that we might adhere to international norms, let alone laws or treaties.
The Neocons who Trump has appointed are accomplishing what seemed unthinkable not long ago: Driving China and Russia together
– the great nightmare of Henry Kissinger and Zbigniew Brzezinski. They also are driving Germany and other European countries into
the Eurasian orbit, the "Heartland" nightmare of Halford Mackinder a century ago.
The root cause is clear: After the crescendo of pretenses and deceptions over Iraq, Libya and Syria, along with our absolution
of the lawless regime of Saudi Arabia, foreign political leaders are coming to recognize what world-wide public opinion polls reported
even before the Iraq/Iran-Contra boys turned their attention to the world's largest oil reserves in Venezuela: The United States
is now the greatest threat to peace on the planet.
Calling the U.S. coup being sponsored in Venezuela a defense of democracy reveals the Doublethink underlying U.S. foreign
policy. It defines "democracy" to mean supporting U.S. foreign policy, pursuing neoliberal privatization of public infrastructure,
dismantling government regulation and following the direction of U.S.-dominated global institutions, from the IMF and World Bank
to NATO. For decades, the resulting foreign wars, domestic austerity programs and military interventions have brought more violence,
not democracy.
In the Devil's Dictionary that U.S. diplomats are taught to use as their "Elements of Style" guidelines for Doublethink, a "democratic"
country is one that follows U.S. leadership and opens its economy to U.S. investment, and IMF- and World Bank-sponsored privatization.
The Ukraine is deemed democratic, along with Saudi Arabia, Israel and other countries that act as U.S. financial and military protectorates
and are willing to treat America's enemies are theirs too.
A point had to come where this policy collided with the self-interest of other nations, finally breaking through the public
relations rhetoric of empire. Other countries are proceeding to de-dollarize and replace what U.S. diplomacy calls "internationalism"
(meaning U.S. nationalism imposed on the rest of the world) with their own national self-interest.
This trajectory could be seen 50 years ago (I described it in Super Imperialism [1972] and Global Fracture [1978].) It had to
happen. But nobody thought that the end would come in quite the way that is happening. History has turned into comedy, or at least
irony as its dialectical path unfolds.
For the past half-century, U.S. strategists, the State Department and National Endowment for Democracy (NED) worried that
opposition to U.S. financial imperialism would come from left-wing parties. It therefore spent enormous resources manipulating parties
that called themselves socialist (Tony Blair's British Labour Party, France's Socialist Party, Germany's Social Democrats, etc.)
to adopt neoliberal policies that were the diametric opposite to what social democracy meant a century ago. But U.S. political planners
and Great Wurlitzer organists neglected the right wing, imagining that it would instinctively support U.S. thuggishness.
The reality is that right-wing parties want to get elected, and a populist nationalism is today's road to election victory in
Europe and other countries just as it was for Donald Trump in 2016.
Trump's agenda may really be to break up the American Empire, using the old Uncle Sucker isolationist rhetoric of half a century
ago. He certainly is going for the Empire's most vital organs. But it he a witting anti-American agent? He might as well be – but
it would be a false mental leap to use "quo bono" to assume that he is a witting agent.
After all, if no U.S. contractor, supplier, labor union or bank will deal with him, would Vladimir Putin, China or Iran be any
more naïve? Perhaps the problem had to erupt as a result of the inner dynamics of U.S.-sponsored globalism becoming impossible
to impose when the result is financial austerity, waves of population flight from U.S.-sponsored wars, and most of all, U.S. refusal
to adhere to the rules and international laws that it itself sponsored seventy years ago in the wake of World War II.
Dismantling International Law and Its Courts
Any international system of control requires the rule of law. It may be a morally lawless exercise of ruthless power imposing
predatory exploitation, but it is still The Law. And it needs courts to apply it (backed by police power to enforce it and punish
violators).
Here's the first legal contradiction in U.S. global diplomacy: The United States always has resisted letting any other country
have any voice in U.S. domestic policies, law-making or diplomacy. That is what makes America "the exceptional nation." But for seventy
years its diplomats have pretended that its superior judgment promoted a peaceful world (as the Roman Empire claimed to be), which
let other countries share in prosperity and rising living standards.
At the United Nations, U.S. diplomats insisted on veto power. At the World Bank and IMF they also made sure that their equity
share was large enough to give them veto power over any loan or other policy. Without such power, the United States would not join
any international organization. Yet at the same time, it depicted its nationalism as protecting globalization and internationalism.
It was all a euphemism for what really was unilateral U.S. decision-making.
Inevitably, U.S. nationalism had to break up the mirage of One World internationalism, and with it any thought of an international
court. Without veto power over the judges, the U.S. never accepted the authority of any court, in particular the United Nations'
International Court in The Hague. Recently that court undertook an investigation into U.S. war crimes in Afghanistan, from its torture
policies to bombing of civilian targets such as hospitals, weddings and infrastructure. "That investigation ultimately found 'a reasonable
basis to believe that war crimes and crimes against humanity."
[1]
Donald Trump's National Security Adviser John Bolton erupted in fury, warning in September that: "The United States will use any
means necessary to protect our citizens and those of our allies from unjust prosecution by this illegitimate court," adding that
the UN International Court must not be so bold as to investigate "Israel or other U.S. allies."
That prompted a senior judge, Christoph Flügge from Germany, to resign in protest. Indeed, Bolton told the court to keep out of
any affairs involving the United States, promising to ban the Court's "judges and prosecutors from entering the United States." As
Bolton spelled out the U.S. threat: "We will sanction their funds in the U.S. financial system, and we will prosecute them in the
U.S. criminal system. We will not cooperate with the ICC. We will provide no assistance to the ICC. We will not join the ICC. We
will let the ICC die on its own. After all, for all intents and purposes, the ICC is already dead to us."
What this meant, the German judge spelled out was that: "If these judges ever interfere in the domestic concerns of the U.S. or
investigate an American citizen, [Bolton] said the American government would do all it could to ensure that these judges would no
longer be allowed to travel to the United States – and that they would perhaps even be criminally prosecuted."
The original inspiration of the Court – to use the Nuremburg laws that were applied against German Nazis to bring similar prosecution
against any country or officials found guilty of committing war crimes – had already fallen into disuse with the failure to indict
the authors of the Chilean coup, Iran-Contra or the U.S. invasion of Iraq for war crimes.
Dismantling Dollar Hegemony from the IMF to SWIFT
Of all areas of global power politics today, international finance and foreign investment have become the key flashpoint. International
monetary reserves were supposed to be the most sacrosanct, and international debt enforcement closely associated.
Central banks have long held their gold and other monetary reserves in the United States and London. Back in 1945 this seemed
reasonable, because the New York Federal Reserve Bank (in whose basement foreign central bank gold was kept) was militarily safe,
and because the London Gold Pool was the vehicle by which the U.S. Treasury kept the dollar "as good as gold" at $35 an ounce. Foreign
reserves over and above gold were kept in the form of U.S. Treasury securities, to be bought and sold on the New York and London
foreign-exchange markets to stabilize exchange rates. Most foreign loans to governments were denominated in U.S. dollars, so Wall
Street banks were normally name as paying agents.
That was the case with Iran under the Shah, whom the United States had installed after sponsoring the 1953 coup against Mohammed
Mosaddegh when he sought to nationalize Anglo-Iranian Oil (now British Petroleum) or at least tax it. After the Shah was overthrown,
the Khomeini regime asked its paying agent, the Chase Manhattan bank, to use its deposits to pay its bondholders. At the direction
of the U.S. Government Chase refused to do so. U.S. courts then declared Iran to be in default, and froze all its assets in the United
States and anywhere else they were able.
This showed that international finance was an arm of the U.S. State Department and Pentagon. But that was a generation ago,
and only recently did foreign countries begin to feel queasy about leaving their gold holdings in the United States, where they might
be grabbed at will to punish any country that might act in ways that U.S. diplomacy found offensive. So last year, Germany finally
got up the courage to ask that some of its gold be flown back to Germany. U.S. officials pretended to feel shocked at the insult
that it might do to a civilized Christian country what it had done to Iran, and Germany agreed to slow down the transfer.
But then came Venezuela. Desperate to spend its gold reserves to provide imports for its economy devastated by U.S. sanctions
– a crisis that U.S. diplomats blame on "socialism," not on U.S. political attempts to "make the economy scream" (as Nixon officials
said of Chile under Salvador Allende) – Venezuela directed the Bank of England to transfer some of its $11 billion in gold held in
its vaults and those of other central banks in December 2018. This was just like a bank depositor would expect a bank to pay a check
that the depositor had written.
England refused to honor the official request, following the direction of Bolton and U.S. Secretary of State Michael Pompeo.
As Bloomberg reported: "The U.S. officials are trying to steer Venezuela's overseas assets to [Chicago Boy Juan] Guaido to help bolster
his chances of effectively taking control of the government. The $1.2 billion of gold is a big chunk of the $8 billion in foreign
reserves held by the Venezuelan central bank."
Turkey seemed to be a likely destination, prompting Bolton and Pompeo to warn it to desist from helping Venezuela, threatening
sanctions against it or any other country helping Venezuela cope with its economic crisis. As for the Bank of England and other European
countries, the Bloomberg report concluded: "Central bank officials in Caracas have been ordered to no longer try contacting the Bank
of England. These central bankers have been told that Bank of England staffers will not respond to them."
This led to rumors that Venezuela was selling 20 tons of gold via a Russian Boeing 777 – some $840 million. The money probably
would have ended up paying Russian and Chinese bondholders as well as buying food to relieve the local famine.
[4] Russia denied this report, but Reuters has confirmed is that Venezuela has sold 3 tons of a planned 29 tones of gold to the
United Arab Emirates, with another 15 tones are to be shipped on Friday, February 1.
[5] The U.S. Senate's Batista-Cuban hardliner Rubio accused this of being "theft," as if feeding the people to alleviate the
U.S.-sponsored crisis was a crime against U.S. diplomatic leverage.
If there is any country that U.S. diplomats hate more than a recalcitrant Latin American country, it is Iran. President Trump's
breaking of the 2015 nuclear agreements negotiated by European and Obama Administration diplomats has escalated to the point of threatening
Germany and other European countries with punitive sanctions if they do not also break the agreements they have signed. Coming on
top of U.S. opposition to German and other European importing of Russian gas, the U.S. threat finally prompted Europe to find a way
to defend itself.
Imperial threats are no longer military. No country (including Russia or China) can mount a military invasion of another major
country. Since the Vietnam Era, the only kind of war a democratically elected country can wage is atomic, or at least heavy bombing
such as the United States has inflicted on Iraq, Libya and Syria. But now, cyber warfare has become a way of pulling out the
connections of any economy. And the major cyber connections are financial money-transfer ones, headed by SWIFT, the acronym for the
Society for Worldwide Interbank Financial Telecommunication, which is centered in Belgium.
Russia and China have already moved to create a shadow bank-transfer system in case the United States unplugs them from SWIFT.
But now, European countries have come to realize that threats by Bolton and Pompeo may lead to heavy fines and asset grabs if they
seek to continue trading with Iran as called for in the treaties they have negotiated.
On January 31 the dam broke with the announcement that Europe had created its own bypass payments system for use with Iran
and other countries targeted by U.S. diplomats. Germany, France and even the U.S. poodle Britain joined to create INSTEX -- Instrument
in Support of Trade Exchanges. The promise is that this will be used only for "humanitarian" aid to save Iran from a U.S.-sponsored
Venezuela-type devastation. But in view of increasingly passionate U.S. opposition to the Nord Stream pipeline to carry Russian gas,
this alternative bank clearing system will be ready and able to become operative if the United States tries to direct a sanctions
attack on Europe.
I have just returned from Germany and seen a remarkable split between that nation's industrialists and their political leadership.
For years, major companies have seen Russia as a natural market, a complementary economy needing to modernize its manufacturing and
able to supply Europe with natural gas and other raw materials. America's New Cold War stance is trying to block this commercial
complementarity. Warning Europe against "dependence" on low-price Russian gas, it has offered to sell high-priced LNG from the United
States (via port facilities that do not yet exist in anywhere near the volume required). President Trump also is insisting that NATO
members spend a full 2 percent of their GDP on arms – preferably bought from the United States, not from German or French merchants
of death.
The U.S. overplaying its position is leading to the Mackinder-Kissinger-Brzezinski Eurasian nightmare that I mentioned above.
In addition to driving Russia and China together, U.S. diplomacy is adding Europe to the heartland, independent of U.S. ability to
bully into the state of dependency toward which American diplomacy has aimed to achieve since 1945.
The World Bank, for instance, traditionally has been headed by a U.S. Secretary of Defense. Its steady policy since its inception
is to provide loans for countries to devote their land to export crops instead of giving priority to feeding themselves. That is
why its loans are only in foreign currency, not in the domestic currency needed to provide price supports and agricultural extension
services such as have made U.S. agriculture so productive. By following U.S. advice, countries have left themselves open to food
blackmail – sanctions against providing them with grain and other food, in case they step out of line with U.S. diplomatic demands.
It is worthwhile to note that our global imposition of the mythical "efficiencies" of forcing Latin American countries to
become plantations for export crops like coffee and bananas rather than growing their own wheat and corn has failed catastrophically
to deliver better lives, especially for those living in Central America. The "spread" between the export crops and cheaper food imports
from the U.S. that was supposed to materialize for countries following our playbook failed miserably – witness the caravans and refugees
across Mexico. Of course, our backing of the most brutal military dictators and crime lords has not helped either.
Likewise, the IMF has been forced to admit that its basic guidelines were fictitious from the beginning. A central core has been
to enforce payment of official inter-government debt by withholding IMF credit from countries under default. This rule was instituted
at a time when most official inter-government debt was owed to the United States. But a few years ago Ukraine defaulted on $3
billion owed to Russia. The IMF said, in effect, that Ukraine and other countries did not have to pay Russia or any other country
deemed to be acting too independently of the United States. The IMF has been extending credit to the bottomless it of Ukrainian corruption
to encourage its anti-Russian policy rather than standing up for the principle that inter-government debts must be paid.
It is as if the IMF now operates out of a small room in the basement of the Pentagon in Washington. Europe has taken
notice that its own international monetary trade and financial linkages are in danger of attracting U.S. anger. This became clear
last autumn at the funeral for George H. W. Bush, when the EU's diplomat found himself downgraded to the end of the list to be called
to his seat. He was told that the U.S. no longer considers the EU an entity in good standing. In December, "Mike Pompeo gave a speech
on Europe in Brussels -- his first, and eagerly awaited -- in which he extolled the virtues of nationalism, criticised multilateralism
and the EU, and said that "international bodies" which constrain national sovereignty "must be reformed or eliminated."
[5]
Most of the above events have made the news in just one day, January 31, 2019. The conjunction of U.S. moves on so many fronts,
against Venezuela, Iran and Europe (not to mention China and the trade threats and moves against Huawei also erupting today) looks
like this will be a year of global fracture.
It is not all President Trump's doing, of course. We see the Democratic Party showing the same colors. Instead of applauding democracy
when foreign countries do not elect a leader approved by U.S. diplomats (whether it is Allende or Maduro), they've let the mask fall
and shown themselves to be the leading New Cold War imperialists. It's now out in the open. They would make Venezuela the new Pinochet-era
Chile. Trump is not alone in supporting Saudi Arabia and its Wahabi terrorists acting, as Lyndon Johnson put it, "Bastards, but they're
our bastards."
Where is the left in all this? That is the question with which I opened this article. How remarkable it is that it is only right-wing
parties, Alternative for Deutschland (AFD), or Marine le Pen's French nationalists and those of other countries that are opposing
NATO militarization and seeking to revive trade and economic links with the rest of Eurasia.
The end of our monetary imperialism, about which I first wrote in 1972 in Super Imperialism, stuns even an informed observer like
me. It took a colossal level of arrogance, short-sightedness and lawlessness to hasten its decline -- something that only crazed
Neocons like John Bolton, Elliot Abrams and Mike Pompeo could deliver for Donald Trump.
[2] Patricia Laya, Ethan Bronner and Tim Ross,
"Maduro Stymied in Bid to Pull $1.2 Billion of Gold From U.K.," Bloomberg, January 25, 2019. Anticipating just such a double-cross,
President Chavez acted already in 2011 to repatriate 160 tons of gold to Caracas from the United States and Europe.
Well, if the StormTrumpers can tear down all the levers and institutions of international US dollar strength, perhaps they
can also tear down all the institutions of Corporate Globalonial Forced Free Trade. That itself may BE our escape . . . if there
are enough millions of Americans who have turned their regionalocal zones of habitation into economically and politically armor-plated
Transition Towns, Power-Down Zones, etc. People and places like that may be able to crawl up out of the rubble and grow and defend
little zones of semi-subsistence survival-economics.
If enough millions of Americans have created enough such zones, they might be able to link up with eachother to offer hope
of a movement to make America in general a semi-autarchik, semi-secluded and isolated National Survival Economy . . . . much smaller
than today, perhaps likelier to survive the various coming ecosystemic crash-cramdowns, and no longer interested in leading or
dominating a world that we would no longer have the power to lead or dominate.
We could put an end to American Exceptionalism. We could lay this burden down. We could become American Okayness Ordinarians.
Make America an okay place for ordinary Americans to live in.
If Populists, I assume that's what you mean by "Storm Troopers", offer me M4A and revitalized local economies, and deliver
them, they have my support and more power to them.
That's why Trump was elected, his promises, not yet delivered, were closer to that then the Democrats' promises. If the Democrats
promised those things and delivered, then they would have my support.
If the Democrats run a candidate, who has a no track record of delivering such things, we stay home on election day. Trump
can have it, because it won't be any worse.
I don't give a damn about "social issues." Economics, health care and avoiding WWIII are what motivates my votes, and I think
more and more people are going to vote the same way.
Good point about Populist versus StormTrumper. ( And by the way, I said StormTRUMper, not StormTROOper). I wasn't thinking
of the Populists. I was thinking of the neo-etc. vandals and arsonists who want us to invade Venezuela, leave the JCPOA with Iran,
etc. Those are the people who will finally drive the other-country governments into creating their own parallel payment systems,
etc.
And the midpoint of those efforts will leave wreckage and rubble for us to crawl up out of. But we will have a chance to crawl
up out of it.
My reason for voting for Trump was mainly to stop the Evil Clinton from getting elected and to reduce the chance of near immediate
thermonuclear war with Russia and to save the Assad regime in Syria from Clintonian overthrow and replacement with an Islamic
Emirate of Jihadistan.
Much of what will be attempted " in Trump's name" will be de-regulationism of all kinds delivered by the sorts of basic Republicans
selected for the various agencies and departments by Pence and Moore and the Koch Brothers. I doubt the Populist Voters wanted
the Koch-Pence agenda. But that was a risky tradeoff in return for keeping Clinton out of office.
The only Dems who would seek what you want are Sanders or maybe Gabbard or just barely Warren. The others would all be Clinton
or Obama all over again.
I couldn't really find any details about the new INSTEX system – have you got any good links to brush up on? I know they made
an announcement yesterday but how long until the new payment system is operational?
arguably wouldn't it be better if for USD hegemony to be dismantled? A strong USD hurts US exports, subsidizes American consumption
(by making commodities cheaper in relative terms), makes international trade (aka a 8,000-mile+ supply chain) easier.
For the sake of the environment, you want less of all three. Though obviously I don't like the idea of expensive gasoline,
natural gas or tube socks either.
It would be good for Americans, but the wrong kind of Americans. For the Americans that would populate the Global Executive
Suite, a strong US$ means that the stipends they would pay would be worth more to the lackeys, and command more influence.
Dumping the industrial base really ruined things. America is now in a position where it can shout orders, and drop bombs,
but doesn't have the capacity to do anything helpful. They have to give up being what Toynbee called a creative minority, and
settle for being a dominant minority.
Having watched the 2016 election closely from afar, I was left with the impression that many of the swing voters who cast
their vote for Trump did so under the assumption that he would act as a catalyst for systemic change.
What this change would consist of, and how it would manifest, remained an open question. Would he pursue rapprochement with
Russia and pull troops out of the Middle East as he claimed to want to do during his 2016 campaign, would he doggedly pursue corruption
charges against Clinton and attempt to reform the FBI and CIA, or would he do both, neither, or something else entirely?
Now we know. He has ripped the already transparent mask of altruism off what is referred to as the U.S.-led liberal international
order and revealed its true nature for all to see, and has managed to do it in spite of the liberal international establishment
desperately trying to hold it in place in the hope of effecting a seamless post-Trump return to what they refer to as "norms".
Interesting times.
Exactly. He hasn't exactly lived up to advanced billing so far in all respects, but I suspect there's great deal of skulduggery
going on behind the scenes that has prevented that. Whether or not he ever had or has a coherent plan for the havoc he has
wrought, he has certainly been the agent for change many of us hoped he would be, in stark contrast to the criminal duopoly parties
who continue to oppose him, where the daily no news is always bad news all the same. To paraphrase the infamous Rummy, you
don't go to war with the change agent and policies you wished you had, you go to war with the ones you have. That might be the
best thing we can say about Trump after the historic dust of his administration finally settles.
Look on some bright sides. Here is just one bright side to look on. President Trump has delayed and denied the Clinton Plan
to topple Assad just long enough that Russia has been able to help Assad preserve legitimate government in most of Syria and defeat
the Clinton's-choice jihadis.
That is a positive good. Unless you are pro-jihadi.
Clinton wasn't going to "benefit the greater good" either, and a very strong argument, based on her past behavior, can be made
that she represented the greater threat. Given that the choice was between her and Trump, I think voters made the right decision.
Hudson's done us a service in pulling these threads together. I'd missed the threats against the ICC judges. One question:
is it possible for INSTEX-like arrangements to function secretly? What is to be gained by announcing them publicly and drawing
the expected attacks? Does that help sharpen conflicts, and to what end?
Maybe they're done in secret already – who knows? The point of doing it publicly is to make a foreign-policy impact, in this
case withdrawing power from the US. It's a Declaration of Independence.
It certainly seems as though the 90 percent (plus) are an afterthought in this journey to who knows where? Like George C.Scott
said while playing Patton, "The whole world at economic war and I'm not part of it. God will not let this happen." Looks like
we're on the Brexit track (without the vote). The elite argue with themselves and we just sit and watch. It appears to me that
the elite just do not have the ability to contemplate things beyond their own narrow self interest. We are all deplorables now.
The end of America's unchallenged global economic dominance has arrived sooner than expected
Is not supported by this (or really the rest of the article). The past tense here, for example, is unwarranted:
At the United Nations, U.S. diplomats insisted on veto power. At the World Bank and IMF they also made sure that their
equity share was large enough to give them veto power over any loan or other policy.
And this
So last year, Germany finally got up the courage to ask that some of its gold be flown back to Germany. Germany agreed
to slow down the transfer.
Doesn't show Germany as breaking free at all, and worse it is followed by the pregnant
But then came Venezuela.
Yet we find out that Venezuela didn't managed to do what they wanted to do, the Europeans, the Turks, etc bent over yet
again. Nothing to see here, actually.
So what I'm saying is he didn't make his point. I wish it were true. But a bit of grumbling and (a tiny amount of) foot-dragging
by some pygmy leaders (Merkel) does not signal a global change.
"So what I'm saying is he didn't make his point. I wish it were true. But a bit of grumbling and (a tiny amount of) foot-dragging
by some pygmy leaders (Merkel) does not signal a global change."
I'm surprised more people aren't recognizing this. I read the article waiting in vain for some evidence of "the end of our
monetary imperialism" besides some 'grumbling and foot dragging' as you aptly put it. There was some glimmer of a buried lede
with INTEX, created to get around U.S. sanctions against Iran ─ hardly a 'dam-breaking'. Washington is on record as being annoyed.
Currency regime change can take decades, and small percentage differences are enormous because of the flows involved. USD
as reserve for 61% of global sovereigns versus 64% 15 years ago is a massive move. World bond market flows are 10X the size
of world stock market flows even though the price of the Dow and Facebook shares etc get all of the headlines.
And foreign exchange flows are 10-50X the flows of bond markets, they're currently on the order of $5 *trillion* per day. And
since forex is almost completely unregulated it's quite difficult to get the data and spot reserve currency trends. Oh, and buy
gold. It's the only currency that requires no counterparty and is no one's debt obligation.
That's not what Hudson claims in his swaggering final sentence:
"The end of our monetary imperialism, about which I first wrote in 1972 in Super Imperialism, stuns even an informed
observer like me."
Which is risible as not only did he fail to show anything of the kind, his opening sentence stated a completely different reality:
"The end of America's unchallenged global economic dominance has arrived sooner than expected" So if we hold him to his first
declaration, his evidence is feeble, as I mentioned. As a scholar, his hyperbole is untrustworthy.
No, gold is pretty enough lying on the bosom of a lady-friend but that's about its only usefulness in the real world.
Always bemusing that gold bugs never talk about gold being in a bubble . yet when it goes south of its purchase price speak
in tongues about ev'bal forces.
thanks Mr. Hudson. One has to wonder what has happened when the government (for decades) has been shown to be morally and otherwise
corrupt and self serving. It doesn't seem to bother anyone but the people, and precious few of them. Was it our financial and
legal bankruptcy that sent us over the cliff?
Indeed! It is to say the least encouraging to see Dr. Hudson return so forcefully to the theme of 'monetary imperialism'.
I discovered his Super Imperialism while looking for an explanation for the pending 2003 US invasion of Iraq. If you
haven't read it yet, move it to the top of your queue if you want to have any idea of how the world really works. You can
find any number of articles on his web site that return periodically to the theme of monetary imperialism. I remember one in particular
that described how the rest of the world was brought on board to help pay for its good old-fashioned military imperialism.
If it isn't clear to the rest of the world by now, it never will be. The US is incapable of changing on its own a corrupt
status quo dominated by a coalition of its military industrial complex, Wall Street bankers and fossil fuels industries. As long
as the world continues to chase the debt created on the keyboards of Wall Street banks and 'deficits don't matter' Washington
neocons – as long as the world's 1% think they are getting 'richer' by adding more "debts that can't be repaid (and) won't be"
to their portfolios, the global economy can never be put on a sustainable footing.
Until the US returns to the path of genuine wealth creation, it is past time for the rest of the world to go its own way with
its banking and financial institutions.
In other words, after 2 World Wars that produced the current world order, it is still in a state of insanity with the same
pretensions to superiority by the same people, to get number 3.
UK withholding Gold may start another Brexit? IE: funds/gold held by BOE for other countries in Africa, Asian, South America,
and the "stans" with start to depart, slowly at first, perhaps for Switzerland?
Where is the left in all this? Pretty much the same place as Michael Hudson, I'd say. Where is the US Democratic Party in all
this? Quite a different question, and quite a different answer. So far as I can see, the Democrats for years have bombed, invaded
and plundered other countries 'for their own good'. Republicans do it 'for the good of America', by which the ignoramuses mean
the USA. If you're on the receiving end, it doesn't make much difference.
Agreed! South America intervention and regime change, Syria ( Trump is pulling out), Iraq, Middle East meddling, all predate
Trump. Bush, Clinton and Obama have nothing to do with any of this.
" So last year, Germany finally got up the courage to ask that some of its gold be flown back to Germany. "
What proof is there that the gold is still there? Chances are it's notional. All Germany, Venezuela, or the others have is
an IOU – and gold cannot be printed. Incidentally, this whole discussion means that gold is still money and the gold standard
still exists.
What makes you think that the gold in Fort Knox is still there? If I remember right, there was a Potemkin visit back in the
70s to assure everyone that the gold was still there but not since then. Wait, I tell a lie. There was another visit about two
years ago but look who was involved in that visit-
And I should mention that it was in the 90s that between 1.3 and 1.5 million 400 oz tungsten blanks were manufactured in the
US under Clinton. Since then gold-coated tungsten bars have turned up in places like Germany, China, Ethiopia, the UK, etc so
who is to say if those gold bars in Fort Knox are gold all the way through either. More on this at --
http://viewzone2.com/fakegoldx.html
It wasn't last year that Germany brought back its Gold. It has been ongoing since 2013, after some political and popular pressure
build up. They finished the transaction in 2017. According to an article in Handelblatt (but it was widely reported back then)
they brought back pretty much everything they had in Paris (347t), left what they had in London (perhaps they should have done
it in reverse) and took home another 300t from the NY Fed. That still leaves 1236t in NY. But half of their Gold (1710t) is now
in Frankfurt. That is 50% of the Bundesbanks holdings.
They made a point in saying that every bar was checked and weighed and presented some bars in Frankfurt. I guess they didn't
melt them for assaying, but I'd expect them to be smart enough to check the density.
Their reason to keep Gold in NY and London is to quickly buy USD in case of a crisis. That's pretty much a cold war plan, but
that's what they do right now.
Regarding Michal Hudsons piece, I enjoyed reading through this one. He tends to write ridiculously long articles and in the
last few years with less time and motivation at hand I've skipped most of his texts on NC as they just drag on.
When I'm truly fascinated I like well written, long articles but somehow he lost me at some point. But I noticed that some
long original articles in US magazines, probably research for a long time by the journalist, can just drag on for ever as well
I just tune out.
This is making sense. I would guess that tearing up the old system is totally deliberate. It wasn't working so well for us
because we had to practice too much social austerity, which we have tried to impose on the EU as well, just to stabilize "king
dollar" – otherwise spread so thin it was a pending catastrophe.
Now we can get out from under being the reserve currency – the currency that maintains its value by financial manipulation
and military bullying domestic deprivation. To replace this old power trip we are now going to mainline oil. The dollar will become
a true petro dollar because we are going to commandeer every oil resource not already nailed down.
When we partnered with SA in Aramco and the then petro dollar the dollar was only backed by our military. If we start monopolizing
oil, the actual commodity, the dollar will be an apex competitor currency without all the foreign military obligations which will
allow greater competitive advantages.
No? I'm looking at PdVSA, PEMEX and the new "Energy Hub for the Eastern Mediterranean" and other places not yet made public.
It looks like a power play to me, not a hapless goofball president at all.
So sand people with sociological attachment to the OT is a compelling argument based on antiquarian preferences with authoritarian
patriarchal tendencies for their non renewable resource . after I might add it was deemed a strategic concern after WWII .
Considering the broader geopolitical realities I would drain all the gold reserves to zero if it was on offer . here natives
have some shiny beads for allowing us to resource extract we call this a good trade you maximize your utility as I do mine .
Hay its like not having to run C-corp compounds with western 60s – 70s esthetics and letting the locals play serf, blow back
pay back, and now the installed local chiefs can own the risk and refocus the attention away from the real antagonists.
Indeed. Thanks so much for this. Maybe the RICS will get serious now – can no longer include Brazil with Bolsonaro. There needs
to be an alternate system or systems in place, and to see US Imperialism so so blatantly and bluntly by Trump admin –
"US
gives Juan Guaido control over some Venezuelan assets" – should sound sirens on every continent and especially in the developing
world. I too hope there will be fracture to the point of breakage. Countries of the world outside the US/EU/UK/Canada/Australia
confraternity must now unite to provide a permanent framework outside the control of imperial interests. The be clear, this must
not default to alternative forms of imperialism germinating by the likes of China.
" such criticism can't begin to take in the full scope of the damage the Trump White House is inflicting on the system of global
power Washington built and carefully maintained over those 70 years. Indeed, American leaders have been on top of the world for
so long that they no longer remember how they got there.
Few among Washington's foreign policy elite seem to fully grasp the complex system that made U.S. global power what it
now is, particularly its all-important geopolitical foundations. As Trump travels the globe, tweeting and trashing away, he's
inadvertently showing us the essential structure of that power, the same way a devastating wildfire leaves the steel beams of
a ruined building standing starkly above the smoking rubble."
I read something like this and I am like, some of these statements need to be qualified. Like: "Driving China and Russia together".
Like where's the proof? Is Xi playing telephone games more often now with Putin? I look at those two and all I see are two egocentric
people who might sometimes say the right things but in general do not like the share the spotlight. Let's say they get together
to face America and for some reason the later gets "defeated", it's not as if they'll kumbaya together into the night.
This website often points out the difficulties in implementing new banking IT initiatives. Ok, so Europe has a new "payment
system". Has it been tested thoroughly? I would expect a couple of weeks or even months of chaos if it's not been tested, and
if it's thorough that probably just means that it's in use right i.e. all the kinks have been worked out. In that case the transition
is already happening anyway. But then the next crisis arrives and then everyone would need their dollar swap lines again which
probably needs to cleared through SWIFT or something.
Anyway, does this all mean that one day we'll wake up and a slice of bacon is 50 bucks as opposed to the usual 1 dollar?
Driving Russia and China together is correct. I recall them signing a variety of economic and military agreement a few years
ago. It was covered in the media. You should at least google an issue before making silly comments. You might start with the report
of Russia and China signing 30 cooperation agreements three years ago. See
https://www.rbth.com/international/2016/06/27/russia-china-sign-30-cooperation-agreements_606505
. There are lots and lots of others.
He's draining the swamp in an unpredicted way, a swamp that's founded on the money interest. I don't care what NYT and
WaPo have to say, they are not reporting events but promoting agendas.
The financial elites are only concerned about shaping society as they see fit, side of self serving is just a historical
foot note, Trumps past indicates a strong preference for even more of the same through authoritarian memes or have some missed
the OT WH reference to dawg both choosing and then compelling him to run.
Whilst the far right factions fight over the rudder the only new game in town is AOC, Sanders, Warren, et al which Trumps supporters
hate with Ideological purity.
Highly doubt Trump is a "witting agent", most likely is that he is just as ignorant as he almost daily shows on twitter. On
US role in global affairs he says the same today as he did as a media celebrity in the late 80s. Simplistic household "logics"
on macroeconomics. If US have trade deficit it loses. Countries with surplus are the winners.
On a household level it fits, but there no "loser" household that in infinity can print money that the "winners" can accumulate
in exchange for their resources and fruits of labor.
One wonder what are Trumps idea of US being a winner in trade (surplus)? I.e. sending away their resources and fruits of labor
overseas in exchange for what? A pile of USD? That US in the first place created out of thin air. Or Chinese Yuan, Euros, Turkish
liras? Also fiat-money. Or does he think US trade surplus should be paid in gold?
When the US political and economic hegemony will unravel it will come "unexpected". Trump for sure are undermining it with
his megalomaniac ignorance. But not sure it's imminent.
Anyhow frightening, the US hegemony have its severe dark sides. But there is absolutely nothing better on the horizon, a crash
will throw the world in turmoil for decades or even a century. A lot of bad forces will see their chance to elevate their influence.
There will be fierce competition to fill the gap.
On could the insane economic model of EU/Germany being on top of global affairs, a horribly frightening thought. Misery and
austerity for all globally, a permanent recession. Probably not much better with the Chinese on top.
I'll take the USD hegemony any day compared to that prospect.
Michael Hudson, in Super Imperialism, went into how the US could just create the money to run a large trade deficit with the
rest of the world. It would get all these imports effectively for nothing, the US's exorbitant privilege. I tied this in with this graph from MMT.
The trade deficit required a large Government deficit to cover it and the US government could just create the money to cover
it.
Then ideological neoliberals came in wanting balanced budgets and not realising the Government deficit covered the trade deficit.
The US has been destabilising its own economy by reducing the Government deficit. Bill Clinton didn't realize a Government surplus is an indicator a financial crisis is about to hit. The last US Government surplus occurred in 1927 – 1930, they go hand-in-hand with financial crises.
Richard Koo shows the graph central bankers use and it's the flow of funds within the economy, which sums to zero (32-34 mins.).
The Government was running a surplus as the economy blew up in the early 1990s. It's the positive and negative, zero sum, nature of the monetary system. A big trade deficit needs a big Government deficit to cover it. A big trade deficit, with a balanced budget, drives the private sector into debt and blows up the economy.
It should be remembered Bill Clinton's early meeting with Rubin, where in he was informed that wages and productivity had diverged –
Rubin did not blink an eye.
Over the past two years, the White House has initiated trade disputes, insulted allies and
enemies alike, and withdrawn from or refused to ratify multinational treaties and agreements.
It has also expanded the reach of its unilaterally imposed rules, forcing other nations to
abide by its demands or face economic sanctions. While the stated Trump Administration
intention has been to enter into new arrangements more favorable to the United States, the end
result has been quite different, creating a broad consensus within the international community
that Washington is unstable, not a reliable partner and cannot be trusted. This sentiment has,
in turn, resulted in conversations among foreign governments regarding how to circumvent the
American banking system, which is the primary offensive weapon apart from dropping bombs that
Washington has to force compliance with its dictates.
Consequently, there has been considerable blowback from the Make America Great Again
campaign, particularly as the flip side of the coin appears to be that the "greatness" will be
obtained by making everyone else less great. The only country in the world that currently
regards the United States favorably is Israel, which certainly has good reason to do so given
the largesse that has come from the Trump Administration. Everyone else is keen to get out from
under the American heel.
Well the worm has finally turned, maybe. Even the feckless Angela Merkel's Germany now
understands that national interests must prevail when the United States is demanding that it do
the unspeakable. At the recently concluded G20 meeting in Tokyo Britain, France and Germany
announced that the special trade mechanism that they have been working on this year is now
up and running. It is called the Instrument in Support of Trade Exchanges (Instex) and it will
permit companies in Europe to do business with countries like Iran, avoiding American sanctions
by trading outside the SWIFT system, which is dollar denominated and de facto controlled by the
US Treasury.
The significance of the European move cannot be understated. It is the first major step in
moving away from the dominance of the dollar as the world's trading and reserve currency. As is
often the case, the damage to US perceived interests is self-inflicted. There has been talk for
years regarding setting up trade mechanisms that would not be dollar based, but they did not
gain any momentum until the Trump Administration abruptly withdrew from the Joint Comprehensive
Plan of Action (JCPOA) with Iran over a year ago.
There were other signatories to the JCPOA, all of whom were angered by the White House move,
because they believed correctly that it was a good agreement, preventing Iranian development of
a nuclear weapon while also easing tensions in the Middle East. Major European powers Germany,
France and Great Britain, as well as Russia and China, were all signatories and the agreement
was endorsed by the United Nations Security Council. The US withdrawal in an attempt to destroy
the "plan of action" was therefore viewed extremely negatively by all the other signatories and
their anger increased when Washington declared that it would reinstate sanctions on Iran and
also use secondary sanctions to punish any third party that did not comply with the
restrictions on trade.
Instex is an upgrade of a previous "Special Purpose Vehicle" set up by the Europeans a year
ago to permit trading with Iran without any actual money transfers, something like a barter
system based on balancing payments by value. The announcement regarding Instex came as a result
of last week's meeting in Vienna in which the JCPOA signatories minus the US got together with
Iranian ministry spokesman Abbas Mousavi, who called the gathering "the last chance for the
remaining parties to gather and see how they can meet their commitments towards Iran."
Iran is quietly pleased by the development, even though there are
critics of the arrangement and the government is officially declaring that Instex is
not
enough and it will proceed with plans to increase its uranium production. This produced
an immediate response from Secretary of State Mike Pompeo last week speaking in New Delhi
"If there is conflict, if there is war, if there is a kinetic activity, it will be because the
Iranians made that choice." Nevertheless, Instex could possibly be a model for mechanisms that
will allow Iran to sell its oil without hindrance from Washington. But a sharp reaction from
the White House is expected. While Instex was in the development phase, US observers noted that
the Iranian Special Trade and Finance Instrument, that will do the actual trading, includes
government agencies that are already under US sanctions. That likely means that Washington will
resort to secondary sanctions on the Europeans, a move that will definitely make the bilateral
relationship even more poisonous than it already is. A global trade war is a distinct
possibility and, as observed above, the abandonment of the dollar as the international reserve
currency is a possible consequence.
Trump
has already been "threatening penalties against the financial body created by Germany, the
U.K. and France to shield trade with the Islamic Republic from US sanctions." The Treasury's
undersecretary for terrorism and financial intelligence, Israeli Sigal Mandelker, warned in a
May 7 th letter that "I urge you to carefully consider the potential sanctions
exposure of Instex. Engaging in activities that run afoul of US sanctions can result in severe
consequences, including a loss of access to the US financial system."
Indeed, the White House appears to be willing to engage in economic warfare with Europe over
the issue of punishing Iran. The Treasury Department
issued a statement regarding the Mandelker letter, saying "entities that transact in trade
with the Iranian regime through any means may expose themselves to considerable sanctions risk,
and Treasury intends to aggressively enforce our authorities." Mike Pompeo also was explicit
during a visit to London on May 8 th when he stated that " it doesn't matter what
vehicle's out there, if the transaction is sanctionable, we will evaluate it, review it, and if
appropriate, levy sanctions against those that were involved in that transaction. It's very
straightforward."
It is perhaps not unreasonable to wish the Europeans success, as they are supporting free
trade while also registering their opposition to the White House's bullying tactics using the
world financial system. And if the dollar ceases to be the world's trade and reserve currency,
what of it? It would mean that the Treasury might have to cease printing surplus dollars and
the US ability to establish global hegemony on a credit card might well be impeded. Those would
be good results and one might also hope that some day soon the United States might once again
become a normal country that Americans would be proud to call home.
Following Russia signalling last week, its willingness to join the controversial payments channel Instex - designed to circumvent
both SWIFT as well as US sanctions banning trade with Iran - new statements from Russian Deputy Foreign Minister Sergei Ryabkov called
on the international community to free itself from a purely US-controlled international financial system and US dollar dominance.
"We must protect ourselves from political abuses made with the help of the US dollar and the American banking system," he said
while addressing a ministerial meeting of the Non-Aligned Movement held in Venezuela, according to
TASS . "We must turn our dependence in this sphere into independence,"
he added.
"Let us be multipolar in the spheres of finance and currency," he said.
The senior diplomat was specifically addressing US-led sanctions and the tightening economic noose, including a near total oil
export blockade, on the Maduro government in Caracas.
The comments also come after early this year the Maduro regime was stymied in its bid to pull $1.2 billion worth of gold out of
the Bank of England , according to a January
Bloomberg report . The Bank of England's (BoE) decision to deny Maduro officials' withdrawal request was a the height of US coup
efforts targeting Maduro.
Specifically top US officials, including Secretary of State Michael Pompeo and National Security Adviser John Bolton, had lobbied
their UK counterparts to help cut off the regime from its overseas assets, as we
reported at the time. Washington has further lobbied other international institutions, and especially its Latin American allies,
to seize Venezuelan assets and essentially hold them for control of Juan Guaido's opposition government in exile.
"This is just one of the examples of a wider policy of deliberate instigation of crises to change government, to replace legitimately
elected politician with American stooges ."
Despite western capitals virtue-signaling their "rules-based order" approach, Ryabkov said instead, "We think that it is not a
rule-based world order, it is rather a foisted and imposed world order ."
Meanwhile, the establishment of the 'SWIFT-alternative' Instex - now online as of three weeks ago - constitutes the biggest threat
the dollar as a reserve currency to date, especially if Russia follows through on its signalling it could join.
DeDollarization is inevitable. The US has abused the dollar reserve currency by weaponizing it first under FDR when he dropped
the price of gold from $50 to 35 over night, a violation of Bretton Woods.
Then Nixon devalued three times
The worst infraction of all was Obama Sanctioning Russia and weaponizing the dollar reserve.
Trump who knows nothing at all except bullyism, then used Obama weaponizing sanctions and now covers nearly 50% of the global
population. Trump is dumber than dirt.
It is now inevitable that the rest of the world will find methods to trade outside of the dollar. That is currently being done
with Iron ore and coal with China in Yuan and this will spread.
The present system of demigod dollars is not sustainable. Maynard Keynes proposed a synthetic currency called the Bancor comprise
of five of the world's leading currencies. New technology in Cryptos may at last be a method of trade that cannot be weaponized.
Obviously a global currency that could not be manipulated is necessary. A crypto could be instantly valued correctly based on
real instant transactions not speculators buying and selling.
Bitcoin is unsatisfactory for many reasons, primarily because the developers gave themselves lots of free bitcoins and its
circulation is so limited that its value cannot be determined due to volatility. It's worthless. But the idea is the future.
Until then the best alternative is competing currencies. Let buyers and sellers determine the currency to be used.
The big question on my mind is how long before all confidence in the Dollar is lost? Foreign central banks are buying gold
which leaves the U.S. government with a funding problem. Just this year the U.S. has to roll over 11 Trillion in debt. Without
central banks adding Dollars to their core reserves who's going to fund U.S. deficits ? certainly not the domestic financial economy.
Then you have INSTEX bypassing the petro Dollar with Iran and now potentially with Russia. We know Russia and China are trading
directly and bypassing the Dollar. We're also losing weapons sales and Boeing aircraft sales to competitors. These are Dollar
denominated big ticket items that support the Dollar. How long before people start getting rid of Dollars in mass? When is the
confidence lost?
According to all the expert articles written on ZH both Russia and China had fully functioning alternatives to SWIFT several
years ago.
And they were going to facilitate the abandonment of the dollar, with the dollars demise any day.
Now, the experts tell us Russia wants to join the Instex club, which was created by Europe and controlled by Europe and has
very limited abilities to handle international trade.
The inability of Russia to avoid SWIFT and having to use the dollar in much of Russia's trade is a huge tactical error in this
financial war.
"The Bank of the United States is one of the most deadly hostilities existing, against the principles and form of our Constitution.
An institution like this, penetrating by its branches every part of the Union, acting by command and in phalanx, may, in a critical
moment, upset the government. I deem no government safe which is under the vassalage of any self-constituted authorities, or any
other authority than that of the nation, or its regular functionaries. What an obstruction could not this bank of the United States,
with all its branch banks, be in time of war! It might dictate to us the peace we should accept, or withdraw its aids. Ought we
then to give further growth to an institution so powerful, so hostile?" –Thomas Jefferson to Albert Gallatin, 1803. ME 10:437
When you are going to war, dig two graves for yourself too.
American sanctions undermine the hegemony of the dollar.
Russia, Iran, China, North Korea, Venezuela, Cuba and those many others who are tired of the hegemony of the dollar. The total
population of these countries exceeds two billion people, and the cumulative GDP is over 15 trillion.
Almost eight year ago
, we first presented a chart first created by JPMorgan's Michael Cembalest, which showed very simply and vividly that reserve currencies
don't last forever, and that in the not too distant future, the US Dollar would also lose its status as the world's most important
currency, since it is never different this time.
As Cembalest put it back in January 2012, "I am reminded of the following remark from late MIT economist Rudiger Dornbusch: 'Crisis
takes a much longer time coming than you think, and then it happens much faster than you would have thought.'"
Perhaps it is not a coincidence then that in light of the growing number of mentions of MMT and various other terminal, destructive
monetary policies that have been proposed to kick on the current financial system the can just a little bit longer, that the topic
of longevity of reserve currency status is once again becoming all the rage, and none other than JPMorgan's Private Bank ask in this
month's investment strategy note whether "the dollar's "exorbitant privilege" is coming to an end?"
So why is JPM, after first creating the iconic chart above which has since spread virally across all financial corners of the
internet, not only worried that the dollar's reserve status may be coming to an end, but in fact goes so far as to state that "we
believe the dollar could lose its status as the world's dominant currency (which could see it depreciate over the medium term) due
to structural reasons as well as cyclical impediments."
Read on to learn why even the largest US bank has started to lose faith in the world's most powerful currency.
Is the dollar's "exorbitant privilege" coming to an end?
In Brief
The U.S. dollar (USD) has been the world's dominant reserve currency for almost a century. As such, many investors today, even
outside the United States, have built and become comfortable with sizable USD overweights in their portfolios. However, we believe
the dollar could lose its status as the world's dominant currency (which could see it depreciate over the medium term) due to structural
reasons as well as cyclical impediments .
As such, diversifying dollar exposure by placing a higher weighting on other currencies in developed markets and in Asia, as well
as precious metals makes sense today. This diversification can be achieved with a strategy that maintains the underlying assets in
an investment portfolio, but changes the mix of currencies within that portfolio. This is a completely bespoke approach that can
be customized to meet the unique needs of individual clients.
The rise of the U.S. dollar
It is commonly perceived that the U.S. dollar overtook the Great British Pound (GBP) as the world's international reserve currency
with the signing of the Bretton Woods Agreements after World War II. The reality is that sterling's value was eroded for many decades
prior to Bretton Woods. The dollar's rise to international prominence was fueled by the establishment of the Federal Reserve System
a little over a century ago and U.S. economic emergence after World War I. The Federal Reserve System aided in the establishment
of more mature capital markets and a nationally coordinated monetary policy, two important pillars of reserve-currency countries.
Being the world's unit of account has given the United States what former French Finance Minister Valery d'Estaing called an "exorbitant
privilege" by being able to purchase imports and issue debt in its own currency and run persistent deficits seemingly without consequence.
The shifting center
There is nothing to suggest that the dollar dominance should remain in perpetuity . In fact, the dominant international currency
has changed many times throughout history going back thousands of years as the world's economic center has shifted.
After the end of World War II, the U.S. accounted for biggest share of world GDP at more than 25%. This number is brought to more
than 40% when we include Western European powers. Since then, the main driver of economic growth has shifted eastwards towards Asia
at the expense of the U.S. and the West. China is at the epicenter of this recent economic shift driven by the country's strong growth
and commitment to domestic reforms. Over the last 70 years, China has quadrupled its share of global GDP to around 20% -- roughly
the same share as the U.S. -- and this share is expected to continue to grow in the years ahead. China is no longer just a manufacturer
of low cost goods as a growing share of corporate earnings is coming from "high value add" sectors like technology.
In addition to China, the economies of Southeast Asia, including India, have strong secular tailwinds driven by younger demographics
and proliferating technological know-how. Specifically, the Asian economic zone -- from the Arabian Peninsula and Turkey in the West
to Japan and New Zealand in the East and from Russia in the North and Australia in the South -- now represents 50% of global GDP
and two-thirds of global economic growth. Of the estimated $30 trillion in middle-class consumption growth between 2015 and 2030,
only $1 trillion is expected to come from today's Western economies. As this region grows, the share of non-USD transactions will
inevitably increase which will likely erode the dollar's "reserveness", even if the dollar isn't replaced as the dominant international
currency.
In other words, in the coming decades we think the world economy will transition from U.S. and USD dominance toward a system where
Asia wields greater power. In currency space, this means the USD will likely lose value compared to a basket of other currencies,
including precious commodities like gold.
Dollar's declining role already under way?
Recent data on currency reserve holdings among global central banks suggests this shift may already be under way. As a share of
overall central bank reserves, the USD's role has been declining ever since the Great Recession (see chart). The most recent central
bank reserve flow data also suggests that for the first time since the euro's introduction in 1999, central banks simultaneously
sold dollars and bought euros.
Central banks across the globe are also adding to gold reserves at their strongest pace on record. 2018 saw the strongest demand
for gold from central banks since 1971 and a rolling four-quarter sum of gold purchases is the strongest on record. To us, this makes
sense: gold is a stable source of value with thousands of years of trust among humans supporting it.
The current U.S. administration has called into question agreements with nearly all of its largest partners -- tariffs on China,
Mexico and the European Union, renegotiating NAFTA, as well as abandoning the Trans Pacific Partnership. A more adversarial U.S.
administration could also encourage countries to reduce their reliance on USD in trade. Currently 85% of all currency transactions
involve the USD despite the U.S. accounting for only roughly 25% of global GDP.
Countries around the world are already developing payment mechanisms that would avoid using the dollar. These systems are small
and still developing but this is likely to be a structural story that will extend beyond one particular administration. In a recent
speech on the international role of the euro, Bank for International Settlements Chief Economist Claudio Borio brought up the benefits
of pricing oil in the euro saying, "Trading and settling oil in the euro would move payments from dollars to euros and thereby shift
ultimate settlement to the euro's TARGET2 system. This could limit the reach of U.S. foreign policy insofar as it leverages dollar
payments." The European Central Bank also alluded to this theme in a recent report saying that "growing concerns about the impact
of international trade tensions and challenges to multilateralism, including the imposition of unilateral sanctions seem to have
lent support to the euro's global standing."
We believe we are at an important juncture. On a real basis, the dollar stands currently more than 10% above its long-term average
and on a nominal basis has actually been trending lower for 50 years (see chart below).
Source: Bloomberg as of June 13, 2019
Given the persistent -- and rising -- deficits in the United States (in both fiscal and trade), we believe the U.S. dollar could
become vulnerable to a loss of value relative to a more diversified basket of currencies, including gold . As we scan client portfolios,
we see that many of them have far more U.S. dollar exposure than we feel is prudent. At this stage of the economic cycle, we believe
this exposure should be more diversified. In many cases, our recommendation would likely be to place a higher weighting on other
G10 currencies, currencies in Asia and gold (see chart).
The Spanish Piece of Eight (a silver coin) was in circulation until Mao's Long March (1934) and was legal tender in the US
until 1857. Known as the Spanish dollar it was one of the few currencies accepted by the Chinese until the Opium Wars.
It was silver and it was reliably minted. And as you prolly know, the Chinese only accepted silver or precious metals as currency.
Then the British declared war on them bc ...reasons.
Spain minted a huge ammount of Po8 in 300 years, that went on circulation for a long time. The coins were minted in Bolivia
from Mexican and Peruvian mines. In that time Mexicans earned like 5 times the wage of most Europeans.
But I guess you're right in some way. However, Mexico was not the country that it is now.
The Fed has become the great enabler. A key role of a reserve currency is to force other currencies to toe the line or pay
a stiff price. Ignoring this economic reality translates into pain for those holding the currency of any country that abuses this
economic law.
The rapid expansion of debt and credit during the last decade could have occurred without the Fed being totally complicit and
in agreement. It has been the Fed that decided to allow the dollar to be used as a global prop.
Trump's desire to manipulate the dollar lower to boost exports would take the world down a very slippery slope. The article
below argues this is a destabilizing force.
Many of us see the introduction of a single "World Currency" as a major part of the economic endgame. This is something that
will be forced on us as part of a "needed reset" to a global economy that has gone off track. The fact this issue is again in
the news may be an indication we are getting closer to where currencies begin to fail.
The new world order and globalization which has been pushed by many world leaders and the rich elite touting that "larger,
more cooperative governments under one financial unit will benefit us all" plays into the world currency scenario. The article
below delves into how this might unfold.
Most Americans are financial illiterates and easy prey for the wolves. How many know that the USD / FRN is the WRC? I am guessing
five, or less, out of 100.
"On a similar note, I've wondered why Russia has not defaulted on it's considerable USD and
EUR debt (also too, why is Russia still doing debt in USD and thus strengthening U.S.?)"
It should be noted that Russia has almost zero foreign public debt and that the private foreign
debt has been much reduced and now amounts to US dollars 450 billion.
As Russia has a surplus of more than US dollars 100 billion on the current account the total
foreign debt amounts to 4 years current account surplus only.
Ad to this that Russias international currency reserves amounts to ca. US dollars 500
billion which meens that Russia is in a very strong fiscal position as it is capable of paying
off its entire foreign debt any time it chooses.
Along the same lines, the summary starts with, "The first existential objective is to
avoid the current threat of war by winding down U.S. military interference in foreign
countries and removing U.S. military bases as relics of neocolonialism." Either would be
taken as proof of evil anti-US intentions, leading to sanctions, coups, assassinations,
regime change, and eventually outright war. As Mael Colium says, the US picks off individual
countries by isolating them.
Regarding money, and the difference between private and public money.
As with all things public and private, public money is not required to make a profit, but
in contrast, private money has no other reason to exist than to make a profit.
What we call money in the US, is privately owned. It is actually a promissory note, the
signifier of a loan made to those who hold the note. This is how US money comes into
existence.
We could trade coconut shells, or beads, but we trade promissory notes. They are legal
tender by law. And they fulfill the role of money pretty well. But we the people do not
ultimately own those obligations.
Public money is issued out of the same thin air as private money, but not as a debt,
simply as an issuance. The bills do their job for exchange and storage, and circulate until
being retired as taxes and the like. No one pays interest on that money.
Public money doesn't charge interest. Private money charges interest. This is the only
difference, and this difference is killing us and destroying the entire world.
~~
Professor Richard Werner illustrates nicely how a mortgage comes into existence through a
bank, which doesn't actually create money in this loan, but purchases a promissory note from
the home buyer. It is this promissory note that then enters the public record as new money,
which we then trade like sea shells - happy children, except that we now will pay interest of
more than 100 percent over the next 30 years. This interest is the profit on the private
money.
You'll find the mortgage part specifically around 16:15.
~~
As to all the rest, there is much more collateral, including the flagship work by Helen
Brown. Sorry I have no time to supply more links.
But I'm surprised to see so much wordy ignorance here on the subject, which is actually
very simple (although obfuscated, of course). Thanks to psychohistorian and karlof1 and
others who show that the good economists are all calling for public money which charges no
interest. And the communists and socialists do this as a matter of course.
As Hudson ended in his address cited by b and discussed here: "nations face a choice
between socialism and barbarism" .
Neoliberal economics and private finance is this very barbarism. It is accompanied by
fascism, oppression and the utter loss of freedom. As I cited in my previous comment, Dambisa
Moyo suggests very cogently that economic sufficiency undergirds democratic freedom. The
corollary is obvious: as we get more impoverished, freedom flees away.
~~
Interest charged on a loan is a claim on wealth that it doesn't create. It therefore
steals existing wealth in order to be redeemed. That's where our wealth went, and why we're
all so broke.
A loan for a productive purpose that will create new wealth can hopefully afford to slice
some of this new wealth off to pay the interest. It's still usury. But any loan at interest
that doesn't create wealth - such as a mortgage that simply buys an existing asset - is
something vastly more wicked.
"... As Mael Colium says, the US picks off individual countries by isolating them. ..."
"... there's a fundamental difference between debt in the past and debt today. In the past debt was owed to the state, today it's owed to some wealthy corporations. Good luck with debt jubilees in the absence of violent uprisings. ..."
"... The difference is they internalize profit and externalize cost. And that's fundamentally different from all other epochs in the past. Even the birth of nation state was out of their rationalization of how to maximize profit extraction and cost externalization in the 1st place. Good luck with debt jubilees. ..."
"... How would this occur aside from a repudiation of the almighty buck one wonders, and would it be based on reserves in the vault, or actual use as money? ..."
"... The Eurozone and China could run trade deficits, thereby creating an opportunity for their currencies to become reasonably viable alternative reserves. But they don't because they don't want to cede control of their manufacturing and export-driven economic bases away. ..."
"... The sine qua non of our economic empire (which I learned here) is that a global currency requires global trade deficits, which must grow as quickly as the global economy to fulfill its role. ..."
"... So American deficits are structural. Our debt-ceiling controversies are theater. And our dollar is exceptional until the instant it isn't–then the Fed electron-tranfers trillions more to the speculators whose notional dollars just evaporated, keeping the currencies in the air with their new casino chips. Is this a loan? A gift? An electron cloud? It's the fog of war by other means . . . ..."
"... Resources and the critical health of the planet bother me a lot. Money and "gold" are, in the end, both fictitious obsessions. ..."
"... You'll find few authors willing to provide their seminal work for free online– 2nd Edition PDF . I think it fair for those unfamiliar with Hudson's work to read his analysis prior to being judgmental. ..."
"On a similar note, I've wondered why Russia has not defaulted on it's considerable USD and
EUR debt (also too, why is Russia still doing debt in USD and thus strengthening U.S.?)"
It should be noted that Russia has almost zero foreign public debt and that the private foreign
debt has been much reduced and now amounts to US dollars 450 billion.
As Russia has a surplus of more than US dollars 100 billion on the current account the total
foreign debt amounts to 4 years current account surplus only.
Ad to this that Russias international currency reserves amounts to ca. US dollars 500
billion which meens that Russia is in a very strong fiscal position as it is capable of paying
off its entire foreign debt any time it chooses.
Along the same lines, the summary starts with, "The first existential objective is to avoid the current threat of war by
winding down U.S. military interference in foreign countries and removing U.S. military bases as relics of neocolonialism."
Either would be
taken as proof of evil anti-US intentions, leading to sanctions, coups, assassinations,
regime change, and eventually outright war. As Mael Colium says, the US picks off individual
countries by isolating them.
When we have MMT paying for arts, history, journalism and particularly editors, I won't be
so irritated by these kinds of criticisms.
We live in a very advanced world of Bernaysian propaganda where the communicative
industries are privately owned and directed to ensure deep criticisms of the
hyper-exploitative current reality CANNOT be published and promoted.
When someone takes the effort to produce something, like this or the book other commenters
on this thread are also slighting, at great personal expense to themselves without corporate
backing or institutional support, a decent reply would be "Thank you!", rather than tasking
them or our hosts here at this site to "go back and clean up this mess??"
If you had any decency, you might suggest clarifying edits in comments, like changing
"– so that it can taxing its own citizens." at the end of the 23rd paragraph to,
"– so that it can avoid taxing its own citizens", to help the people you are
criticizing for making things so difficult for you.
Michael Hudson is a modern day Saint! Who cares about a few typos when his ideas are truly REVOLUTIONARY!
For example, i had no idea about Debt Jubilees in early civilizations 3000 years ago! The
pyramids built by FREE MEN! Liberty and Freedom originating from canceling debts! Torches and
Beacons of light as representatives of said Debt Jubilees!
If you ask me, the #HudsonHawk is trying to awaken the Workers of the World in
Forgiveness, Peace, Love, and Solidarity.
I didn't know that until I read anthropologist David Graeber's Debt: The First 5,000
Years.
But there's a fundamental difference between debt in the past and debt today. In the past
debt was owed to the state, today it's owed to some wealthy corporations. Good luck with debt
jubilees in the absence of violent uprisings.
The difference is they internalize profit and externalize cost. And that's fundamentally
different from all other epochs in the past. Even the birth of nation state was out of their
rationalization of how to maximize profit extraction and cost externalization in the 1st
place. Good luck with debt jubilees.
That is why Russia, China and other powers that U.S. strategists deem to be strategic
rivals and enemies are looking to restore gold's role as the preferred asset to settle
payments imbalances.
How would this occur aside from a repudiation of the almighty buck one wonders, and would
it be based on reserves in the vault, or actual use as money?
Keep in mind that there isn't a human alive now who ever proffered a monetized gold coin
in order to purchase something, and increasingly relatively few that have ever used a
monetized silver coin for the same purpose.
I don't have a huge amount of sympathy. The Eurozone and China could run trade deficits,
thereby creating an opportunity for their currencies to become reasonably viable alternative
reserves. But they don't because they don't want to cede control of their manufacturing and
export-driven economic bases away.
The US doesn't mind and doesn't care about the domestic repercussions. For how much longer
that can continue, especially as Trump's America First policy is putting that under
some strain, is an open question. But for now, it's willing to be satisfied with a little
rowing back rather than wholesale reversal (back to, for example, an immediate-post war
position of significant trade surpluses although the article is correct to point out this was
due to the US being the last man standing, in terms of having a manufacturing base still
intact).
The Eurozone and China are not only not showing any signs of a policy change, they've
continued embedding and strengthening the current modus operandi. You pays your money, you
takes your choices. Here as elsewhere. If they'd rather not have the US$ having a
more-or-less monopoly position in then global financial system as a reserve currency, they'll
need to make the compromises needed to set up these challenger currencies as viable
alternatives.
But they can't have their economic cakes and eat them, too.
And it's not just currencies. You need legal systems which are deemed to be (which can
only come through real, observational experience) investor-friendly -- not just prone to
supporting or at the very least given an easy ride to domestic stalwarts. Again, this has
repercussions if you then have to stop cosseting domestic "champions". The US legal system is
ridiculously business friendly. But it doesn't, overtly, differentiate between US and non-US
companies in a commercial dispute.
The sine qua non of our economic empire (which I learned here) is that a global currency requires global trade
deficits, which must grow as quickly as the global economy to fulfill its role. Tell that to Germany! If your silly little euro or yen or renminbi tries to go
global, the dollar-based currency speculators will shrivel it like Soros did the pound in the
90s.
So American deficits are structural. Our debt-ceiling controversies are theater. And our
dollar is exceptional until the instant it isn't–then the Fed electron-tranfers
trillions more to the speculators whose notional dollars just evaporated, keeping the
currencies in the air with their new casino chips. Is this a loan? A gift? An electron cloud?
It's the fog of war by other means . . .
It may have been Hudson who explained that a quarter (or was it half?) of all corporate
profits after WWII went to American companies, when our economy was that much of the world's.
Now we're a much smaller fraction of the global economy, but our corporate sector still
profits as much as it did when it was producing, rather than marketing, real goods. Another
exceptional achievement.
Really all we know is that such a plan would create a different order. That so many
countries have continued to pauper their populations long after the obviousness that
"development" is a sham doesn't bode well for their intentions even after the USA is brought
to heel.
Agreed. The likes of the Regional Comprehensive Economic Partnership are still under
negotiation and still, like every other multilateral investment agreement of recent vintage,
apparently primarily concerned with creating supranational rights for landlords, especially
of the absentee variety, at the expense of citizens in their collective capacity.
This is a good summary of our irrational world. MMT and the GND can save the situation but
only if we industrialized humans forego any more fossil fuels except for long-term survival
purposes. Ration it with draconian discipline. That in turn will discipline our military and
turn our energies to things we can no longer ignore. Money doesn't bother me much. Resources
and the critical health of the planet bother me a lot. Money and "gold" are, in the end, both
fictitious obsessions.
Thanks for providing this transcript prior to Hudson posting it to his own website. He was
the first political-economist to lay out the Outlaw US Empire's game plan when he published
Super Imperialism: The Economic Strategy of American Empire in 1972.
You'll find few
authors willing to provide their seminal work for free online– 2nd Edition
PDF . I think it fair for those unfamiliar with Hudson's work to read his analysis prior
to being judgmental.
I think Calvin and his role in today's debt based monetary system is much underestimated.
The meteoric rise of the seven provinces and what was to become the Dutch colonial empire was
in no small part funded and financed by this debt based system in the latter half of the 16th
century. The same applied shortly afterwards to the UK. The book passage I quoted from is
from Devaluing the Scholastics: Calvin's Ethics of Usury .
I read the Michael Hudson piece and shake my head at the manifest obfuscation at play
The world is in WWIII which is between private and public finance. To characterize the
private finance side as being just the US is obfuscation
Global private finance exists outside the bounds of any one nation state and the US is
just the current face of the centuries of empires under this model.
Why is the West unable to have a discussion about the core component to the world war we
are engaged in?
Sad comment on the successful brainwashing at work here.....that is why I call the web
site Michael Hudson's writing is provided at ALMOST Naked Capitalism
Wake the rest of the way up fellow humans of the West.
The essential problem is that money functions as a contract, with one side an asset and
the other a debt, but as we experience it as quantified hope and security, we try to save and
store it. Thus Econ 101 tells us it is both medium of exchange and store of value. Even
though one is dynamic and the other is static, like blood and fat, or roads and parking
lots.
Necessarily then, in order to store the asset side, generally equal amounts of debt have
to be manufactured and this creates a centripetal effect, as positive feedback pulls the
asset side to the center of the economy, while negative feedback accumulates the debt on the
fringes.
The ancients used debt jubilees to push the reset button, but since we have been conditioned
to think of money as private property, not a public medium, now the only way to reset is for
societal collapse.
Value, as a savings for the future, needs to be stored in tangibles, like strong social
and environmental networks, not as abstractions in the financial circulation system. The
functionality of money is in its fungibility. We own it like we own the section of road we
are using, or the fluids passing through our bodies.
We are also conditioned to think of ourselves as individuals, not as parts of a larger
community, so this social atomization enables finance to mediate most transactions and tax
them. A figurative version of The Matrix.
I was pretty much banned from NC for questioning MMT. Yves called me a troll. The exchange
is jan 6, in the links post.
Consequently I'll only try posting very occasionally and one or two have gone through
moderation.
My view in MMT is that either these people are extremely naive, or operatives for the
oligarchy, as there is no free lunch and the public issuing ever more promises only drives it
further into debt. Which is then accumulated by the oligarchy and eventually traded for
remaining public assets. It's basic predatory lending/disaster capitalism and has been going
on since the dawn of civilization.
Not that people are not often incredibly stupid, but I suspect some recognize the dynamic.
When you start having to pay tolls on most roads, you will know we are way down that rabbit
hole.
John Merryman @7: Sure there are free lunches, Uncle Sugar has been getting lots of free
lunches ever since WWII. The thing about free lunches is those situations cannot be permanent
in a growth economy. To have permanent free lunches you have to have an ecologically stable
economy and a stable population consuming it. In other words, you can't get too greedy.
What's ridiculous is to fall for the "public vs. private" scam, one of the most potent
divide-and-conquer scams of the corporate state, where in reality there's zero distinction
between public and private power.
Power is power, and the finance sector is purely wasteful, purely destructive, serves zero
legitimate purpose, and needs to be abolished as a necessary part of any kind of human
liberation.
Of course the Mammon religion has brainwashed almost everyone into believing, among other
lies, that the dominion of money is necessary for human existence. Never mind that the vast
majority of societies didn't use money for more than a few special transactions, and many
didn't use it at all. Almost all of those societies were humanly more wholesome than this
one, and all of them were less ecologically destructive by many orders of magnitude.
"The ancients used debt jubilees to push the reset button, but since we have been conditioned
to think of money as private property, not a public medium, now the only way to reset is for
societal collapse."
John Merryman @4
There are compromises in this business: debt repudiation being an obvious one.
It is easy enough to make a case for declaring large parts of the public debt, odious. This
is particularly true of the enormous debts run up by Public-Private Partnerships of the sort
that the former UK Premier Brown promoted so enthusiastically. But it is generally true of
debts contracted for purposes which contradict the public interest.
Debt used to make deposits in private bank accounts in the Caymans for example can
justifiably be repudiated by the public, particularly when the creditor was well aware that
its loans were going to be employed for corrupt purposes.
Most of the US Debt, contracted to finance the MIC, is not only odious on general grounds
(Defending what against whom?) but on a contract to contract basis, most contracts being
padded to ensure the ability to provide kickbacks: when Congressmen receive funds from
government contractors and 'public servants', including military types, get jobs/sinecures
from the same, then any money borrowed to finance such contracts is, clearly, odious.
It would be revolutionary no doubt but perfectly practicable to push a 'reset' button on
the Public Debt by proclaiming that, in future, all borrowing for purposes not approved or
understood the putative taxpayer would be found to be odious.
Another possible course would be to stop paying interest on public debt and issue bonds to
repay the capital amounts lent.
The fact that such options are understood would make the regular claims, by neo-liberals
pushing austerity, that there is no money for such things as social security or living wages,
an obvious trigger for debt reduction measures designed to impact the rich rather than their
victims.
Predators and Prey. But the prey believe themselves to be predators also, or at least to have
the potential to become predators should they win the lotto.
Today's world is at war on many fronts. The rules of international law and order put in
place toward the end of World War II are being broken by U.S. foreign policy escalating its
confrontation with countries that refrain from giving its companies control of their economic
surpluses. Countries that do not give the United States control their oil and financial sectors
or privatize their key sectors are being isolated by the United States imposing trade sanctions
and unilateral tariffs giving special advantages to U.S. producers in violation of free trade
agreements with European, Asian and other countries.
This global fracture has an increasingly military cast. U.S. officials justify tariffs and
import quotas illegal under WTO rules on "national security" grounds, claiming that the United
States can do whatever it wants as the world's "exceptional" nation. U.S. officials explain
that this means that their nation is not obliged to adhere to international agreements or even
to its own treaties and promises. This allegedly sovereign right to ignore on its international
agreements was made explicit after Bill Clinton and his Secretary of State Madeline Albright
broke the promise by President George Bush and Secretary of State James Baker that NATO would
not expand eastward after 1991. ("You didn't get it in writing," was the U.S. response to the
verbal agreements that were made.)
Likewise, the Trump administration repudiated the multilateral Iranian nuclear agreement
signed by the Obama administration, and is escalating warfare with its proxy armies in the Near
East. U.S. politicians are waging a New Cold War against Russia, China, Iran, and oil-exporting
countries that the United States is seeking to isolate if cannot control their governments,
central bank and foreign diplomacy.
The international framework that originally seemed equitable was pro-U.S. from the outset.
In 1945 this was seen as a natural result of the fact that the U.S. economy was the least
war-damaged and held by far most of the world's monetary gold. Still, the postwar trade and
financial framework was ostensibly set up on fair and equitable international principles. Other
countries were expected to recover and grow, creating diplomatic, financial and trade parity
with each other.
But the past decade has seen U.S. diplomacy become one-sided in turning the International
Monetary Fund (IMF), World Bank, SWIFT bank-clearing system and world trade into an
asymmetrically exploitative system. This unilateral U.S.-centered array of institutions is
coming to be widely seen not only as unfair, but as blocking the progress of other countries
whose growth and prosperity is seen by U.S. foreign policy as a threat to unilateral U.S.
hegemony. What began as an ostensibly international order to promote peaceful prosperity has
turned increasingly into an extension of U.S. nationalism, predatory rent-extraction and a more
dangerous military confrontation.
Deterioration of international diplomacy into a more nakedly explicit pro-U.S. financial,
trade and military aggression was implicit in the way in which economic diplomacy was shaped
when the United Nations, IMF and World Bank were shaped mainly by U.S. economic strategists.
Their economic belligerence is driving countries to withdraw from the global financial and
trade order that has been turned into a New Cold War vehicle to impose unilateral U.S.
hegemony. Nationalistic reactions are consolidating into new economic and political alliances
from Europe to Asia.
We are still mired in the Oil War that escalated in 2003 with the invasion of Iraq, which
quickly spread to Libya and Syria. American foreign policy has long been based largely on
control of oil. This has led the United States to oppose the Paris accords to stem global
warming. Its aim is to give U.S. officials the power to impose energy sanctions forcing other
countries to "freeze in the dark" if they do not follow U.S. leadership.
To expand its oil monopoly, America is pressuring Europe to oppose the Nordstream II gas
pipeline from Russia, claiming that this would make Germany and other countries dependent on
Russia instead of on U.S. liquified natural gas (LNG). Likewise, American oil diplomacy has
imposed unilateral sanctions against Iranian oil exports, until such time as a regime change
opens up that country's oil reserves to U.S., French, British and other allied oil majors.
U.S. control of dollarized money and credit is critical to this hegemony. As Congressman
Brad Sherman of Los Angeles told a House Financial Services Committee hearing on May 9, 2019:
"An awful lot of our international power comes from the fact that the U.S. dollar is the
standard unit of international finance and transactions. Clearing through the New York Fed is
critical for major oil and other transactions. It is the announced purpose of the supporters of
cryptocurrency to take that power away from us, to put us in a position where the most
significant sanctions we have against Iran, for example, would become irrelevant."[1]
The U.S. aim is to keep the dollar as the transactions currency for world trade, savings,
central bank reserves and international lending. This monopoly status enables the U.S. Treasury
and State Department to disrupt the financial payments system and trade for countries with
which the United States is at economic or outright military war.
Russian President Vladimir Putin quickly responded by describing how "the degeneration of
the universalist globalization model [is] turning into a parody, a caricature of itself, where
common international rules are replaced with the laws of one country."[2]That is the trajectory
on which this deterioration of formerly open international trade and finance is now moving. It
has been building up for a decade. On June 5, 2009, then-Russian President Dmitry Medvedev
cited this same disruptive U.S. dynamic at work in the wake of the U.S. junk mortgage and bank
fraud crisis.
Those whose job it was to forecast events were not ready for the depth of the crisis and
turned out to be too rigid, unwieldy and slow in their response. The international financial
organisations – and I think we need to state this up front and not try to hide it –
were not up to their responsibilities, as has been said quite unambiguously at a number of
major international events such as the two recent G20 summits of the world's largest
economies.
Furthermore, we have had confirmation that our pre-crisis analysis of global economic trends
and the global economic system were correct. The artificially maintained uni-polar system and
preservation of monopolies in key global economic sectors are root causes of the crisis. One
big centre of consumption, financed by a growing deficit, and thus growing debts, one formerly
strong reserve currency, and one dominant system of assessing assets and risks – these
are all factors that led to an overall drop in the quality of regulation and the economic
justification of assessments made, including assessments of macroeconomic policy. As a result,
there was no avoiding a global crisis.[3]
That crisis is what is now causing today's break in global trade and payments.
Warfare on Many Fronts, with Dollarization Being the Main Arena
Dissolution of the Soviet Union 1991 did not bring the disarmament that was widely expected.
U.S. leadership celebrated the Soviet demise as signaling the end of foreign opposition to
U.S.-sponsored neoliberalism and even as the End of History. NATO expanded to encircle Russia
and sponsored "color revolutions" from Georgia to Ukraine, while carving up former Yugoslavia
into small statelets. American diplomacy created a foreign legion of Wahabi fundamentalists
from Afghanistan to Iran, Iraq, Syria and Libya in support of Saudi Arabian extremism and
Israeli expansionism.
The United States is waging war for control of oil against Venezuela, where a military coup
failed a few years ago, as did the 2018-19 stunt to recognize an unelected pro-American puppet
regime. The Honduran coup under President Obama was more successful in overthrowing an elected
president advocating land reform, continuing the tradition dating back to 1954 when the CIA
overthrew Guatemala's Arbenz regime.
U.S. officials bear a special hatred for countries that they have injured, ranging from
Guatemala in 1954 to Iran, whose regime it overthrew to install the Shah as military dictator.
Claiming to promote "democracy," U.S. diplomacy has redefined the word to mean pro-American,
and opposing land reform, national ownership of raw materials and public subsidy of foreign
agriculture or industry as an "undemocratic" attack on "free markets," meaning markets
controlled by U.S. financial interests and absentee owners of land, natural resources and
banks.
A major byproduct of warfare has always been refugees, and today's wave fleeing ISIS, Al
Qaeda and other U.S.-backed Near Eastern proxies is flooding Europe. A similar wave is fleeing
the dictatorial regimes backed by the United States from Honduras, Ecuador, Colombia and
neighboring countries. The refugee crisis has become a major factor leading to the resurgence
of nationalist parties throughout Europe and for the white nationalism of Donald Trump in the
United States.
Dollarization as the Vehicle for U.S. Nationalism
The Dollar Standard – U.S. Treasury debt to foreigners held by the world's central
banks – has replaced the gold-exchange standard for the world's central bank reserves to
settle payments imbalances among themselves. This has enabled the United States to uniquely run
balance-of-payments deficits for nearly seventy years, despite the fact that these Treasury
IOUs have little visible likelihood of being repaid except under arrangements where U.S.
rent-seeking and outright financial tribute from other enables it to liquidate its official
foreign debt.
The United States is the only nation that can run sustained balance-of-payments deficits
without having to sell off its assets or raise interest rates to borrow foreign money. No other
national economy in the world can could afford foreign military expenditures on any major scale
without losing its exchange value. Without the Treasury-bill standard, the United States would
be in this same position along with other nations. That is why Russia, China and other powers
that U.S. strategists deem to be strategic rivals and enemies are looking to restore gold's
role as the preferred asset to settle payments imbalances.
The U.S. response is to impose regime change on countries that prefer gold or other foreign
currencies to dollars for their exchange reserves. A case in point is the overthrow of Libya's
Omar Kaddafi after he sought to base his nation's international reserves on gold. His
liquidation stands as a military warning to other countries.
Thanks to the fact that payments-surplus economies invest their dollar inflows in U.S.
Treasury bonds, the U.S. balance-of-payments deficit finances its domestic budget deficit. This
foreign central-bank recycling of U.S. overseas military spending into purchases of U.S.
Treasury securities gives the United States a free ride, financing its budget – also
mainly military in character – so that it can taxing its own citizens.
Trump Is Forcing Other Countries To Create an Alternative to the Dollar Standard
The fact that Donald Trump's economic policies are proving ineffective in restoring American
manufacturing is creating rising nationalist pressure to exploit foreigners by arbitrary
tariffs without regard for international law, and to impose trade sanctions and diplomatic
meddling to disrupt regimes that pursue policies that U.S. diplomats do not like.
There is a parallel here with Rome in the late 1 st century BC. It stripped its
provinces to pay for its military deficit, the grain dole and land redistribution at the
expense of Italian cities and Asia Minor. This created foreign opposition to drive Rome out.
The U.S. economy is similar to Rome's: extractive rather than productive, based mainly on land
rents and money-interest. As the domestic market is impoverished, U.S. politicians are seeking
to take from abroad what no longer is being produced at home.
What is so ironic – and so self-defeating of America's free global ride – is
that Trump's simplistic aim of lowering the dollar's exchange rate to make U.S. exports more
price-competitive. He imagines commodity trade to be the entire balance of payments, as if
there were no military spending, not to mention lending and investment. To lower the dollar's
exchange rate, he is demanding that China's central bank and those of other countries stop
supporting the dollar by recycling the dollars they receive for their exports into holdings of
U.S. Treasury securities.
This tunnel vision leaves out of account the fact that the trade balance is not simply a
matter of comparative international price levels. The United States has dissipated its supply
of spare manufacturing capacity and local suppliers of parts and materials, while much of its
industrial engineering and skilled manufacturing labor has retired. An immense shortfall must
be filled by new capital investment, education and public infrastructure, whose charges are far
above those of other economics.
Trump's infrastructure ideology is a Public-Private Partnership characterized by high-cost
financialization demanding high monopoly rents to cover its interest charges, stock dividends
and management fees. This neoliberal policy raises the cost of living for the U.S. labor force,
making it uncompetitive. The United States is unable to produce more at any price right now,
because its has spent the past half-century dismantling its infrastructure, closing down its
part suppliers and outsourcing its industrial technology.
The United States has privatized and financialized infrastructure and basic needs such as
public health and medical care, education and transportation that other countries have kept in
their public domain to make their economies more cost-efficient by providing essential services
at subsidized prices or freely. The United States also has led the practice of debt pyramiding,
from housing to corporate finance. This financial engineering and wealth creation by inflating
debt-financed real estate and stock market bubbles has made the United States a high-cost
economy that cannot compete successfully with well-managed mixed economies.
Unable to recover dominance in manufacturing, the United States is concentrating on
rent-extracting sectors that it hopes monopolize, headed by information technology and military
production. On the industrial front, it threatens disrupt China and other mixed economies by
imposing trade and financial sanctions.
The great gamble is whether these other countries will defend themselves by joining in
alliances enabling them to bypass the U.S. economy. American strategists imagine their country
to be the world's essential economy, without whose market other countries must suffer
depression. The Trump Administration thinks that There Is No Alternative (TINA) for other
countries except for their own financial systems to rely on U.S. dollar credit.
To protect themselves from U.S. sanctions, countries would have to avoid using the dollar,
and hence U.S. banks. This would require creation of a non-dollarized financial system for use
among themselves, including their own alternative to the SWIFT bank clearing system. Table 1
lists some possible related defenses against U.S. nationalistic diplomacy.
As noted above, what also is ironic in President Trump's accusation of China and other
countries of artificially manipulating their exchange rate against the dollar (by recycling
their trade and payments surpluses into Treasury securities to hold down their currency's
dollar valuation) involves dismantling the Treasury-bill standard. The main way that foreign
economies have stabilized their exchange rate since 1971 has indeed been to recycle their
dollar inflows into U.S. Treasury securities. Letting their currency's value rise would
threaten their export competitiveness against their rivals, although not necessarily benefit
the United States.
Ending this practice leaves countries with the main way to protect their currencies from
rising against the dollar is to reduce dollar inflows by blocking U.S. lending to domestic
borrowers. They may levy floating tariffs proportioned to the dollar's declining value. The
U.S. has a long history since the 1920s of raising its tariffs against currencies that are
depreciating: the American Selling Price (ASP) system. Other countries can impose their own
floating tariffs against U.S. goods.
Trade dependency as an Aim of the World Bank, IMF and US AID
The world today faces a problem much like what it faced on the eve of World War II. Like
Germany then, the United States now poses the main threat of war, and equally destructive
neoliberal economic regimes imposing austerity, economic shrinkage and depopulation. U.S.
diplomats are threatening to destroy regimes and entire economies that seek to remain
independent of this system, by trade and financial sanctions backed by direct military
force.
Dedollarization will require creation of multilateral alternatives to U.S. "front"
institutions such as the World Bank, IMF and other agencies in which the United States holds
veto power to block any alternative policies deemed not to let it "win." U.S. trade policy
through the World Bank and U.S. foreign aid agencies aims at promoting dependency on U.S. food
exports and other key commodities, while hiring U.S. engineering firms to build up export
infrastructure to subsidize U.S. and other natural-resource investors.[4]The financing is
mainly in dollars, providing risk-free bonds to U.S. and other financial institutions. The
resulting commercial and financial "interdependency" has led to a situation in which a sudden
interruption of supply would disrupt foreign economies by causing a breakdown in their chain of
payments and production. The effect is to lock client countries into dependency on the U.S.
economy and its diplomacy, euphemized as "promoting growth and development."
U.S. neoliberal policy via the IMF imposes austerity and opposes debt writedowns. Its
economic model pretends that debtor countries can pay any volume of dollar debt simply by
reducing wages to squeeze more income out of the labor force to pay foreign creditors. This
ignores the fact that solving the domestic "budget problem" by taxing local revenue still faces
the "transfer problem" of converting it into dollars or other hard currencies in which most
international debt is denominated. The result is that the IMF's "stabilization" programs
actually destabilize and impoverish countries forced into following its advice.
IMF loans support pro-U.S. regimes such as Ukraine, and subsidize capital flight by
supporting local currencies long enough to enable U.S. client oligarchies to flee their
currencies at a pre-devaluation exchange rate for the dollar. When the local currency finally
is allowed to collapse, debtor countries are advised to impose anti-labor austerity. This
globalizes the class war of capital against labor while keeping debtor countries on a short
U.S. financial leash.
U.S. diplomacy is capped by trade sanctions to disrupt economies that break away from U.S.
aims. Sanctions are a form of economic sabotage, as lethal as outright military warfare in
establishing U.S. control over foreign economies. The threat is to impoverish civilian
populations, in the belief that this will lead them to replace their governments with
pro-American regimes promising to restore prosperity by selling off their domestic
infrastructure to U.S. and other multinational investors.
US Warfare on Many Fronts Dedollarization defense
Military warfare (the Near East, Asia)
NATO and bilateral treaty (Saudi, ISIS, Al Qaida). color revolutions and proxy
wars.
Shanghai Cooperation Organization, and pressure for Europe to
withdraw from NATO unless the U.S. alleviates its New Cold War threats.
Dollarization is monetary warfare. The US Treasury-bill
standard finances the mainly military U.S. balance-of-payments deficit. SWIFT threatens to
isolate Iran and Russia
Dedollarization will refrain from foreign central banks financing U.S. overseas military
spending by keeping their savings in dollars.
Creation of alternative payments clearing system.
The IMF finances US client regimes and seeks to isolate those
not following US policy.
An alternative global financial organization, such as Europe's
INSTEX to circumvent US anti-Iran sanctions, and Russo-China alternative to SWIFT.
Creditor policy forcing austerity on debtor economies, forcing
them to privatize and sell off their public domain to pay debts.
An international court empowered to write down debts to the
ability to pay, based on the original principles that were to guide the BIS in 1931.
The World Bank finances trade dependency on US food exports and
opposes national food self-sufficiency.
An alternative development organization based on food
self-sufficiency. Annulment of World Bank and IMF debt as "odious debt."
Unilateral US trade war based on levy of US protectionist
tariffs, quotas and sanctions,
Countervailing sanctions, and creation of an alternative to the
WTO or a strengthened organization free of US control.
Cyber War, spycraft via US internet platforms, and Stuxnet
sabotage.
Work with Huawei and other alternatives to US internet
options.
Class War: austerity program for labor
MMT, taxation of rentier income and capital gains.
Neoliberal monetarist doctrine of privatization and creditor-oriented
rules
Promotion of a mixed economy with public infrastructure as a
factor of production.
US patent policy seeks monopoly rents.
Non-recognition of predatory monopoly patents.
Investment control
Deprivatization and buyoutsof US assets abroad.
International law and diplomacy
The U.S. as the world's "exceptional nation," not subject to international laws or even
to its own treaty agreements.
Veto power in any organization it joins. The basic principle that the U.S. is not
subject to any foreign say over its laws and policies.
Global Problems caused by US Policy Response to U.S. Disruptive Policy
U.S. refuses to join international agreements to reduce carbon emissions, Global Warming
and Extreme Weather.
U.S. diplomacy is based on control of oil to make other countries dependent on U.S.
energy dominance.
Trade and tax sanctions against U.S. exporters and banks. Taxes on U.S. tax avoidance by
the oil industry's "flags of convenience" (convenient for tax avoidance).
Taxation or isolation of U.S. exports based on high-carbon production.
Attempt to monopolize new G5 Internet technology, Sanctioning of Huawei,
insistence on US priority in high-tech.
Rejection of patents on basic IT, medicine and other basic human
needs.
Patent laws in pharmaceuticals, etc.
Taxation of monopoly rents.
There Are Alternatives, on Many Fronts
Militarily, today's leading alternative to NATO expansionism is the Shanghai Cooperation
Organization (SCO), along with Europe following France's example under Charles de Gaulle and
withdrawing. After all, there is no real threat of military invasion today in Europe. No nation
can occupy another without an enormous military draft and such heavy personnel losses that
domestic protests would unseat the government waging such a war. The U.S. anti-war movement in
the 1960s signaled the end of the military draft, not only in the United States but in nearly
all democratic countries (Israel, Switzerland, Brazil and South Korea are exceptions).
The enormous spending on armaments for a kind of war unlikely to be fought is not really
military, but simply to provide profits to the military industrial complex. The arms are not
really to be used. They are simply to be bought, and ultimately scrapped. The danger, of
course, is that these not-for-use arms actually might be used, if only to create a need for new
profitable production.
Likewise, foreign holdings of dollars are not really to be spent on purchases of U.S.
exports or investments. They are like fine-wine collectibles, for saving rather than for
drinking. The alternative to such dollarized holdings is to create a mutual use of national
currencies, and a domestic bank-clearing payments system as an alternative to SWIFT.Russia,
China, Iran and Venezuela already are said to be developing a crypto-currency payments to
circumvent U.S. sanctions and hence financial control.
In the World Trade Organization, the United States has tried to claim that any industry
receiving public infrastructure or credit subsidy deserves tariff retaliation in order to force
privatization. In response to WTO rulings that U.S. tariffs are illegally imposed, the United
States "has blocked all new appointments to the seven-member appellate body in protest, leaving
it in danger of collapse because it may not have enough judges to allow it to hear new
cases."[5]In the U.S. view, only privatized trade financed by private rather than public banks
is "fair" trade.
An alternative to the WTO (or removal of its veto privilege given to the U.S. bloc) is
needed to cope with U.S. neoliberal ideology and, most recently, the U.S. travesty claiming
"national security" exemption to free-trade treaties, impose tariffs on steel, aluminum, and on
European countries that circumvent sanctions on Iran or threaten to buy oil from Russia via the
Nordstream II pipeline instead of high-cost liquified "freedom gas" from the United States.
In the realm of development lending, China's bank along with its Belt and Road initiative is
an incipient alternative to the World Bank, whose main role has been to promote foreign
dependency on U.S. suppliers. The IMF for its part now functions as an extension of the U.S.
Department of Defense to subsidize client regimes such as Ukraine while financially isolating
countries not subservient to U.S. diplomacy.
To save debt-strapped economies suffering Greek-style austerity, the world needs to replace
neoliberal economic theory with an analytic logic for debt writedowns based on the ability to
pay. The guiding principle of the needed development-oriented logic of international law should
be that no nation should be obliged to pay foreign creditors by having to sell of the public
domain and rent-extraction rights to foreign creditors. The defining character of nationhood
should be the fiscal right to tax natural resource rents and financial returns, and to create
its own monetary system.
The United States refuses to join the International Criminal Court. To be effective, it
needs enforcement power for its judgments and penalties, capped by the ability to bring charges
of war crimes in the tradition of the Nuremberg tribunal. U.S. to such a court, combined with
its military buildup now threatening World War III, suggests a new alignment of countries akin
to the Non-Aligned Nations movement of the 1950s and 1960s. Non-aligned in this case means
freedom from U.S. diplomatic control or threats.
Such institutions require a more realistic economic theory and philosophy of operations to
replace the neoliberal logic for anti-government privatization, anti-labor austerity, and
opposition to domestic budget deficits and debt writedowns. Today's neoliberal doctrine counts
financial late fees and rising housing prices as adding to "real output" (GDP), but deems
public investment as deadweight spending, not a contribution to output. The aim of such logic
is to convince governments to pay their foreign creditors by selling off their public
infrastructure and other assets in the public domain.
Just as the "capacity to pay" principle was the foundation stone of the Bank for
International Settlements in 1931, a similar basis is needed to measure today's ability to pay
debts and hence to write down bad loans that have been made without a corresponding ability of
debtors to pay. Without such an institution and body of analysis, the IMF's neoliberal
principle of imposing economic depression and falling living standards to pay U.S. and other
foreign creditors will impose global poverty.
The above proposals provide an alternative to the U.S. "exceptionalist" refusal to join any
international organization that has a say over its affairs. Other countries must be willing to
turn the tables and isolate U.S. banks, U.S. exporters, and to avoid using U.S. dollars and
routing payments via U.S. banks. To protect their ability to create a countervailing power
requires an international court and its sponsoring organization.
Summary
The first existential objective is to avoid the current threat of war by winding down U.S.
military interference in foreign countries and removing U.S. military bases as relics of
neocolonialism. Their danger to world peace and prosperity threatens a reversion to the
pre-World War II colonialism, ruling by client elites along lines similar to the 2014 Ukrainian
coup by neo-Nazi groups sponsored by the U.S. State Department and National Endowment for
Democracy. Such control recalls the dictators that U.S. diplomacy established throughout Latin
America in the 1950s. Today's ethnic terrorism by U.S.-sponsored Wahabi-Saudi Islam recalls the
behavior of Nazi Germany in the 1940s.
Global warming is the second major existentialist threat. Blocking attempts to reverse it is
a bedrock of American foreign policy, because it is based on control of oil. So the military,
refugee and global warming threats are interconnected.
The U.S. military poses the greatest immediate danger. Today's warfare is fundamentally
changed from what it used to be. Prior to the 1970s, nations conquering others had to invade
and occupy them with armies recruited by a military draft. But no democracy in today's world
can revive such a draft without triggering widespread refusal to fight, voting the government
out of power. The only way the United States – or other countries – can fight other
nations is to bomb them. And as noted above, economic sanctions have as destructive an effect
on civilian populations in countries deemed to be U.S. adversaries as overt warfare. The United
States can sponsor political coups (as in Honduras and Pinochet's Chile), but cannot occupy. It
is unwilling to rebuild, to say nothing of taking responsibility for the waves of refugees that
our bombing and sanctions are causing from Latin America to the Near East.
U.S. ideologues view their nation's coercive military expansion and political subversion and
neoliberal economic policy of privatization and financialization as an irreversible victory
signaling the End of History. To the rest of the world it is a threat to human survival.
The American promise is that the victory of neoliberalism is the End of History, offering
prosperity to the entire world. But beneath the rhetoric of free choice and free markets is the
reality of corruption, subversion, coercion, debt peonage and neofeudalism. The reality is the
creation and subsidy of polarized economies bifurcated between a privileged rentier
class and its clients, eir debtors and renters. America is to be permitted to monopolize trade
in oil and food grains, and high-technology rent-yielding monopolies, living off its dependent
customers. Unlike medieval serfdom, people subject to this End of History scenario can choose
to live wherever they want. But wherever they live, they must take on a lifetime of debt to
obtain access to a home of their own, and rely on U.S.-sponsored control of their basic needs,
money and credit by adhering to U.S. financial planning of their economies. This dystopian
scenario confirms Rosa Luxemburg's recognition that the ultimate choice facing nations in
today's world is between socialism and barbarism.
___________________
[1]Billy Bambrough, "Bitcoin Threatens To 'Take Power' From The U.S. Federal Reserve,"
Forbes , May 15, 2019.
https://www.forbes.com/sites/billybambrough/2019/05/15/a-u-s-congressman-is-so-scared-of-bitcoin-and-crypto-he-wants-it-banned/#36b2700b6405.
[2]Vladimir Putin, keynote address to the Economic Forum, June 5-6 2019. Putin went on to
warn of "a policy of completely unlimited economic egoism and a forced breakdown." This
fragmenting of the global economic space "is the road to endless conflict, trade wars and maybe
not just trade wars. Figuratively, this is the road to the ultimate fight of all against
all."
[3]Address to St Petersburg International Economic Forum's Plenary Session, St Petersburg,
Kremlin.ru, June 5, 2009, from Johnson's Russia List, June 8, 2009, #8,
[4] https://www.rt.com/business/464013-china-russia-cryptocurrency-dollar-dethrone/
. Already in the late 1950s the Forgash Plan proposed a World Bank for Economic Acceleration.
Designed by Terence McCarthy and sponsored by Florida Senator Morris Forgash, the bank would
have been a more truly development-oriented institution to guide foreign development to create
balanced economies self-sufficient in food and other essentials. The proposal was opposed by
U.S. interests on the ground that countries pursuing land reform tended to be anti-American.
More to the point, they would have avoided trade and financial dependency on U.S. suppliers and
banks, and hence on U.S. trade and financial sanctions to prevent them from following policies
at odds with U.S. diplomatic demands.
[5]Don Weinland, "WTO rules against US in tariff dispute with China," Financial Times
, July 17, 2019.
Views from an economist who has been promoting neoclassical ideology for decades and then
wonders when there are no alternatives to escape the narrative? Completely ignores how a
monetary sovereign capacity can move away from US hegemony. The countries under the heel of
the US are there because the IMF has engineered their economies in favour of the US. They
could all threaten default at the same time and scare off the IMF horses – the US picks
off individual countries by isolating them. Play the united game and the power of division
practiced by the US would crumble. Just saying.
"They could all threaten default at the same time and scare off the IMF horses – the
US picks off individual countries by isolating them. Play the united game and the power of
division practiced by the US would crumble."
This is interesting. On a similar note, I've wondered why Russia has not defaulted on it's
considerable USD and EUR debt (also too, why is Russia still doing debt in USD and thus
strengthening U.S.?).
But only after she sells off all her U.S. holdings which will be (and have been already)
seized by Out Law America.
I believe Russia would be on some sort of legal ground in doing so in response to the
illegal sanctions imposed upon by by the EU and U.S.
And it will be interesting to see if Germany backs down on Nordstream II. Will she be a
total puppet of the U.S.?
Of course, it's depressing Russia has not reformed it's internal economy so that she can
grow faster. Maybe because while Putin and others don't want to take orders from Washington
they are trapped in neoliberal economic thinking and can't think outside the box?
Until Washington changes, I firmly believe Russia and other nations must act as if their
future hold one totally without U.S. interdependence and must create completely independent
economies the U.S. can not touch. China? Hard to include China in that right now with so much
trade with the U.S. but on the other hand their are reports U.S. related firms are starting
to move out of China.
The corporations that moved manufacturing to Mexico and then subsequently to China will
continue to seek cheaper labor so that their management can feather their own nests. They're
not going to bring back manufacturing to the US. Look at these greedy corporations that sell
Hanes underwear for example. They get rid of labels on their product to save less than a cent
per item and spend money and spend millions in extolling the virtues of not having labesl on
their tee shirts (Michael Jordon is the spokesman in the ad). Greed has no limits.
"Maybe because while Putin and others don't want to take orders from Washington they are
trapped in neoliberal economic thinking and can't think outside the box?"
Probably a lot there. Maybe the idea is that the system can work but needs to be fiddled
with to make it more fair to B stringers like Russia and China.
The only time anyone has had any success escaping Anglo-American finance was Germany,
Japan and the USSR in the 1930-45 period. The Soviets managed to keep their thing going until
much later, but internal corruption ( where isn't this a factor?) did them in.
Post WWII Japan kept away from the stranglehold of US Financiers by only purchasing
technology and protecting their markets which other countries have to emulate.
"I've wondered why Russia has not defaulted on it's considerable USD and EUR debt (also
too, why is Russia still doing debt in USD and thus strengthening U.S.?)"
Notice how this hasn't effected anything; other parties just happily bought it all up. The
Russians were stupid to drop it because Treasury Securities are a guaranteed return on
investment. Because, stick with me here on this, the US government can't run out of US
dollars.
They have removed those assets from the very great possibility of seizure by the US and
others (like the Venezuelan gold seized by the UK). When push comes to shove the US and its
minions have no ethics abut breaking whatever laws they deem to be in their way.
They bought quite a lot of gold, which seems to be doing pretty well these days.
You misunderstood me. Russia borrows USD and EUR from Western banks. That makes US –
Russia's enemy – stronger. Russia should borrow from Russia not the US. I'm asking why
don't they default on that debt. Your response assumed I was referring to Russia holding US
assets. That's different. BTW I don't agree with you that Russia made a mistake getting rid
of US assets given the US has stolen Russian real estate holdings in the US and other nations
property held in US banks like Venezuela's USD deposits and gold.
Along the same lines, the summary starts with, "The first existential objective is to
avoid the current threat of war by winding down U.S. military interference in foreign
countries and removing U.S. military bases as relics of neocolonialism." Either would be
taken as proof of evil anti-US intentions, leading to sanctions, coups, assassinations,
regime change, and eventually outright war. As Mael Colium says, the US picks off individual
countries by isolating them.
I noticed that. I think Michael Hudson is a classical economist pushing back against the
currently reigning neo-classical economists. Classical economics is not Neo-classical
economics. Saying Hudson promotes neo-classical economics is a mistake.
I believe his hope is for the world to recognise that Athens, Rome and Constantinoiple
collapsed economically due to legislatively favoring creditors over debtors. Its a process we
see alive in North America and Europe today. That's where he is coming from
"Views from an economist who has been promoting neoclassical ideology for decades and then
wonders when there are no alternatives to escape the narrative?"
Really, you should read the article you posted this note under. What text is this comment
in reference to?
Michael Hudson promoting neoclassical ideology for decades?? Are we talking about the same
Michael Hudson from UMKC?
Could you please provide one single link to a paper that was written by him relying on
inductive methodology-based equilibrium theory??
There are a number of such "unclear sentences" in the article. Is the original article so
poorly written/edited, or is it errata in the transcription here?
Either way, it's a shame that such errors detract from the clarity of the ideas presented.
Is there any way to go back and clean this mess up??
Reading Michael's fascinating history of debt forgiveness isn't much different. I'm
grateful for his writing but suffer from his typing. Have proofreaders gone the way of buggy
whips?
(And we must stipulate that typos here on NC are so buggy they're a feature. Which makes
me wonder if/when Roman inscriptions went illiterate–first century BC civil wars, or
third century AD Christian takeover? Valuable historic perspective!)
Support. I would go further and say the article should be taken down for editing. Needs to
be translated into English.
Also, too, the final sentence: "This dystopian scenario confirms Rosa Luxemburg's
recognition that the ultimate choice facing nations in today's world is between socialism and
barbarism." is a rather large jump from the text. While many regular NC readers will agree,
the connection for others is obscure.
Wait the final sentence is what it is because it comes after everything before it. The
quote distills much of what precedes it: The US is determined to be "the winner" in all
dealings and nations acquiescing to US goals will likely lead to barbarism (austerity) for
those populations.
Sometimes a phrase hits to the core of a wider meaning: "Send Her Back!" (a racist chant
in any language).
When we have MMT paying for arts, history, journalism and particularly editors, I won't be
so irritated by these kinds of criticisms.
We live in a very advanced world of Bernaysian propaganda where the communicative
industries are privately owned and directed to ensure deep criticisms of the
hyper-exploitative current reality CANNOT be published and promoted.
When someone takes the effort to produce something, like this or the book other commenters
on this thread are also slighting, at great personal expense to themselves without corporate
backing or institutional support, a decent reply would be "Thank you!", rather than tasking
them or our hosts here at this site to "go back and clean up this mess??"
If you had any decency, you might suggest clarifying edits in comments, like changing
"– so that it can taxing its own citizens." at the end of the 23rd paragraph to,
"– so that it can avoid taxing its own citizens", to help the people you are
criticizing for making things so difficult for you.
Who cares about a few typos when his ideas are truly REVOLUTIONARY!
For example, i had no idea about Debt Jubilees in early civilizations 3000 years ago! The
pyramids built by FREE MEN! Liberty and Freedom originating from canceling debts! Torches and
Beacons of light as representatives of said Debt Jubilees!
If you ask me, the #HudsonHawk is trying to awaken the Workers of the World in
Forgiveness, Peace, Love, and Solidarity.
I didn't know that until I read anthropologist David Graeber's Debt: The First 5,000
Years.
But there's a fundamental difference between debt in the past and debt today. In the past
debt was owed to the state, today it's owed to some wealthy corporations. Good luck with debt
jubilees in the absence of violent uprisings.
The difference is they internalize profit and externalize cost. And that's fundamentally
different from all other epochs in the past. Even the birth of nation state was out of their
rationalization of how to maximize profit extraction and cost externalization in the 1st
place. Good luck with debt jubilees.
I agree. I can read through typos, missing words, etc as long as the writing conveys the
intended meaning. I think the criticism of the document for grammatical perfection is not
warranted. I enjoyed the article myself anad I thank the author.
That is why Russia, China and other powers that U.S. strategists deem to be strategic
rivals and enemies are looking to restore gold's role as the preferred asset to settle
payments imbalances.
How would this occur aside from a repudiation of the almighty buck one wonders, and would
it be based on reserves in the vault, or actual use as money?
Keep in mind that there isn't a human alive now who ever proffered a monetized gold coin
in order to purchase something, and increasingly relatively few that have ever used a
monetized silver coin for the same purpose.
I don't have a huge amount of sympathy. The Eurozone and China could run trade deficits,
thereby creating an opportunity for their currencies to become reasonably viable alternative
reserves. But they don't because they don't want to cede control of their manufacturing and
export-driven economic bases away.
The US doesn't mind and doesn't care about the domestic repercussions. For how much longer
that can continue, especially as Trump's America First policy is putting that under
some strain, is an open question. But for now, it's willing to be satisfied with a little
rowing back rather than wholesale reversal (back to, for example, an immediate-post war
position of significant trade surpluses although the article is correct to point out this was
due to the US being the last man standing, in terms of having a manufacturing base still
intact).
The Eurozone and China are not only not showing any signs of a policy change, they've
continued embedding and strengthening the current modus operandi. You pays your money, you
takes your choices. Here as elsewhere. If they'd rather not have the US$ having a
more-or-less monopoly position in then global financial system as a reserve currency, they'll
need to make the compromises needed to set up these challenger currencies as viable
alternatives.
But they can't have their economic cakes and eat them, too.
And it's not just currencies. You need legal systems which are deemed to be (which can
only come through real, observational experience) investor-friendly -- not just prone to
supporting or at the very least given an easy ride to domestic stalwarts. Again, this has
repercussions if you then have to stop cosseting domestic "champions". The US legal system is
ridiculously business friendly. But it doesn't, overtly, differentiate between US and non-US
companies in a commercial dispute.
The sine qua non of our economic empire (which I learned here) is that a global currency
requires global trade deficits, which must grow as quickly as the global economy to fulfill
its role. Tell that to Germany! If your silly little euro or yen or renminbi tries to go
global, the dollar-based currency speculators will shrivel it like Soros did the pound in the
90s. So American deficits are structural. Our debt-ceiling controversies are theater. And our
dollar is exceptional until the instant it isn't–then the Fed electron-tranfers
trillions more to the speculators whose notional dollars just evaporated, keeping the
currencies in the air with their new casino chips. Is this a loan? A gift? An electron cloud?
It's the fog of war by other means . . .
It may have been Hudson who explained that a quarter (or was it half?) of all corporate
profits after WWII went to American companies, when our economy was that much of the world's.
Now we're a much smaller fraction of the global economy, but our corporate sector still
profits as much as it did when it was producing, rather than marketing, real goods. Another
exceptional achievement.
Oops, and I meant to begin with strong agreement, Clive, just developing your point about
the need for deficits to 'buy' control with unpayable debt. And it's an excellent point that
"The US doesn't mind and doesn't care about the domestic repercussions." Just imagine if we
did.
Oh man, this is definitely a two coffee cup read with a ton of material to absorb.
Definitely a keeper this. I'll just make a brief comment as it is late here. Maybe what is
key here is that there are so many trends working against the US as power shifts from a
unipolar to a multipolar world that a determination has been made in Washington to try to set
out a unilateral domineering position with regards the rest of the world to stop the loss of
prestige and power. This is just not Trump but the Washington political establishment backing
him up to put the US in a domineering position for at least the first half of this
century.
This is the first serious article I've seen linking opposition to climate action with the
US strategic focus on securing oil. The current oil wars may have started in 2003, but we've
really been fighting them for longer, at least since the Tanker War of the late 80s, which
led into the first Gulf War (which was explicitly for oil). We've been openly preparing for
such wars since the Carter Doctrine of the late 70s as well. Those dates matter because the
public generally became aware of global warming with the congressional hearings in 1988, and
the oil companies (and thus presumably the rest of the deep state) became aware of the
science as early as the 70s.
US military strategy has been based around ensuring climate change happens for as long as
climate change has been known about. Why isn't this more of a scandal? Why isn't this more
openly discussed as a justification for changing US foreign policy? Why isn't reducing
imperial adventures discussed as a side benefit of any policy, like a Green New Deal, that
seriously attempted to cut carbon emissions? It boggles the mind, and seems like the sort of
thing that'll be obvious to future generations so long as civilization hasn't collapsed by
then.
Really all we know is that such a plan would create a different order. That so many
countries have continued to pauper their populations long after the obviousness that
"development" is a sham doesn't bode well for their intentions even after the USA is brought
to heel.
This is a good summary of our irrational world. MMT and the GND can save the situation but
only if we industrialized humans forego any more fossil fuels except for long-term survival
purposes. Ration it with draconian discipline. That in turn will discipline our military and
turn our energies to things we can no longer ignore. Money doesn't bother me much. Resources
and the critical health of the planet bother me a lot. Money and "gold" are, in the end, both
fictitious obsessions.
Thanks for providing this transcript prior to Hudson posting it to his own website. He was
the first political-economist to lay out the Outlaw US Empire's game plan when he published
Super Imperialism: The Economic Strategy of American Empire in 1972. You'll find few
authors willing to provide their seminal work for free online– 2nd Edition
PDF . I think it fair for those unfamiliar with Hudson's work to read his analysis prior
to being judgmental.
The first existential objective is to avoid the current threat of war by winding down
U.S. military interference in foreign countries and removing U.S. military bases as relics of
neocolonialism.
Clark Air Force base in Angeles City, Philippines had closed the year earlier in 1991.
China is growing power and challenger to shipping freedom of the South China Sea trading
route, building artificial fortified islands and aircraft carriers. History has not ended.
Power abhors a vacuum.
I agree with Hudson's point about the dangers of misdirected militarism, but I don't think
closing military bases around the world necessarily guarantees the end of military
adventurism dangers by other rising powers.
"... Aditya Chakrabortty ( It's reckless. But a Tory cash splurge could win an election , 3 July) is right to point out the hypocrisy of the political right about public expenditure. While progressive proposals for public spending are decried as burdening the hard-pressed taxpayer, the right is happy to use public money to rescue the banks or boost their electoral chances. ..."
"... As I explain in my book Money: Myths, Truths and Alternatives, neoliberal economics is built on a fairytale about money that distorts our view of how a contemporary public money system operates. It is assumed that public spending depends on extracting money from the market and that money (like gold) is always in short supply. Neither is true. Both the market and the state generate money – the market through bank lending and the state through public spending. Both increase the money supply, while bank loan repayments and taxation reduce it. There is no natural shortage of money – which today mainly exists only as data. ..."
Neoliberal economics and other fairytales about money Politics is not about a
struggle over a fixed pot of money, says Mary Mellor, and the best way to end austerity is to
reject it as an ideology, says Peter McKenna
Aditya Chakrabortty (
It's reckless. But a Tory cash splurge could win an election , 3 July) is right to point
out the hypocrisy of the political right about public expenditure. While progressive proposals
for public spending are decried as burdening the hard-pressed taxpayer, the right is happy to
use public money to rescue the banks or boost their electoral chances.
As I explain in my book Money: Myths, Truths and Alternatives, neoliberal economics is built
on a fairytale about money that distorts our view of how a contemporary public money system
operates. It is assumed that public spending depends on extracting money from the market and
that money (like gold) is always in short supply. Neither is true. Both the market and the
state generate money – the market through bank lending and the state through public
spending. Both increase the money supply, while bank loan repayments and taxation reduce it.
There is no natural shortage of money – which today mainly exists only as data.
The case for austerity missed the point. Politics is not about a struggle over a fixed pot
of money. What is limited are resources (particularly the environment) and human capacity. How
these are best used should be a matter of democratic debate. The allocation of money should
depend on the priorities identified. In this the market has no more claim than the public
economy to be the source of sustainable human welfare.
Professor Mary Mellor Newcastle upon Tyne
• Over the years Aditya Chakrabortty has provided us with powerful critiques of
austerity. His message now – that EU membership "is the best way to end austerity"
– overlooks the fact that the UK was in the EU all that time.
Moreover, the EU's stability and growth pact requires that budget deficits and public debt
be pegged below 3% and 60% of GDP respectively.
Such notions are the beating heart of austerity, and the European commission's excessive
deficit procedure taken against errant states has almost universally resulted in swingeing
austerity programmes. These were approved and monitored by the commission and council, with the
UK only taken off the naughty step in 2017 after years of crippling austerity finally reduced
the deficit to 2.3% of GDP.
The best way to end austerity – and to sway voters – is to reject austerity as
an ideology regardless of remain or leave, and rehabilitate the concept of public investment in
a people's economy.
Peter McKenna
"... The purpose of a military conquest is to take control of foreign economies, to take control of their land and impose tribute. The genius of the World Bank was to recognize that it's not necessary to occupy a country in order to impose tribute, or to take over its industry, agriculture and land. Instead of bullets, it uses financial maneuvering. As long as other countries play an artificial economic game that U.S. diplomacy can control, finance is able to achieve today what used to require bombing and loss of life by soldiers ..."
"... It was set up basically by the United States in 1944, along with its sister institution, the International Monetary Fund (IMF). Their purpose was to create an international order like a funnel to make other countries economically dependent on the United States ..."
"... American diplomats insisted on the ability to veto any action by the World Bank or IMF. The aim of this veto power was to make sure that any policy was, in Donald Trump's words, to put America first. "We've got to win and they've got to lose." ..."
"... The World Bank was set up from the outset as a branch of the military, of the Defense Department. John J. McCloy (Assistant Secretary of War, 1941-45), was the first full-time president ..."
"... Many countries had two rates: one for goods and services, which was set normally by the market, and then a different exchange rate that was managed for capital movements. That was because countries were trying to prevent capital flight. They didn't want their wealthy classes or foreign investors to make a run on their own currency – an ever-present threat in Latin America. ..."
"... The IMF and the World Bank backed the cosmopolitan classes, the wealthy. Instead of letting countries control their capital outflows and prevent capital flight, the IMF's job is to protect the richest One Percent and foreign investors from balance-of-payments problems ..."
"... The IMF enables its wealthy constituency to move their money out of the country without taking a foreign-exchange loss ..."
"... Wall Street speculators have sold the local currency short to make a killing, George-Soros style. ..."
"... When the debtor-country currency collapses, the debts that these Latin American countries owe are in dollars, and now have to pay much more in their own currency to carry and pay off these debts. ..."
"... Local currency is thrown onto the foreign-exchange market for dollars, lowering the exchange rate. That increases import prices, raising a price umbrella for domestic products. ..."
"... Instead, the IMF says just the opposite: It acts to prevent any move by other countries to bring the debt volume within the ability to be paid. It uses debt leverage as a way to control the monetary lifeline of financially defeated debtor countries. ..."
"... This control by the U.S. financial system and its diplomacy has been built into the world system by the IMF and the World Bank claiming to be international instead of an expression of specifically U.S. New Cold War nationalism. ..."
"... The same thing happened in Greece a few years ago, when almost all of Greece's foreign debt was owed to Greek millionaires holding their money in Switzerland ..."
"... The IMF could have seized this money to pay off the bondholders. Instead, it made the Greek economy pay. It found that it was worth wrecking the Greek economy, forcing emigration and wiping out Greek industry so that French and German bondholding banks would not have to take a loss. That is what makes the IMF so vicious an institution. ..."
"... America was able to grab all of Iran's foreign exchange just by the banks interfering. The CIA has bragged that it can do the same thing with Russia. If Russia does something that U.S. diplomats don't like, the U.S. can use the SWIFT bank payment system to exclude Russia from it, so the Russian banks and the Russian people and industry won't be able to make payments to each other. ..."
"... You can't create the money, especially if you're running a balance of payments deficit and if U.S. foreign policy forces you into deficit by having someone like George Soros make a run on your currency. Look at the Asia crisis in 1997. Wall Street funds bet against foreign currencies, driving them way down, and then used the money to pick up industry cheap in Korea and other Asian countries. ..."
"... This was also done to Russia's ruble. The only country that avoided this was Malaysia, under Mohamed Mahathir, by using capital controls. Malaysia is an object lesson in how to prevent a currency flight. ..."
"... Client kleptocracies take their money and run, moving it abroad to hard currency areas such as the United States, or at least keeping it in dollars in offshore banking centers instead of reinvesting it to help the country catch up by becoming independent agriculturally, in energy, finance and other sectors. ..."
"... But in shaping the World Trade Organization's rules, the United States said that all countries had to promote free trade and could not have government support, except for countries that already had it. We're the only country that had it. That's what's called "grandfathering". ..."
"The purpose of a military conquest is to take control of foreign economies, to take control of their land and impose
tribute. The genius of the World Bank was to recognize that it's not necessary to occupy a country in order to impose tribute,
or to take over its industry, agriculture and land. Instead of bullets, it uses financial maneuvering. As long as other countries
play an artificial economic game that U.S. diplomacy can control, finance is able to achieve today what used to require bombing
and loss of life by soldiers."
I'm Bonnie Faulkner. Today on Guns and Butter: Dr. Michael Hudson. Today's show: The IMF and World Bank: Partners In Backwardness
. Dr. Hudson is a financial economist and historian. He is President of the Institute for the Study of Long-Term Economic Trend,
a Wall Street Financial Analyst, and Distinguished Research Professor of Economics at the University of Missouri, Kansas City.
His most recent books include " and Forgive them Their Debts: Lending, Foreclosure and Redemption from Bronze Age Finance
to the Jubilee Year "; Killing the Host: How Financial Parasites and Debt Destroy the Global Economy , and J Is for
Junk Economics: A Guide to Reality in an Age of Deception . He is also author of Trade, Development and Foreign Debt
, among many other books.
We return today to a discussion of Dr. Hudson's seminal 1972 book, Super Imperialism: The Economic Strategy of American Empire
, a critique of how the United States exploited foreign economies through the IMF and World Bank, with a special emphasis on
food imperialism.
... ... ...
Bonnie Faulkner : In your seminal work form 1972, Super-Imperialism: The Economic Strategy of American Empire ,
you write: "The development lending of the World Bank has been dysfunctional from the outset." When was the World Bank set up and
by whom?
Michael Hudson : It was set up basically by the United States in 1944, along with its sister institution, the International
Monetary Fund (IMF). Their purpose was to create an international order like a funnel to make other countries economically dependent
on the United States. To make sure that no other country or group of countries – even all the rest of the world – could not
dictate U.S. policy. American diplomats insisted on the ability to veto any action by the World Bank or IMF. The aim of this
veto power was to make sure that any policy was, in Donald Trump's words, to put America first. "We've got to win and they've got
to lose."
The World Bank was set up from the outset as a branch of the military, of the Defense Department. John J. McCloy (Assistant
Secretary of War, 1941-45), was the first full-time president. He later became Chairman of Chase Manhattan Bank (1953-60).
McNamara was Secretary of Defense (1961-68), Paul Wolfowitz was Deputy and Under Secretary of Defense (1989-2005), and Robert Zoellick
was Deputy Secretary of State. So I think you can look at the World Bank as the soft shoe of American diplomacy.
Bonnie Faulkner : What is the difference between the World Bank and the International Monetary Fund, the IMF? Is
there a difference?
Michael Hudson : Yes, there is. The World Bank was supposed to make loans for what they call international development.
"Development" was their euphemism for dependency on U.S. exports and finance. This dependency entailed agricultural backwardness
– opposing land reform, family farming to produce domestic food crops, and also monetary backwardness in basing their monetary system
on the dollar.
The World Bank was supposed to provide infrastructure loans that other countries would go into debt to pay American engineering
firms, to build up their export sectors and their plantation sectors by public investment roads and port development for imports
and exports. Essentially, the Bank financed long- investments in the foreign trade sector, in a way that was a natural continuation
of European colonialism.
In 1941, for example, C. L. R. James wrote an article on "Imperialism in Africa" pointing out the fiasco of European railroad
investment in Africa: "Railways must serve flourishing industrial areas, or densely populated agricult5ural regions, or they must
open up new land along which a thriving population develops and provides the railways with traffic. Except in the mining regions
of South Africa, all these conditions are absent. Yet railways were needed, for the benefit of European investors and heavy industry."
That is why, James explained "only governments can afford to operate them," while being burdened with heavy interest obligations.
[1] What was "developed" was Africa's
mining and plantation export sector, not its domestic economies. The World Bank followed this pattern of "development" lending without
apology.
The IMF was in charge of short-term foreign currency loans. Its aim was to prevent countries from imposing capital controls to
protect their balance of payments. Many countries had a dual exchange rate: one for trade in goods and services, the other rate
for capital movements. The function of the IMF and World Bank was essentially to make other countries borrow in dollars, not in
their own currencies, and to make sure that if they could not pay their dollar-denominated debts, they had to impose austerity on
the domestic economy – while subsidizing their import and export sectors and protecting foreign investors, creditors and client
oligarchies from loss.
The IMF developed a junk-economics model pretending that any country can pay any amount of debt to the creditors if it just impoverishes
its labor enough. So when countries were unable to pay their debt service, the IMF tells them to raise their interest rates to bring
on a depression – austerity – and break up the labor unions. That is euphemized as "rationalizing labor markets." The rationalizing
is essentially to disable labor unions and the public sector. The aim – and effect – is to prevent countries from essentially following
the line of development that had made the United States rich – by public subsidy and protection of domestic agriculture, public
subsidy and protection of industry and an active government sector promoting a New Deal democracy. The IMF was essentially promoting
and forcing other countries to balance their trade deficits by letting American and other investors buy control of their commanding
heights, mainly their infrastructure monopolies, and to subsidize their capital flight.
BONNIE FAULKNER : Now, Michael, when you began speaking about the IMF and monetary controls, you mentioned that there
were two exchange rates of currency in countries. What were you referring to?
MICHAEL HUDSON : When I went to work on Wall Street in the '60s, I was balance-of-payments economist for Chase Manhattan,
and we used the IMF's monthly International Financial Statistics every month. At the top of each country's statistics would
be the exchange-rate figures. Many countries had two rates: one for goods and services, which was set normally by the market,
and then a different exchange rate that was managed for capital movements. That was because countries were trying to prevent capital
flight. They didn't want their wealthy classes or foreign investors to make a run on their own currency – an ever-present threat
in Latin America.
The IMF and the World Bank backed the cosmopolitan classes, the wealthy. Instead of letting countries control their capital
outflows and prevent capital flight, the IMF's job is to protect the richest One Percent and foreign investors from balance-of-payments
problems.
The World Bank and American diplomacy have steered them into a chronic currency crisis. The IMF enables its wealthy constituency
to move their money out of the country without taking a foreign-exchange loss. It makes loans to support capital flight out
of domestic currencies into the dollar or other hard currencies. The IMF calls this a "stabilization" program. It is never effective
in helping the debtor economy pay foreign debts out of growth. Instead, the IMF uses currency depreciation and sell-offs of public
infrastructure and other assets to foreign investors after the flight capital has left and currency collapses. Wall Street speculators
have sold the local currency short to make a killing, George-Soros style.
When the debtor-country currency collapses, the debts that these Latin American countries owe are in dollars, and now have
to pay much more in their own currency to carry and pay off these debts. We're talking about enormous penalty rates in domestic
currency for these countries to pay foreign-currency debts – basically taking on to finance a non-development policy and to subsidize
capital flight when that policy "fails" to achieve its pretended objective of growth.
All hyperinflations of Latin America – Chile early on, like Germany after World War I – come from trying to pay foreign debts
beyond the ability to be paid. Local currency is thrown onto the foreign-exchange market for dollars, lowering the exchange
rate. That increases import prices, raising a price umbrella for domestic products.
A really functional and progressive international monetary fund that would try to help countries develop would say: "Okay, banks
and we (the IMF) have made bad loans that the country can't pay. And the World Bank has given it bad advice, distorting its domestic
development to serve foreign customers rather than its own growth. So we're going to write down the loans to the ability to be paid."
That's what happened in 1931, when the world finally stopped German reparations payments and Inter-Ally debts to the United States
stemming from World War I.
Instead, the IMF says just the opposite: It acts to prevent any move by other countries to bring the debt volume within
the ability to be paid. It uses debt leverage as a way to control the monetary lifeline of financially defeated debtor countries.
So if they do something that U.S. diplomats don't approve of, it can pull the plug financially, encouraging a run on their currency
if they act independently of the United States instead of falling in line. This control by the U.S. financial system and its
diplomacy has been built into the world system by the IMF and the World Bank claiming to be international instead of an expression
of specifically U.S. New Cold War nationalism.
BONNIE FAULKNER : How do exchange rates contribute to capital flight?
MICHAEL HUDSON : It's not the exchange rate that contributes. Suppose that you're a millionaire, and you see that your
country is unable to balance its trade under existing production patterns. The money that the government has under control is pesos,
escudos, cruzeiros or some other currency, not dollars or euros. You see that your currency is going to go down relative to the
dollar, so you want to get our money out of the country to preserve your purchasing power.
This has long been institutionalized. By 1990, for instance, Latin American countries had defaulted so much in the wake of the
Mexico defaults in 1982 that I was hired by Scudder Stevens, to help start a Third World Bond Fund (called a "sovereign high-yield
fund"). At the time, Argentina and Brazil were running such serious balance-of-payments deficits that they were having to pay 45
percent per year interest, in dollars, on their dollar debt. Mexico, was paying 22.5 percent on its tesobonos .
Scudders' salesmen went around to the United States and tried to sell shares in the proposed fund, but no Americans would buy
it, despite the enormous yields. They sent their salesmen to Europe and got a similar reaction. They had lost their shirts on Third
World bonds and couldn't see how these countries could pay.
Merrill Lynch was the fund's underwriter. Its office in Brazil and in Argentina proved much more successful in selling investments
in Scudder's these offshore fund established in the Dutch West Indies. It was an offshore fund, so Americans were not able to buy
it. But Brazilian and Argentinian rich families close to the central bank and the president became the major buyers. We realized
that they were buying these funds because they knew that their government was indeed going to pay their stipulated interest charges.
In effect, the bonds were owed ultimately to themselves. So these Yankee dollar bonds were being bought by Brazilians and other
Latin Americans as a vehicle to move their money out of their soft local currency (which was going down), to buy bonds denominated
in hard dollars.
BONNIE FAULKNER : If wealthy families from these countries bought these bonds denominated in dollars, knowing that they
were going to be paid off, who was going to pay them off? The country that was going broke?
MICHAEL HUDSON : Well, countries don't pay; the taxpayers pay, and in the end, labor pays. The IMF certainly doesn't want
to make its wealthy client oligarchies pay. It wants to squeeze ore economic surplus out of the labor force. So countries are told
that the way they can afford to pay their enormously growing dollar-denominated debt is to lower wages even more.
Currency depreciation is an effective way to do this, because what is devalued is basically labor's wages. Other elements of
exports have a common world price: energy, raw materials, capital goods, and credit under the dollar-centered international monetary
system that the IMF seeks to maintain as a financial strait jacket.
According to the IMF's ideological models, there's no limit to how far you can lower wages by enough to make labor competitive
in producing exports. The IMF and World Bank thus use junk economics to pretend that the way to pay debts owed to the wealthiest
creditors and investors is to lower wages and impose regressive excise taxes, to impose special taxes on necessities that labor
needs, from food to energy and basic services supplied by public infrastructure.
BONNIE FAULKNER: So you're saying that labor ultimately has to pay off these junk bonds?
MICHAEL HUDSON: That is the basic aim of IMF. I discuss its fallacies in my Trade Development and Foreign Debt
, which is the academic sister volume to Super Imperialism . These two books show that the World Bank and IMF were viciously
anti-labor from the very outset, working with domestic elites whose fortunes are tied to and loyal to the United States.
BONNIE FAULKNER : With regard to these junk bonds, who was it or what entity
MICHAEL HUDSON : They weren't junk bonds. They were called that because they were high-interest bonds, but they weren't
really junk because they actually were paid. Everybody thought they were junk because no American would have paid 45 percent interest.
Any country that really was self-reliant and was promoting its own economic interest would have said, "You banks and the IMF have
made bad loans, and you've made them under false pretenses – a trade theory that imposes austerity instead of leading to prosperity.
We're not going to pay." They would have seized the capital flight of their comprador elites and said that these dollar bonds were
a rip-off by the corrupt ruling class.
The same thing happened in Greece a few years ago, when almost all of Greece's foreign debt was owed to Greek millionaires
holding their money in Switzerland. The details were published in the "Legarde List." But the IMF said, in effect that its
loyalty was to the Greek millionaires who ha their money in Switzerland. The IMF could have seized this money to pay off the
bondholders. Instead, it made the Greek economy pay. It found that it was worth wrecking the Greek economy, forcing emigration and
wiping out Greek industry so that French and German bondholding banks would not have to take a loss. That is what makes the IMF
so vicious an institution.
BONNIE FAULKNER : So these loans to foreign countries that were regarded as junk bonds really weren't junk, because
they were going to be paid. What group was it that jacked up these interest rates to 45 percent?
MICHAEL HUDSON : The market did. American banks, stock brokers and other investors looked at the balance of payments of
these countries and could not see any reasonable way that they could pay their debts, so they were not going to buy their bonds.
No country subject to democratic politics would have paid debts under these conditions. But the IMF, U.S. and Eurozone diplomacy
overrode democratic choice.
Investors didn't believe that the IMF and the World Bank had such a strangle hold over Latin American, Asian, and African countries
that they could make the countries act in the interest of the United States and the cosmopolitan finance capital, instead of in
their own national interest. They didn't believe that countries would commit financial suicide just to pay their wealthy One Percent.
They were wrong, of course. Countries were quite willing to commit economic suicide if their governments were dictatorships propped
up by the United States. That's why the CIA has assassination teams and actively supports these countries to prevent any party coming
to power that would act in their national interest instead of in the interest of a world division of labor and production along
the lines that the U.S. planners want for the world. Under the banner of what they call a free market, you have the World Bank and
the IMF engage in central planning of a distinctly anti-labor policy. Instead of calling them Third World bonds or junk bonds, you
should call them anti-labor bonds, because they have become a lever to impose austerity throughout the world.
BONNIE FAULKNER : Well, that makes a lot of sense, Michael, and answers a lot of the questions I've put together to ask
you. What about Puerto Rico writing down debt? I thought such debts couldn't be written down.
MICHAEL HUDSON : That's what they all said, but the bonds were trading at about 45 cents on the dollar, the risk of their
not being paid. The Wall Street Journal on June 17, reported that unsecured suppliers and creditors of Puerto Rico, would
only get nine cents on the dollar. The secured bond holders would get maybe 65 cents on the dollar.
The terms are being written down because it's obvious that Puerto Rico can't pay, and that trying to do so is driving the population
to move out of Puerto Rico to the United States. If you don't want Puerto Ricans to act the same way Greeks did and leave Greece
when their industry and economy was shut down, then you're going to have to provide stability or else you're going to have half
of Puerto Rico living in Florida.
BONNIE FAULKNER : Who wrote down the Puerto Rican debt?
MICHAEL HUDSON : A committee was appointed, and it calculated how much Puerto Rico can afford to pay out of its taxes.
Puerto Rico is a U.S. dependency, that is, an economic colony of the United States. It does not have domestic self-reliance. It's
the antithesis of democracy, so it's never been in charge of its own economic policy and essentially has to do whatever the United
States tells it to do. There was a reaction after the hurricane and insufficient U.S. support to protect the island and the enormous
waste and corruption involved in the U.S. aid. The U.S. response was simply: "We won you fair and square in the Spanish-American
war and you're an occupied country, and we're going to keep you that way." Obviously this is causing a political resentment.
BONNIE FAULKNER : You've already touched on this, but why has the World Bank traditionally been headed by a U.S. secretary
of defense?
MICHAEL HUDSON : Its job is to do in the financial sphere what, in the past, was done by military force. The purpose of
a military conquest is to take control of foreign economies, to take control of their land and impose tribute. The genius of the
World Bank was to recognize that it's not necessary to occupy a country in order to impose tribute, or to take over its industry,
agriculture and land. Instead of bullets, it uses financial maneuvering. As long as other countries play an artificial economic
game that U.S. diplomacy can control, finance is able to achieve today what used to require bombing and loss of life by soldiers.
In this case the loss of life occurs in the debtor countries. Population growth shrinks, suicides go up. The World Bank engages
in economic warfare that is just as destructive as military warfare. At the end of the Yeltsin period Russia's President Putin said
that American neoliberalism destroyed more of Russia's population than did World War II. Such neoliberalism, which basically is
the doctrine of American supremacy and foreign dependency, is the policy of the World Bank and IMF.
BONNIE FAULKNER : Why has World Bank policy since its inception been to provide loans for countries to devote their land
to export crops instead of giving priority to feeding themselves? And if this is the case, why do countries want these loans?
MICHAEL HUDSON : One constant of American foreign policy is to make other countries dependent on American grain exports
and food exports. The aim is to buttress America's agricultural trade surplus. So the first thing that the World Bank has done is
not to make any domestic currency loans to help food producers. Its lending has steered client countries to produce tropical export
crops, mainly plantation crops that cannot be grown in the United States. Focusing on export crops leads client countries to become
dependent on American farmers – and political sanctions.
In the 1950s, right after the Chinese revolution, the United States tried to prevent China from succeeding by imposing grain
export controls to starve China into submission by putting sanctions on exports. Canada was the country that broke these export
controls and helped feed China.
The idea is that if you can make other countries export plantation crops, the oversupply will drive down prices for cocoa and
other tropical products, and they won't feed themselves. So instead of backing family farms like the American agricultural policy
does, the World Bank backed plantation agriculture. In Chile, which has the highest natural supply of fertilizer in the world from
its guano deposits, exports guano instead of using it domestically. It also has the most unequal land distribution, blocking it
from growing its own grain or food crops. It's completely dependent on the United States for this, and it pays by exporting copper,
guano and other natural resources.
The idea is to create interdependency – one-sided dependency on the U.S. economy. The United States has always aimed at being
self-sufficient in its own essentials, so that no other country can pull the plug on our economy and say, "We're going to starve
you by not feeding you." Americans can feed themselves. Other countries can't say, "We're going to let you freeze in the dark by
not sending you oil," because America's independent in energy. But America can use the oil control to make other countries freeze
in the dark, and it can starve other countries by food-export sanctions.
So the idea is to give the United States control of the key interconnections of other economies, without letting any country
control something that is vital to the working of the American economy.
There's a double standard here. The United States tells other countries: "Don't do as we do. Do as we say." The only way it can
enforce this is by interfering in the politics of these countries, as it has interfered in Latin America, always pushing the right
wing. For instance, when Hillary's State Department overthrew the Honduras reformer who wanted to undertake land reform and feed
the Hondurans, she said: "This person has to go." That's why there are so many Hondurans trying to get into the United States now,
because they can't live in their own country.
The effect of American coups is the same in Syria and Iraq. They force an exodus of people who no longer can make a living under
the brutal dictatorships supported by the United States to enforce this international dependency system.
BONNIE FAULKNER : So when I asked you why countries would want these loans, I guess you're saying that they wouldn't,
and that's why the U.S. finds it necessary to control them politically.
MICHAEL HUDSON : That's a concise way of putting it Bonnie.
BONNIE FAULKNER : Why are World Bank loans only in foreign currency, not in the domestic currency of the country to which
it is lending?
MICHAEL HUDSON : That's a good point. A basic principle should be to avoid borrowing in a foreign currency. A country
can always pay the loans in its own currency, but there's no way that it can print dollars or euros to pay loans denominated in
these foreign currencies.
Making the dollar central forces other countries to interface with the U.S. banking system. So if a country decides to go its
own way, as Iran did in 1953 when it wanted to take over its oil from British Petroleum (or Anglo Iranian Oil, as it was called
back then), the United States can interfere and overthrow it. The idea is to be able to use the banking system's interconnections
to stop payments from being made.
After America installed the Shah's dictatorship, they were overthrown by Khomeini, and Iran had run up a U.S. dollar debt under
the Shah. It had plenty of dollars. I think Chase Manhattan was its paying agent. So when its quarterly or annual debt payment came
due, Iran told Chase to draw on its accounts and pay the bondholders. But Chase took orders from the State Department or the Defense
Department, I don't know which, and refused to pay. When the payment was not made, America and its allies claimed that Iran was
in default. They demanded the entire debt to be paid, as per the agreement that the Shah's puppet government had signed. America
simply grabbed the deposits that Iran had in the United States. This is the money that was finally returned to Iran without interest
under the agreement of 2016.
America was able to grab all of Iran's foreign exchange just by the banks interfering. The CIA has bragged that it can do
the same thing with Russia. If Russia does something that U.S. diplomats don't like, the U.S. can use the SWIFT bank payment system
to exclude Russia from it, so the Russian banks and the Russian people and industry won't be able to make payments to each other.
This prompted Russia to create its own bank-transfer system, and is leading China, Russia, India and Pakistan to draft plans
to de-dollarize.
BONNIE FAULKNER : I was going to ask you, why would loans in a country's domestic currency be preferable to the country
taking out a loan in a foreign currency? I guess you've explained that if they took out a loan in a domestic currency, they would
be able to repay it.
MICHAEL HUDSON : Yes.
BONNIE FAULKNER : Whereas a loan in a foreign currency would cripple them.
MICHAEL HUDSON : Yes. You can't create the money, especially if you're running a balance of payments deficit and if
U.S. foreign policy forces you into deficit by having someone like George Soros make a run on your currency. Look at the Asia crisis
in 1997. Wall Street funds bet against foreign currencies, driving them way down, and then used the money to pick up industry cheap
in Korea and other Asian countries.
This was also done to Russia's ruble. The only country that avoided this was Malaysia, under Mohamed Mahathir, by using capital
controls. Malaysia is an object lesson in how to prevent a currency flight.
But for Latin America and other countries, much of their foreign debt is held by their own ruling class. Even though it's denominated
in dollars, Americans don't own most of this debt. It's their own ruling class. The IMF and World Bank dictate tax policy to Latin
America – to un-tax wealth and shift the burden onto labor. Client kleptocracies take their money and run, moving it abroad
to hard currency areas such as the United States, or at least keeping it in dollars in offshore banking centers instead of reinvesting
it to help the country catch up by becoming independent agriculturally, in energy, finance and other sectors.
BONNIE FAULKNER : You say that: "While U.S. agricultural protectionism has been built into the postwar global system at
its inception, foreign protectionism is to be nipped in the bud." How has U.S. agricultural protectionism been built into the postwar
global system?
MICHAEL HUDSON : Under Franklin Roosevelt the Agricultural Adjustment Act of 1933 called for price supports for crops
so that farmers could earn enough to invest in equipment and seeds. The Agriculture Department was a wonderful department in spurring
new seed varieties, agricultural extension services, marketing and banking services. It provided public support so that productivity
in American agriculture from the 1930s to '50s was higher over a prolonged period than that of any other sector in history.
But in shaping the World Trade Organization's rules, the United States said that all countries had to promote free trade
and could not have government support, except for countries that already had it. We're the only country that had it. That's what's
called "grandfathering". The Americans said: "We already have this program on the books, so we can keep it. But no other country
can succeed in agriculture in the way that we have done. You must keep your agriculture backward, except for the plantation crops
and growing crops that we can't grow in the United States." That's what's so evil about the World Bank's development plan.
BONNIE FAULKNER : According to your book: "Domestic currency is needed to provide price supports and agricultural extension
services such as have made U.S. agriculture so productive." Why can't infrastructure costs be subsidized to keep down the economy's
overall cost structure if IMF loans are made in foreign currency?
MICHAEL HUDSON : If you're a farmer in Brazil, Argentina or Chile, you're doing business in domestic currency. It doesn't
help if somebody gives you dollars, because your expenses are in domestic currency. So if the World Bank and the IMF can prevent
countries from providing domestic currency support, that means they're not able to give price supports or provide government marketing
services for their agriculture.
America is a mixed economy. Our government has always subsidized capital formation in agriculture and industry, but it insists
that other countries are socialist or communist if they do what the United States is doing and use their government to support the
economy. So it's a double standard. Nobody calls America a socialist country for supporting its farmers, but other countries are
called socialist and are overthrown if they attempt land reform or attempt to feed themselves.
This is what the Catholic Church's Liberation Theology was all about. They backed land reform and agricultural self-sufficiency
in food, realizing that if you're going to support population growth, you have to support the means to feed it. That's why the United
States focused its assassination teams on priests and nuns in Guatemala and Central America for trying to promote domestic self-sufficiency.
BONNIE FAULKNER : If a country takes out an IMF loan, they're obviously going to take it out in dollars. Why can't they
take the dollars and convert them into domestic currency to support local infrastructure costs?
MICHAEL HUDSON : You don't need a dollar loan to do that. Now were getting in to MMT. Any country can create its own currency.
There's no reason to borrow in dollars to create your own currency. You can print it yourself or create it on your computers.
BONNIE FAULKNER: Well, exactly. So why don't these countries simply print up their own domestic currency?
MICHAEL HUDSON : Their leaders don't want to be assassinated. More immediately, if you look at the people in charge of
foreign central banks, almost all have been educated in the United States and essentially brainwashed. It's the mentality of foreign
central bankers. The people who are promoted are those who feel personally loyal to the United States, because they that that's
how to get ahead. Essentially, they're opportunists working against the interests of their own country. You won't have socialist
central bankers as long as central banks are dominated by the International Monetary Fund and the Bank for International Settlements.
BONNIE FAULKNER : So we're back to the main point: The control is by political means, and they control the politics and
the power structure in these countries so that they don't rebel.
MICHAEL HUDSON : That's right. When you have a dysfunctional economic theory that is destructive instead of productive,
this is never an accident. It is always a result of junk economics and dependency economics being sponsored. I've talked to people
at the U.S. Treasury and asked why they all end up following the United States. Treasury officials have told me: "We simply buy
them off. They do it for the money." So you don't need to kill them. All you need to do is find people corrupt enough and opportunist
enough to see where the money is, and you buy them off.
BONNIE FAULKNER : You write that "by following U.S. advice, countries have left themselves open to food blackmail." What
is food blackmail?
MICHAEL HUDSON : If you pursue a foreign policy that we don't like -- for instance, if you trade with Iran, which we're
trying to smash up to grab its oil -- we'll impose financial sanctions against you. We won't sell you food, and you can starve.
And because you've followed World Bank advice and not grown your own food, you will starve, because you're dependent on us, the
United States and our Free World Ó allies. Canada will no longer follow its own policy independently of the United States,
as it did with China in the 1950s when it sold it grain. Europe also is falling in line with U.S. policy.
BONNIE FAULKNER : You write that: "World Bank administrators demand that loan recipients pursue a policy of economic dependency
above all on the United States as food supplier." Was this done to support U.S. agriculture? Obviously it is, but were there other
reasons as well?
MICHAEL HUDSON : Certainly the agricultural lobby was critical in all of this, and I'm not sure at what point this became
thoroughly conscious. I knew some of the World Bank planners, and they had no anticipation that this dependency would be the result.
They believed the free-trade junk economics that's taught in the schools' economics departments and for which Nobel prizes are awarded.
When we're dealing with economic planners, we're dealing with tunnel-visioned people. They stayed in the discipline despite its
unreality because they sort of think that abstractly it makes sense. There's something autistic about most economists, which is
why the French had their non-autistic economic site for many years. The mentality at work is that every country should produce what
it's best at – not realizing that nations also need to be self-sufficient in essentials, because we're in a real world of economic
and military warfare.
BONNIE FAULKNER : Why does the World Bank prefer to perpetrate world poverty instead of adequate overseas capacity to
feed the peoples of developing countries?
MICHAEL HUDSON : World poverty is viewed as solution , not a problem. The World Bank thinks of poverty as low-priced
labor, creating a competitive advantage for countries that produce labor-intensive goods. So poverty and austerity for the World
Bank and IMF is an economic solution that's built into their models. I discuss these in my Trade, Development and Foreign Debt
book. Poverty is to them the solution, because it means low-priced labor, and that means higher profits for the companies bought
out by U.S., British, and European investors. So poverty is part of the class war: profits versus poverty.
BONNIE FAULKNER : In general, what is U.S. food imperialism? How would you characterize it?
MICHAEL HUDSON : Its aim is to make America the producer of essential foods and other countries producing inessential
plantation crops, while remaining dependent on the United States for grain, soy beans and basic food crops.
BONNIE FAULKNER : Does World Bank lending encourage land reform in former colonies?
MICHAEL HUDSON : No. If there is land reform, the CIA sends its assassination teams in and you have mass murder, as you
had in Guatemala, Ecuador, Central America and Columbia. The World Bank is absolutely committed against land reform. When the Forgash
Plan for a World Bank for Economic Acceleration was proposed in the 1950s to emphasize land reform and local-currency loans, a Chase
Manhattan economist to whom the plan was submitted warned that every country that had land reform turned out to be anti-American.
That killed any alternative to the World Bank.
BONNIE FAULKNER : Does the World Bank insist on client governments privatizing their public domain? If so, why, and what
is the effect?
MICHAEL HUDSON : It does indeed insist on privatization, pretending that this is efficient. But what it privatizes are
natural monopolies – the electrical system, the water system and other basic needs. Foreigners take over, essentially finance them
with foreign debt, build the foreign debt that they build into the cost structure, and raise the cost of living and doing business
in these countries, thereby crippling them economically. The effect is to prevent them from competing with the United States and
its European allies.
BONNIE FAULKNER : Would you say then that it is mainly America that has been aided, not foreign economies that borrow
from the World Bank?
MICHAEL HUDSON : That's why the United States is the only country with veto power in the IMF and World Bank – to make
sure that what you just described is exactly what happens.
BONNIE FAULKNER : Why do World Bank programs accelerate the exploitation of mineral deposits for use by other nations?
MICHAEL HUDSON : Most World Bank loans are for transportation, roads, harbor development and other infrastructure needed
to export minerals and plantation crops. The World Bank doesn't make loans for projects that help the country develop in its own
currency. By making only foreign currency loans, in dollars or maybe euros now, the World Bank says that its clients have to repay
by generating foreign currency. The only way they can repay the dollars spent on American engineering firms that have built their
infrastructure is to export – to earn enough dollars to pay back for the money that the World Bank or IMF have lent.
This is what John Perkins' book about being an economic hit man for the World Bank is all about. He realized that his job was
to get countries to borrow dollars to build huge projects that could only be paid for by the country exporting more – which required
breaking its labor unions and lowering wages so that it could be competitive in the race to the bottom that the World Bank and IMF
encourage.
BONNIE FAULKNER : You also point out in Super Imperialism that mineral resources represent diminishing assets,
so these countries that are exporting mineral resources are being depleted while the importing countries aren't.
MICHAEL HUDSON : That's right. They'll end up like Canada. The end result is going to be a big hole in the ground. You've
dug up all your minerals, and in the end you have a hole in the ground and a lot of the refuse and pollution – the mining slag and
what Marx called the excrements of production.
This is not a sustainable development. The World Bank only promotes the U.S. pursuit of sustainable development. So naturally,
they call their "Development," but their focus is on the United States, not the World Bank's client countries.
BONNIE FAULKNER : When Super Imperialism: The Economic Strategy of American Empire was originally published in
1972, how was it received?
MICHAEL HUDSON : Very positively. It enabled my career to take off. I received a phone call a month later by someone from
the Bank of Montreal saying they had just made $240 million on the last paragraph of my book. They asked what it would cost to have
me come up and give a lecture. I began lecturing once a month at $3,500 a day, moving up to $6,500 a day, and became the highest-paid
per diem economist on Wall Street for a few years.
I was immediately hired by the Hudson Institute to explain Super Imperialism to the Defense Department. Herman Kahn said
I showed how U.S. imperialism ran rings around European imperialism. They gave the Institute an $85,000 grant to have me go to the
White House in Washington to explain how American imperialism worked. The Americans used it as a how-to-do-it book.
The socialists, whom I expected to have a response, decided to talk about other than economic topics. So, much to my surprise,
it became a how-to-do-it book for imperialists. It was translated by, I think, the nephew of the Emperor of Japan into Japanese.
He then wrote me that the United States opposed the book being translated into Japanese. It later was translated. It was
received very positively in China, where I think it has sold more copies than in any other country. It was translated into Spanish,
and most recently it was translated into German, and German officials have asked me to come and discuss it with them. So the book
has been accepted all over the world as an explanation of how the system works.
BONNIE FAULKNER : In closing, do you really think that the U.S. government officials and others didn't understand how
their own system worked?
MICHAEL HUDSON : Many might not have understood in 1944 that this would be the consequence. But by the time 50 years went
by, you had an organization called "Fifty Years Is Enough." And by that time everybody should have understood. By the time Joe Stiglitz
became the World Bank's chief economist, there was no excuse for not understanding how the system worked. He was amazed to find
that indeed it didn't work as advertised, and resigned. But he should have known at the very beginning what it was all about. If
he didn't understand how it was until he actually went to work there, you can understand how hard it is for most academics to get
through the vocabulary of junk economics, the patter-talk of free trade and free markets to understand how exploitative and destructive
the system is.
BONNIE FAULKNER : Michael Hudson, thank you very much.
MICHAEL HUDSON : It's always good to be here, Bonnie. I'm glad you ask questions like these.
I've been speaking with Dr. Michael Hudson. Today's show has been: The IMF and World Bank: Partners in Backwardness. Dr.
Hudson is a financial economist and historian. He is president of the Institute for the Study of Long-Term Economic Trend, a Wall
Street financial analyst and Distinguished Research Professor of Economics at the University of Missouri, Kansas City. His 1972
book, Super Imperialism : The Economic Strategy of American Empire , a critique of how the United States exploited foreign economies
through the IMF and World Bank, the subject of today's broadcast, is posted in PDF format on his website at michael-hudson.com.
He is also author of Trade, Development and Foreign Debt , which is the academic sister volume to Super Imperialism. Dr. Hudson
acts as an economic advisor to governments worldwide on finance and tax law. Visit his website at michael-hudson.com.
Guns and Butter is produced by Bonnie Faulkner, Yarrow Mahko and Tony Rango. Visit us at
gunsandbutter.org to listen to past programs, comment on shows, or join
our email list to receive our newsletter that includes recent shows and updates. Email us at
[email protected]. Follow us
on Twitter at #gandbradio.
There is an article on here by Michael Hudson, an economist who wrote about U.S. control of
the World Bank and IMF since 1948. He claims that the U.S. wages war because it gets other
countries to unwittingly finance them and the trade deficit. After WWII the U.S. forced
European countries to pay their war debt, by selling corporate assets, reducing barriers and
reduce their social programs. They had 3/4 of the world gold reserves because of those loans
during the war. Korea and Vietnam reduced their gold reserves to 10 billion by the late 60's
and were forced to get out off the Gold Standard. The French Banks that had a big presense in
Indochina sending their dollars to the French Central Bank and they were trading dollars for
gold. Nixon stopped it.
The dollar gave U.S. the means to have other countries finance their trade deficit, all
their wars and the military buildup. By ending the Gold backed dollar they forced the countries
that had U.S. debt dollars to purchase U.S. Treasury Bonds. As the U.S. debt grew so did the
dollars being held by those countries and the purchase of Treasury Bonds. The U.S. does not
allow countries holding those dollars to buy US property or buy Corporations and risk being
acused of commiting an act of war. So they are forced to buy U.S. debt while the US uses its
dollars to buy other countries resources with those worthless dollars.
The U.S. forces countries that default on their loans to pay penalties and huge interest
payments while the U.S. debt goes un checked and growing without the threat of being in
default...
There is nothing natural about money. There is no link to some scarce essential form of money that sets a limit to its creation.
It can be composed of base metal, paper or electronic data – none of which is in short supply. Similarly – despite what you may have
heard about the need for austerity and a lack of certain cash-generating trees – there is no "natural" level of public expenditure.
The size and reach of the public sector is a matter of political choice.
Which puts austerity, the culling of expenditure in the public economy, under some question. For some countries, such as
Greece , the impact of austerity has been devastating. Austerity policies still persist despite numerous
studies arguing that they were entirely misconceived,
based on political choice rather than economic logic. But the economic case for austerity is equally mistaken: it is based on what
can best be described as fairytale economics.
So what were the justifications? Britain, for example, has lived under an austerity regime since 2010, when the incoming Tory-Liberal
Democrat government reversed the Labour policy of raising the level of public expenditure in response to the 2007-8 financial crisis.
The crisis had created a perfect storm: bank rescue required high levels of public spending while economic contraction reduced tax
income. The case for austerity was that the higher level of public expenditure could not be afforded by the taxpayer. This was supported
by "
handbag economics ", which adopts the analogy of states as being like households, dependent on a (private sector) breadwinner.
Under handbag economics, states are required to restrict their expenditure to what the taxpayer is deemed to be able to afford.
States must not try to increase their spending by borrowing from the (private) financial sector or by "printing money" (although
the banks were rescued by doing so by another name – quantitative
easing , the creation of electronic money).
The ideology of handbag economics claims that money is to be generated only through market activity and that it is always in short
supply. Request for increased public expenditure is almost invariably met with the response "where's the money to come from?" When
confronted by low pay in the NHS, the British prime minister, Theresa May, famously declared, "there is no magic money tree".
So where does money come from? And what is money
anyway? What is money?
Until the last 50 years or so the answer seemed to be obvious: money was represented by cash (notes and coin). When money was
tangible, there seemed no question about its origin, or its value. Coins were minted, banknotes were printed. Both were authorised
by governments or central banks. But what is money today? In richer economies the use of cash is
declining rapidly . Most monetary transactions are based on transfers between accounts: no physical money is involved.
In the run up to the financial crisis, the state's role in relation to money held in bank accounts was ambiguous. Banking was
a monitored and licensed activity with some level of state guarantee of bank deposits, but the actual act of creating bank accounts
was, and is, seen as a private matter. There may be regulations and limitations, but there is
no detailed scrutiny of bank accounts and bank lending.
Yet, as the 2007-8 financial crisis showed, when bank accounts came under threat as banks teetered on the edge of bankruptcy,
states and central banks had to step in and
guarantee the security
of all deposit accounts. The viability of money in non-investment bank accounts was demonstrated to be as much a public responsibility
as cash.
This raises fundamental questions about money as a social institution. Is it right that money can be generated by a private choice
to take on debt, which then becomes a liability of the state to guarantee in a crisis?
But far from seeing money as a public resource, under neoliberal handbag economics, money creation and circulation has increasingly
been seen as a function of the market. Money is "made" solely in the private sector. Public spending is seen as a drain on that money,
justifying austerity to make the public sector as small as possible.
This stance, however, is based on a complete misunderstanding of the nature of money, sustained by a series of deeply embedded
myths.
Myths about money
Neoliberal handbag economics is derived from two key myths about the origin and nature of money. The first is that money emerged
from a previous market economy based on barter. The second is that money was originally made from precious metal.
It is claimed that bartering proved to be very inefficient as each buyer-seller needed to find another person who exactly matched
their requirements. A hat maker might barter a hat for some shoes she needs – but what if the shoe maker is in no need of a hat?
The solution to this problem, so the story goes, was to choose one commodity that everyone desired, to act as a medium of exchange.
Precious metal (gold and silver) was the obvious
choice because it had its own value and could be easily divided and carried. This view of the origin of money goes back to at
least the 18th century: the time of economist
Adam Smith .
The 'father of capitalism' Adam Smith, 1723-1790. Matt Ledwinka/Shutterstock.com
These myths led to two assumptions about money that are still current today. First, that money is essentially connected to, and
generated by, the marketplace. Second that modern money, like its original and ideal form, is always in short supply. Hence the
neoliberal
claim that public spending is a drain on the wealth-creating capacity of the market and that public spending must always be as
limited as possible. Money is seen as a commercial instrument, serving a basic, market, technical, transactional function with no
social or political force.
But the real story of money is very different. Evidence from anthropology and history shows that there was no widespread barter
before markets based on money developed, and precious metal coinage emerged long before market economies. There are also many forms
of money other than precious metal coins.
Money as custom
Something that acts as money has existed in most, if not all, human societies. Stones, shells, beads, cloths, brass rods and many
other forms have been the means of comparing and acknowledging comparative value. But this was rarely used in a market context. Most
early human communities lived directly off the land – hunting, fishing, gathering and gardening. The customary money in such communities
was used mainly to celebrate auspicious social events or serve as a way of resolving social conflict.
For example, the Lele people, who lived in what is now the Democratic Republic of Congo in the 1950s, calculated value in
woven raffia
cloths . The number of cloths required for different occasions was fixed by custom. Twenty cloths should be given to a father
by a son on achieving adulthood and a similar amount given to a wife on the birth of a child. The anthropologist Mary Douglas, who
studied the Lele, found
they were resistant to using the cloths in transactions with outsiders, indicating that the cloths had a specific cultural relevance.
Even stranger is the large stone money of the Yap people of Micronesia. Huge circular discs of stone could weigh up to
four metric tons . Not something to put in your
pocket for a trip to the shops.
Try lugging that to the market. Evenfh/Shutterstock.com
There is plenty of other anthropological evidence such as this all over the world, all pointing to the fact that money, in its
earliest form, served a social rather than market-based purpose.
Money as power
For most traditional societies, the origin of the particular money form has been lost in the mist of time. But the origin and
adoption of money as an institution became much more obvious with the emergence of states. Money did not originate as precious metal
coinage with the development of markets. In fact, the new invention of precious metal coinage in around
600BC was adopted
and controlled by imperial rulers to build their empires by waging war.
Most notable was Alexander the Great, who ruled from 336–323BC. He is said to have used
half a ton of silver a day
to fund his largely mercenary army rather than a share of the spoils (the traditional payment). He had more than 20 mints producing
coins, which had images of gods and heroes and the word Alexandrou (of Alexander). From that time, new ruling regimes have
tended to herald their arrival by a new coinage.
Alexandrou. Alex Coan/Shutterstock.com
More than a thousand years after the invention of coinage, the Holy Roman Emperor Charlemagne (742-814), who ruled most of western
and central Europe, developed what became the basis of the British pre-decimal money system: pounds, shillings and pence. Charlemagne
set up a currency system based on 240 pennies minted from a pound of silver. The pennies became established as the denier in France,
the pfennig in Germany, the dinero in Spain, the denari in Italy and the penny in Britain.
So the real story of money as coinage was not one of barterers and traders: it emerged instead from a long history of politics,
war and conflict. Money was an active agent in state and empire building, not a passive representation of price in the market. Control
of the money supply was a major power of rulers: a sovereign power. Money was created and spent into circulation by rulers either
directly, like Alexander, or through taxation or seizure of private holdings of precious metal.
Nor was early money necessarily based on precious metal. In fact, precious metal was relatively useless for building empires,
because it was in short supply. Even in the Roman era, base metal was used, and Charlemagne's new money eventually became debased.
In China, gold and silver did not feature and paper money was being used as early as the 9th century.
A coin from the time of Charlemagne, 768-814 AD. Classical Numismatic Group, CC BY-SA
What the market economy did introduce was a new form of money: money as debt.
Money as debt
If you look at a £20 banknote you will see it says: "I promise to pay the bearer on demand the sum of twenty pounds." This is
a promise originally made by the Bank of England to exchange notes for the sovereign currency. The banknote was a new form of money.
Unlike sovereign money it was not a statement of value, but a promise of value. A coin, even if made of base metal, was exchangeable
in its own right: it did not represent another, superior, form of money. But when banknotes were first invented, they did.
The new invention of promissory notes emerged through the needs of trade in the 16th and 17th centuries. Promissory notes were
used to acknowledge receipt of loans or investments and the obligation to repay them through the fruits of future transactions. A
major task of the emerging profession of banking was to periodically set all these promises against each other and see who owed what
to whom. This process of "clearing" meant that a great amount of paper commitments was reduced to relatively less actual transfer
of money. Final settlement was either by payment with sovereign money (coins) or another promissory note (banknote).
Eventually, the banknotes became so trusted that they were treated as money in their own right. In Britain they became equivalent
to the coinage, particularly when they were united under the banner of the Bank of England. Today, if you took a banknote to the
Bank of England, it would merely exchange your note for one that is exactly the same. Banknotes are no longer promises, they are
the currency. There is no other "real" money behind them.
What promissory notes became. Wara1982/Shutterstock.com
What modern money does retain is its association with debt. Unlike sovereign money, which was created and spent directly into
circulation, modern money is largely borrowed into circulation through the banking system. This process shelters behind another myth,
that banks merely act as a link between savers and borrowers. In fact, banks create money. And it is only in the last decade that
this powerful myth has been finally put to rest by banking and monetary authorities.
It is now
acknowledged
by monetary authorities such as the IMF, the US Federal Reserve and the Bank of England, that banks are creating new money when
they make loans. They don't lend the money of other account holders to those who want to borrow.
Bank loans consist of money conjured out of thin air, whereby new money is credited to the borrowers account with the agreement
that the amount will eventually be repaid with interest.
The policy implications of the public currency being created out of nowhere and lent to borrowers on a purely commercial basis
have still not been taken on board. Nor has basing a public currency on debt as opposed to the sovereign power to create and directly
circulate money free of debt.
The result is that rather than using their own sovereign power over money creation, as Alexander the Great did, states have become
borrowers from the private sector. Where there are public spending deficits or the need for large scale future expenditure, there
is an expectation that the state will borrow the money or increase taxation, rather than create the money itself.
Creators of cash. Creative Lab/Shutterstock.com
Dilemmas of debt
But basing a money supply on debt is ecologically, socially and economically problematic.
Ecologically, there is a problem because the need to pay off debt could drive potentially
damaging
growth : money creation based on repaying debt with interest must imply constant growth in the money supply. If this is achieved
through increasing productive capacity, there will inevitably be pressure on natural resources.
Basing the money supply on debt is also socially discriminatory because not all citizens are in a position to take on debt. The
pattern of the money supply will tend to favour the already rich or the most speculative risk-taker. Recent decades, for example,
have seen a
huge amount of borrowing by the financial sector to enhance their investments.
The economic problem is that the money supply depends on the capacity of the various elements of the economy (public and private)
to take on more debt. And so as countries have become more dependent upon bank-created money, debt bubbles and credit crunches have
become more frequent.
This is because handbag economics creates an impossible task for the private sector. It has to create all new money through bank-issued
debt and repay it all with interest. It has to completely fund the public sector and generate a profit for investors.
But when the privatised bank-led money supply flounders, the money creating powers of the state come back into clear focus. This
was particularly plain in the 2007-8 crisis, when central banks created new money in the process known as quantitative easing. Central
banks used the sovereign power to create money free of debt to spend directly into the economy (by buying up existing government
debt and other financial assets, for example).
The question then becomes: if the state as represented by the central bank can create money out of thin air to save the banks
– why can't it create money to save the people?
It's a mistake to think of the state as a piggybank or handbag. ColorMaker/Shutterstock.com
Money for the people
The myths about money have led us to look at public spending and taxation the wrong way around. Taxation and spending, like bank
lending and repayment, is in a constant flow. Handbag economics assumes that it is taxation (of the private sector) that is raising
the money to fund the public sector. That taxation takes money out of the taxpayer's pocket.
But the long political history of sovereign power over money would indicate that the flow of money can be in the opposite direction.
In the same way that banks can conjure money out of thin air to make loans, states can conjure money out of thin air to fund public
spending. Banks create money by setting up bank accounts, states create money by allocating budgets.
When governments set budgets they do not see how much money they have in a pre-existing taxation piggybank. The budget allocates
spending commitments that may, or may not, match the amount of money coming in through taxation. Through its accounts in the treasury
and the central bank, the state is constantly spending out and taking in money. If it spends more money than it takes in, it leaves
more money in people's pockets. This creates a budget deficit and what is effectively an overdraft at the central bank.
Is this a problem? Yes, if the state is treated as if it was any other bank account holder – the dependent household of handbag
economics. No, if it is seen as an independent source of money. States do not need to wait for handouts from the commercial sector.
States are the authority behind the money system. The power exercised by the banks to create the public currency out of thin air
is a sovereign power.
It is no longer necessary to mint coins like Alexander, money can be created by keystrokes. There is no reason why this should
be monopolised by the banking sector to create new public money as debt. Deeming public spending as being equivalent to bank borrowing
denies the public, the sovereign people in a democracy, the right to access its own money free of debt.
Money should be designed for the many, not the few. Varavin88/Shutterstock.com
Redefining money
This foray into the historical and anthropological stories about money shows that long-held conceptions – that money emerged from
a previous market economy based on barter, and that it was originally made from precious metal – are fairytales. We need to recognise
this. And we need to capitalise on the public ability to create money.
But it is also important to recognise that the sovereign power to create money is not a solution in itself. Both the state and
bank capacity to create money have advantages and disadvantages. Both can be abused. The reckless lending of the banking sector,
for example, led to the near meltdown of the American and European monetary and financial system. On the other hand, where countries
do not have a developed banking sector, the money supply remains in the hands of the state, with massive room for corruption and
mismanagement.
The answer must be to subject both forms of money creation – bank and state – to democratic accountability. Far from being a technical,
commercial instrument, money can be seen as a social and political construct that has immense radical potential. Our ability to harness
this is hampered if we do not understand what money is
and how it works . Money must become our servant, rather than our master.
theconversation.com The views of individual contributors do not necessarily represent those of the Strategic Culture Foundation.
Tags: Capitalism Neoliberalism
Print this article June
24, 2019 | Editor's Сhoice Neoliberalism Has Tricked Us Into Believing a Fairytale About Where Money Comes From Mary MELLOR
There is nothing natural about money. There is no link to some scarce essential form of money that sets a limit to its creation.
It can be composed of base metal, paper or electronic data – none of which is in short supply. Similarly – despite what you may have
heard about the need for austerity and a lack of certain cash-generating trees – there is no "natural" level of public expenditure.
The size and reach of the public sector is a matter of political choice.
Which puts austerity, the culling of expenditure in the public economy, under some question. For some countries, such as
Greece , the impact of austerity has been devastating. Austerity policies still persist despite numerous
studies arguing that they were entirely misconceived,
based on political choice rather than economic logic. But the economic case for austerity is equally mistaken: it is based on what
can best be described as fairytale economics.
So what were the justifications? Britain, for example, has lived under an austerity regime since 2010, when the incoming Tory-Liberal
Democrat government reversed the Labour policy of raising the level of public expenditure in response to the 2007-8 financial crisis.
The crisis had created a perfect storm: bank rescue required high levels of public spending while economic contraction reduced tax
income. The case for austerity was that the higher level of public expenditure could not be afforded by the taxpayer. This was supported
by "
handbag economics ", which adopts the analogy of states as being like households, dependent on a (private sector) breadwinner.
Under handbag economics, states are required to restrict their expenditure to what the taxpayer is deemed to be able to afford.
States must not try to increase their spending by borrowing from the (private) financial sector or by "printing money" (although
the banks were rescued by doing so by another name – quantitative
easing , the creation of electronic money).
The ideology of handbag economics claims that money is to be generated only through market activity and that it is always in short
supply. Request for increased public expenditure is almost invariably met with the response "where's the money to come from?" When
confronted by low pay in the NHS, the British prime minister, Theresa May, famously declared, "there is no magic money tree".
So where does money come from? And what is money
anyway? What is money?
Until the last 50 years or so the answer seemed to be obvious: money was represented by cash (notes and coin). When money was
tangible, there seemed no question about its origin, or its value. Coins were minted, banknotes were printed. Both were authorised
by governments or central banks. But what is money today? In richer economies the use of cash is
declining rapidly . Most monetary transactions are based on transfers between accounts: no physical money is involved.
In the run up to the financial crisis, the state's role in relation to money held in bank accounts was ambiguous. Banking was
a monitored and licensed activity with some level of state guarantee of bank deposits, but the actual act of creating bank accounts
was, and is, seen as a private matter. There may be regulations and limitations, but there is
no detailed scrutiny of bank accounts and bank lending.
Yet, as the 2007-8 financial crisis showed, when bank accounts came under threat as banks teetered on the edge of bankruptcy,
states and central banks had to step in and
guarantee the security
of all deposit accounts. The viability of money in non-investment bank accounts was demonstrated to be as much a public responsibility
as cash.
This raises fundamental questions about money as a social institution. Is it right that money can be generated by a private choice
to take on debt, which then becomes a liability of the state to guarantee in a crisis?
But far from seeing money as a public resource, under neoliberal handbag economics, money creation and circulation has increasingly
been seen as a function of the market. Money is "made" solely in the private sector. Public spending is seen as a drain on that money,
justifying austerity to make the public sector as small as possible.
This stance, however, is based on a complete misunderstanding of the nature of money, sustained by a series of deeply embedded
myths.
Myths about money
Neoliberal handbag economics is derived from two key myths about the origin and nature of money. The first is that money emerged
from a previous market economy based on barter. The second is that money was originally made from precious metal.
It is claimed that bartering proved to be very inefficient as each buyer-seller needed to find another person who exactly matched
their requirements. A hat maker might barter a hat for some shoes she needs – but what if the shoe maker is in no need of a hat?
The solution to this problem, so the story goes, was to choose one commodity that everyone desired, to act as a medium of exchange.
Precious metal (gold and silver) was the obvious
choice because it had its own value and could be easily divided and carried. This view of the origin of money goes back to at
least the 18th century: the time of economist
Adam Smith .
The 'father of capitalism' Adam Smith, 1723-1790. Matt Ledwinka/Shutterstock.com
These myths led to two assumptions about money that are still current today. First, that money is essentially connected to, and
generated by, the marketplace. Second that modern money, like its original and ideal form, is always in short supply. Hence the
neoliberal
claim that public spending is a drain on the wealth-creating capacity of the market and that public spending must always be as
limited as possible. Money is seen as a commercial instrument, serving a basic, market, technical, transactional function with no
social or political force.
But the real story of money is very different. Evidence from anthropology and history shows that there was no widespread barter
before markets based on money developed, and precious metal coinage emerged long before market economies. There are also many forms
of money other than precious metal coins.
Money as custom
Something that acts as money has existed in most, if not all, human societies. Stones, shells, beads, cloths, brass rods and many
other forms have been the means of comparing and acknowledging comparative value. But this was rarely used in a market context. Most
early human communities lived directly off the land – hunting, fishing, gathering and gardening. The customary money in such communities
was used mainly to celebrate auspicious social events or serve as a way of resolving social conflict.
For example, the Lele people, who lived in what is now the Democratic Republic of Congo in the 1950s, calculated value in
woven raffia
cloths . The number of cloths required for different occasions was fixed by custom. Twenty cloths should be given to a father
by a son on achieving adulthood and a similar amount given to a wife on the birth of a child. The anthropologist Mary Douglas, who
studied the Lele, found
they were resistant to using the cloths in transactions with outsiders, indicating that the cloths had a specific cultural relevance.
Even stranger is the large stone money of the Yap people of Micronesia. Huge circular discs of stone could weigh up to
four metric tons . Not something to put in your
pocket for a trip to the shops.
Try lugging that to the market. Evenfh/Shutterstock.com
There is plenty of other anthropological evidence such as this all over the world, all pointing to the fact that money, in its
earliest form, served a social rather than market-based purpose.
Money as power
For most traditional societies, the origin of the particular money form has been lost in the mist of time. But the origin and
adoption of money as an institution became much more obvious with the emergence of states. Money did not originate as precious metal
coinage with the development of markets. In fact, the new invention of precious metal coinage in around
600BC was adopted
and controlled by imperial rulers to build their empires by waging war.
Most notable was Alexander the Great, who ruled from 336–323BC. He is said to have used
half a ton of silver a day
to fund his largely mercenary army rather than a share of the spoils (the traditional payment). He had more than 20 mints producing
coins, which had images of gods and heroes and the word Alexandrou (of Alexander). From that time, new ruling regimes have
tended to herald their arrival by a new coinage.
Alexandrou. Alex Coan/Shutterstock.com
More than a thousand years after the invention of coinage, the Holy Roman Emperor Charlemagne (742-814), who ruled most of western
and central Europe, developed what became the basis of the British pre-decimal money system: pounds, shillings and pence. Charlemagne
set up a currency system based on 240 pennies minted from a pound of silver. The pennies became established as the denier in France,
the pfennig in Germany, the dinero in Spain, the denari in Italy and the penny in Britain.
So the real story of money as coinage was not one of barterers and traders: it emerged instead from a long history of politics,
war and conflict. Money was an active agent in state and empire building, not a passive representation of price in the market. Control
of the money supply was a major power of rulers: a sovereign power. Money was created and spent into circulation by rulers either
directly, like Alexander, or through taxation or seizure of private holdings of precious metal.
Nor was early money necessarily based on precious metal. In fact, precious metal was relatively useless for building empires,
because it was in short supply. Even in the Roman era, base metal was used, and Charlemagne's new money eventually became debased.
In China, gold and silver did not feature and paper money was being used as early as the 9th century.
A coin from the time of Charlemagne, 768-814 AD. Classical Numismatic Group, CC BY-SA
What the market economy did introduce was a new form of money: money as debt.
Money as debt
If you look at a £20 banknote you will see it says: "I promise to pay the bearer on demand the sum of twenty pounds." This is
a promise originally made by the Bank of England to exchange notes for the sovereign currency. The banknote was a new form of money.
Unlike sovereign money it was not a statement of value, but a promise of value. A coin, even if made of base metal, was exchangeable
in its own right: it did not represent another, superior, form of money. But when banknotes were first invented, they did.
The new invention of promissory notes emerged through the needs of trade in the 16th and 17th centuries. Promissory notes were
used to acknowledge receipt of loans or investments and the obligation to repay them through the fruits of future transactions. A
major task of the emerging profession of banking was to periodically set all these promises against each other and see who owed what
to whom. This process of "clearing" meant that a great amount of paper commitments was reduced to relatively less actual transfer
of money. Final settlement was either by payment with sovereign money (coins) or another promissory note (banknote).
Eventually, the banknotes became so trusted that they were treated as money in their own right. In Britain they became equivalent
to the coinage, particularly when they were united under the banner of the Bank of England. Today, if you took a banknote to the
Bank of England, it would merely exchange your note for one that is exactly the same. Banknotes are no longer promises, they are
the currency. There is no other "real" money behind them.
What promissory notes became. Wara1982/Shutterstock.com
What modern money does retain is its association with debt. Unlike sovereign money, which was created and spent directly into
circulation, modern money is largely borrowed into circulation through the banking system. This process shelters behind another myth,
that banks merely act as a link between savers and borrowers. In fact, banks create money. And it is only in the last decade that
this powerful myth has been finally put to rest by banking and monetary authorities.
It is now
acknowledged
by monetary authorities such as the IMF, the US Federal Reserve and the Bank of England, that banks are creating new money when
they make loans. They don't lend the money of other account holders to those who want to borrow.
Bank loans consist of money conjured out of thin air, whereby new money is credited to the borrowers account with the agreement
that the amount will eventually be repaid with interest.
The policy implications of the public currency being created out of nowhere and lent to borrowers on a purely commercial basis
have still not been taken on board. Nor has basing a public currency on debt as opposed to the sovereign power to create and directly
circulate money free of debt.
The result is that rather than using their own sovereign power over money creation, as Alexander the Great did, states have become
borrowers from the private sector. Where there are public spending deficits or the need for large scale future expenditure, there
is an expectation that the state will borrow the money or increase taxation, rather than create the money itself.
Creators of cash. Creative Lab/Shutterstock.com
Dilemmas of debt
But basing a money supply on debt is ecologically, socially and economically problematic.
Ecologically, there is a problem because the need to pay off debt could drive potentially
damaging
growth : money creation based on repaying debt with interest must imply constant growth in the money supply. If this is achieved
through increasing productive capacity, there will inevitably be pressure on natural resources.
Basing the money supply on debt is also socially discriminatory because not all citizens are in a position to take on debt. The
pattern of the money supply will tend to favour the already rich or the most speculative risk-taker. Recent decades, for example,
have seen a
huge amount of borrowing by the financial sector to enhance their investments.
The economic problem is that the money supply depends on the capacity of the various elements of the economy (public and private)
to take on more debt. And so as countries have become more dependent upon bank-created money, debt bubbles and credit crunches have
become more frequent.
This is because handbag economics creates an impossible task for the private sector. It has to create all new money through bank-issued
debt and repay it all with interest. It has to completely fund the public sector and generate a profit for investors.
But when the privatised bank-led money supply flounders, the money creating powers of the state come back into clear focus. This
was particularly plain in the 2007-8 crisis, when central banks created new money in the process known as quantitative easing. Central
banks used the sovereign power to create money free of debt to spend directly into the economy (by buying up existing government
debt and other financial assets, for example).
The question then becomes: if the state as represented by the central bank can create money out of thin air to save the banks
– why can't it create money to save the people?
It's a mistake to think of the state as a piggybank or handbag. ColorMaker/Shutterstock.com
Money for the people
The myths about money have led us to look at public spending and taxation the wrong way around. Taxation and spending, like bank
lending and repayment, is in a constant flow. Handbag economics assumes that it is taxation (of the private sector) that is raising
the money to fund the public sector. That taxation takes money out of the taxpayer's pocket.
But the long political history of sovereign power over money would indicate that the flow of money can be in the opposite direction.
In the same way that banks can conjure money out of thin air to make loans, states can conjure money out of thin air to fund public
spending. Banks create money by setting up bank accounts, states create money by allocating budgets.
When governments set budgets they do not see how much money they have in a pre-existing taxation piggybank. The budget allocates
spending commitments that may, or may not, match the amount of money coming in through taxation. Through its accounts in the treasury
and the central bank, the state is constantly spending out and taking in money. If it spends more money than it takes in, it leaves
more money in people's pockets. This creates a budget deficit and what is effectively an overdraft at the central bank.
Is this a problem? Yes, if the state is treated as if it was any other bank account holder – the dependent household of handbag
economics. No, if it is seen as an independent source of money. States do not need to wait for handouts from the commercial sector.
States are the authority behind the money system. The power exercised by the banks to create the public currency out of thin air
is a sovereign power.
It is no longer necessary to mint coins like Alexander, money can be created by keystrokes. There is no reason why this should
be monopolised by the banking sector to create new public money as debt. Deeming public spending as being equivalent to bank borrowing
denies the public, the sovereign people in a democracy, the right to access its own money free of debt.
Money should be designed for the many, not the few. Varavin88/Shutterstock.com
Redefining money
This foray into the historical and anthropological stories about money shows that long-held conceptions – that money emerged from
a previous market economy based on barter, and that it was originally made from precious metal – are fairytales. We need to recognise
this. And we need to capitalise on the public ability to create money.
But it is also important to recognise that the sovereign power to create money is not a solution in itself. Both the state and
bank capacity to create money have advantages and disadvantages. Both can be abused. The reckless lending of the banking sector,
for example, led to the near meltdown of the American and European monetary and financial system. On the other hand, where countries
do not have a developed banking sector, the money supply remains in the hands of the state, with massive room for corruption and
mismanagement.
The answer must be to subject both forms of money creation – bank and state – to democratic accountability. Far from being a technical,
commercial instrument, money can be seen as a social and political construct that has immense radical potential. Our ability to harness
this is hampered if we do not understand what money is
and how it works . Money must become our servant, rather than our master.
My advice is to drop the idea of acquiring gold. There are just too many issues for the
small buyer to safely overcome.
1) If gold prices ever shoot through the roof (as the seller sites keep hinting at) I'd
expect the US government to politely invite you to sell them your stocks. This happened in
the Thirties, and can certainly happen again. It is probably impossible to accumulate
anything more than a few pieces of jewelry without being put on somebody's list. The Feds
closely monitor virtually every financial transaction made in this country.
2) How will you know you're getting pure 24k gold vs 23 or 18k stuff? Worse than that, the
Chinese have become VERY good at gilding Tungsten bars or disks. Even central Banks have
been taken in by this scam, and what do you suppose your chances are? The 19.25 gm/cubic
cm. density of Tungsten is very, very close to the 19.3 density of Gold. I'd imagine with a
bit of powder metallurgy work involving a speck of 22.5 Osmium, the numbers could be exactly
matched. There are a few other tests, but nobody outside of the huge dealers or central banks
can afford to do them.
3) come the financial disaster, how will you "spend" your gold? Even if you're certain you
have the genuine product, how will you convince me? Or anybody else, for that matter.
It'll come down to what the guy at the pawn shop will give you for it, and that'll probably
be on the order of 1/3 the value. (there is always the Official Government purchasers, and at
their price and their penalties for holding out)
I'd suggest you buy US "junk silver" in small cash deals - the old silver coins minted up
to 1964. The odds are much higher somebody will understand these have a superior value, and
they're in sizes suitable for small purchases. Even so, would you reasonably expect anybody
to accept a couple Ben Franklin half dollars in exchange for a sack of food - especially
if there is a severe food shortage going on? If your kids know about this acquisition,
you'd better prepare for the burglars - they talk about everything to everybody. Come to
think of it, I know of an adult who lost tens of thousands worth of silver because he was
motor mouth about it. Total loss. BTW, telling your insurance guy is the same as putting it
on a billboard - this information gets shared!
Do as Karlof1 suggested - find a reputable coin dealer in your vicinity. Don't buy at
Amazon, Ebay et al..
Also, if manageable buy 1 ounce coins only as this will save you surcharge that always
comes with the smaller ones. Stick with well known brands - Canadian Maple Leaf, Austrian
Philharmonics, Australian Kangaroo, Britannia, American Eagle - and stay away from collector
items.
Notional value of the coins:
Britannia 100 GBP, Philharmonics 100 Euro, Maple Leaf 50 CAD, American Eagle 50 US, Kangaroo
50 AUS.
Watch Gold spot price prior to any purchase at barchart.com (ticker ^XAUUSD - ^XAUCAD),
stockcharts.com (ticker $Gold), investing.com etc (ticker XAU/CAD - XAU/US).
We can already hear the whining from the uber-left's ivory tower as Fed Chair Jerome Powell
unleashed some common-sense on the latest fraud being thrust upon Americans - that of Modern
Monetary Theory (MMT).
As Bloomberg reminds, MMT argues that because America borrows in its own currency, it can
always print more dollars to cover its obligations. As a result, the thinking goes, the U.S.
can always run sustained budget deficits and rack up an ever-increasing debt burden. Helping
grease the wheels for some MMTers is the expectation that the Fed would keep rates low to
contain the cost of servicing America's obligations . With that in mind, Sen. David Perdue,
R-Ga., asked Powell about the theory, saying its advocates back a "spend-now spend-later
spend-often policy that would use massive annual deficits to fund these tremendously expensive
policy proposals." MMT advocates figure the Fed would be a partner in funding these programs
through easy monetary policy.
Powell's response was brief and to the point:
"The idea that deficits don't matter for countries that can borrow in their own currency I
think is just wrong..."
"And to the extent that people are talking about using the Fed -- our role is not to
provide support for particular policies," Powell said.
"Decisions about spending, and controlling spending and paying for it, are really for
you."
Simply put, Powell explained that the increasingly popular theory espoused by progressives
that the government can continue to borrow to fund social programs such as Medicare for
everyone, free college tuition and a conversion to renewable energy in the next decade is
unworkable and makes some "pretty extreme claims."
Earlier in the hearing Powell also noted that "U.S. debt is fairly high to the level of GDP
-- and much more importantly -- it's growing faster than GDP, really significantly faster. We
are going to have to spend less or raise more revenue."
In his book "A Time For Action" written in 1980 William Simon, a former Secretary of the
Treasury tells how he was "frightened and angry". In short, he sounded the trumpet about how
he saw the country was heading down the wrong path. William Simon (1927 – 2000) was a
businessman and a philanthropist.
Simon became the Secretary of the Treasury on May 8, 1974, during the Nixon administration
and was reappointed by President Ford and served until 1977. I recently picked up a copy of
the book that I had read decades ago and while re-reading it I reflected on and tried to
evaluate the events that brought us to today.
Out of this came an article reflecting on how the economy of today had been greatly shaped
by the actions that took place starting around 1979. Interest rates, inflation, and debt do
matter and are more significant than most people realize. Rewarding savers and placing a
value on the allocation of financial assets is important.
The path has again become unsustainable and many people will be shocked when the reality
hits, this is not the way it has always been. The day of reckoning may soon be upon us, how
it arrives is the question. Many of us see it coming, but the one thing we can bank on is
that after it arrives many people will be caught totally off guard. The piece below explores
how we reached this point.
1) It isn't a theory, just an explanation of the US monetary system and how it works. It
isn't advocating the system, it is just stating how it works and how one would need to
operate within it.
2) MMT states that money shouldn't be created (spent into the economy by the gov) unless
the necessary capacity, productivity, workers, resources and assets existed in the economy.
And, if they didn't, they'd have to be created first. This would prevent inflation, not
create it.
Most everyone is misinformed and hasn't done their homework as to what MMT is. The
Libtards have taken an MMT point out of context and run with it. PRINT MONEY! But they omit
the key MMT policy point of... "Print/spend ONLY ONLY ONLY if the productive capacity and
resources are already in the economy to balance any gov spending out." A slightly important
point that they conveniently overlooked due to their 2nd grade understanding of finance,
economics and accounting.
MMT simply doesn't work if a nation 'borrows' its own currency. However, if it does not,
then MMT would at least theoretically be correct because the issue of 'printing money'
(or creating credit) would not be tied to debt but would entail a balancing of the
beneficial and adverse effects of monetary inflation.
There is some evidence that you can print money and spend it and have a vibrant, powerful
economy. It depends on how you spend it. If it's spent on supportive infrastructure such as
energy, transportation, utilities, communications, etc. it's all upwards. If it's spent on
welfare, war machinery, and supporting the bureaucracy the system fails in one
generation.
Underlying the whole premise of MMT is the question; Does the market determine interest
rates or does the fed?
I know the fed determines the federal funds rate but are they the sole dictator of
interest rates? A large portion of our debt is purchased by both domestic and foreign
investors. These are independent people....as well as governments. Will they continue to buy
bonds at 2% interest from a country that has a debt-to-GDP ration of 300% and 10 trillion
dollar yearly deficits??
If US debt gets downgraded, can the fed over-ride the tide of reality and dictate low
interest rates? Can they print enough to buy them all or do they have to maintain a
functioning balance sheet as well?
cut spending - why does usa need fbi branches in every foreign country?
why do we need so many outdated military machines (ahem aircraft carriers)
why does health care and education cost so much (ahem we forget to talk about cost, only
how to pay the fee imposed by the business)
Much of our debt is result of party over country, pointless wars (that Iraq oil is now
controlled by Russia and china..so much for the return on investment there), Afghanistan is a
failed and foolish intervention - just ask russia, syria is a soverign nation leave them
alone, same as venezuala.
Retrench and let the world figure itself out - after pakistan and india nuke each other
back to stone age, lets hope for humanities sake we can get real global cooperative
leadership that doesnt include the capitalist big read white and blue **** smacking foreign
nations on the forehead to further the elites agenda.
"... But otherwise, quite correct. Raise payments on deposits and get more deposits. Raise charges on loans and get fewer loans. I might note that the Fed has supposedly paused rate hikes, but deposits are still exiting the system faster than loans. This result can be had via Fred. Thus the curve is getting more3 inverted. ..."
Large Excess Reserves and the Relationship between Money and Prices - FRB Richmond
At the same time that it has been normalizing its balance sheet, the Fed also has been
raising its target for interest rates. The ability to pay interest on reserves has been
crucial to allowing the Fed to raise its target rate while there are still significant excess
reserves in the banking system. Despite these rate increases, due to various secular reasons,
interest rates are expected to remain historically low for a long time.
--------------
I sample the current expectation, and it is a bit more detailed. The expectation is that
the curve will remain inverted, generally with a zero near the five yer mark, if I judge from
the Treasury curve where the curve has been inverted with a zero near the five yer mark.
The ten year rate will remain historically higher than the five year rate for some time,
evidently. If we measure interest rate as the per annum percent of Real GDP devoted to
nominal federal interest charges, then the interest rate was higher than it has ever been
going back to 1972, briefly (four months ago) , and now occupies the second highest level
since just before the 92 recession, at about 3.5% of GDP. These result can be had in Fred by
dividing nominal interest payments by real GDP.
But otherwise, quite correct. Raise payments on deposits and get more deposits. Raise
charges on loans and get fewer loans. I might note that the Fed has supposedly paused rate
hikes, but deposits are still exiting the system faster than loans. This result can be had
via Fred. Thus the curve is getting more3 inverted.
Why do we know the curve will invert? It is the law, when the Fed loses deposits, loan
charges drop, not rise as would be normal. That is why we all expect the curve to remain
inverted, the law. The law is specifically designed so the Fed holds the current low rate as
long as possible, then does the sudden regime change. The law, written into the law, a rule
requires that we spend time with an inverted yield curve before price adjustment. I emphasis
the law because it is actually typed out, signed and enforced publicly.
The law requires the Fed hold the curve as long as possible, mainly so the pres and
Congress have time to react to changes in term of trade. So, like under Obama, we hold the
line on rates until Obama and the Repubs agree on a tax and spending plan going forward, then
the treasury curve gains traction again. Te law, it is not under debate unless you want to be
arreswted.
The original bronze disks of Rome circulated as currency. The metal money of U.S.
Confederacy circulated that is until the Confederacy became no more.
The point? Money's true nature is law. When a country collapses, then its money
collapses.
Paper money that was good? Lincoln's greenbacks circulated at par. Massachusetts Bills
circulated as money and prevented Oligarchs from England and their attempted takeover. The
colony used the money to make iron goods (like Cannons) and do commerce.
The real statement is this: Money when it becomes unlawful, always collapses.
Massive money printing can happen when too many loans are made, as in the case today as
all private bank credit notes come into being with loan activity -- a little more that
98%.
Driving a currency down with shorts causes new money to be loaned into existence, which in
turn is the underlying cause of hyperinflations. The new credit creation covers the short.
This mechanism always goes along with exchange rate pressures, where your country has to pay
a debt in a foreign currency.
If you had an internal gold currency, which is recognized internationally, then your debts
would be paid in gold, which would collapse your country into depression instead of
inflation.
Bottom line is that money's true nature is law, and making claims about "paper" or "metal"
obscures this fact.
Since both the Fed and your local bank create money from nothing
They also impose some obligations: repayment of principle and interest. Since we
can't create money from nothing, this payback has to come from money somehow created by the
banks as well.
I'm less worried about "disappearing" tax money than I am about misallocated spending
and its consequences -- eg the 'black budget' of the NSA and 'deep state' generally.
Can't we worry about everything ?
Good point about the 'black budget'. But the last time some sort of DOD audit was
attempted the Pentagon accountants' offices got hit by a missile, I mean airliner, on
911.
Internally, a national currency has a value corresponding to demand placed by the
government, such as money for the taxes the state requires of its people. The ups and downs
of Lincoln's Greenback fiat currency, especially its interaction with the value of gold,
demonstrates how currency is tied to confidence in the government, as you suggest.
Externally, a nation's currency usually has value to the extent that a nation has
something to offer others, which makes the currency useful for making a desired purchase.
Today, the "desired purchase" is oil. The dollar is valued because you need dollars to buy
oil, as formerly enforced by diplomatic pressure. Because of US sanctions, trade in oil is
now beginning using rubles, yuan, and most unforgivably, Venezuelan currency! (Like Iraq,
Libya and Syria). If this keeps up, countries will no longer need dollars for their oil, and
$ will have to compete internationally based on other considerations. That won't be pretty.
IMHO, US leaders have dangerously eroding the dollar's pre-eminence by profligate use of
sanctions.
I need to remedy my own deficiencies in this area, but advocates of Modern Monetary
Theory, like Michael Hudson, Steve Keene, and like-minded economists who often post at
nakedcapitalism, make a strong case for a fiat money system, issued and controlled by
state banks, in contrast to the private banks as now.
But objecting to the fact that private bankers charge us interest, and act above the law
and democratic accountability, is such a quaint complaint.
Money quote: " neoliberalism is the fight of finance to subdue society at large, and to
make the bankers and creditors today in the position that the landlords were under
feudalism."
Notable quotes:
"... ... if you take the Bible literally, it's the fight in almost all of the early books of the Old Testament, the Jewish Bible, all about the fight over indebtedness and debt cancellation. ..."
"... neoliberalism is the fight of finance to subdue society at large,and to make the bankers and creditors today in the position that the landlords were under feudalism. ..."
"... They call themselves free marketers, but they realize that you cannot have neoliberalism unless you're willing to murder and assassinate everyone who promotes an alternative ..."
"... Just so long as you remember that most of the strongest and most moving condemnations of greed and money in the ancient and (today) western world are also Jewish--i.e. Isaiah, Jeremiah, Micah, the Gospels, Letter of James, etc. ..."
"... The history of Jewish banking after the fall or Rome is inextricable from cultural anti-judaism of Christian west and east and de facto marginalization/ghettoization of Jews from most aspects of social life. The Jewish lending of money on interest to gentiles was both necessary for early mercantilist trade and yet usury was prohibited by the church. So Jewish money lenders were essential to and yet ostracized within European economies for centuries. ..."
"... Now Christianity has itself long given up on the tradition teaching against usury of course. ..."
"... In John, for instance most of the references to what in English is translated as "the Jews" are in Greek clearly references to "the Judaeans"--and especially to the ruling elite among the southern tribe in bed with the Romans. ..."
Just finished reading the fascinating
Michael Hudson interview I linked to on previous thread; but since we're discussing Jews
and their religion in a tangential manner, I think it appropriate to post here since the
history Hudson explains is 100% key to the ongoing pain us humans feel and inflict. My
apologies in advance, but it will take this long excerpt to explain what I mean:
"Tribes: When does the concept of a general debt cancellation disappear historically?
"Michael: I guess in about the second or third century AD it was downplayed in the Bible.
After Jesus died, you had, first of all, St Paul taking over, and basically Christianity was
created by one of the most evil men in history, the anti-Semite Cyril of Alexandria. He
gained power by murdering his rivals, the Nestorians, by convening a congress of bishops and
killing his enemies. Cyril was really the Stalin figure of Christianity, killing everybody
who was an enemy, organizing pogroms against the Jews in Alexandria where he ruled.
"It was Cyril that really introduced into Christianity the idea of the Trinity. That's
what the whole fight was about in the third and fourth centuries AD. Was Jesus a human, was
he a god? And essentially you had the Isis-Osiris figure from Egypt, put into Christianity.
The Christians were still trying to drive the Jews out of Christianity. And Cyril knew the
one thing the Jewish population was not going to accept would be the Isis figure and the
Mariolatry that the church became. And as soon as the Christian church became the
establishment rulership church, the last thing it wanted in the West was debt
cancellation.
"You had a continuation of the original Christianity in the Greek Orthodox Church, or the
Orthodox Church, all the way through Byzantium. And in my book And Forgive Them Their Debts,
the last two chapters are on the Byzantine echo of the original debt cancellations, where one
ruler after another would cancel the debts. And they gave very explicit reason for it: if we
don't cancel the debts, we're not going to be able to field an army, we're not going to be
able to collect taxes, because the oligarchy is going to take over. They were very explicit,
with references to the Bible, references to the jubilee year. So you had Christianity survive
in the Byzantine Empire. But in the West it ended in Margaret Thatcher. And Father
Coughlin.
"Tribes: He was the '30s figure here in the States.
"Michael: Yes: anti-Semite, right-wing, pro-war, anti-labor. So the irony is that you have
the people who call themselves fundamentalist Christians being against everything that Jesus
was fighting for, and everything that original Christianity was all about."
Hudson says debt forgiveness was one of the central tenets of Judaism: " ... if
you take the Bible literally, it's the fight in almost all of the early books of the Old
Testament, the Jewish Bible, all about the fight over indebtedness and debt
cancellation. "
Looks like I'll be purchasing Hudson's book as he's essentially unveiling a whole new,
potentially revolutionary, historical interpretation.
@ karlof1 with the Michale Hudson link....thanks!!
Here is the quote that I really like from that interview
"
Michael: No. You asked what is the fight about? The fight is whether the state will be taken
over, essentially to be an extension of Wall Street if you do not have government planning.
Every economy is planned. Ever since the Neolithic (era), you've had to have (a form of)
planning. If you don't have a public authority doing the planning, then the financial
authority becomes the planners. So globalism is in the financial interest –Wall Street
and the City of London, doing the planning, not governments. They will do the planning in
their own interest. So neoliberalism is the fight of finance to subdue society at
large,and to make the bankers and creditors today in the position that the landlords were
under feudalism.
"
karlof1, please email me as I would like to read the book as well and maybe we can share a
copy.
And yes, it is relevant to Netanyahoo and his ongoing passel of lies because humanity has
been told and been living these lives for centuries...it is time to stop this shit and grow
up/evolve
@13 / 78 karlof1... thanks very much for the links to michael hudson, alastair crooke and the
bruno maraces articles...
they were all good for different reasons, but although hudson is being criticized for
glossing over some of his talking points, i think the main thrust of his article is very
worthwhile for others to read! the quote to end his article is quite good "The question is,
who do you want to run the economy? The 1% and the financial sector, or the 99% through
politics? The fight has to be in the political sphere, because there's no other sphere that
the financial interests cannot crush you on."
it seems to me that the usa has worked hard to bad mouth or get rid of government and the
concept of government being involved in anything.. of course everything has to be run by a
'private corp' - ie corporations must run everything.. they call them oligarchs when talking
about russia, lol - but they are corporations when they are in the usa.. slight rant..
another quote i especially liked from hudson.. " They call themselves free marketers,
but they realize that you cannot have neoliberalism unless you're willing to murder and
assassinate everyone who promotes an alternative ." that sounds about right...
@ 84 juliania.. aside from your comments on hudsons characterization of st paul "the
anti-Semite Cyril of Alexandria" further down hudson basically does the same with father
coughlin - https://en.wikipedia.org/wiki/Charles_Coughlin..
he gets the anti-semite tag as well.. i don't know much about either characters, so it's
mostly greek to me, but i do find some of hudsons views especially appealing - debt
forgiveness being central to the whole article as i read it...
it is interesting my own view on how money is so central to the world and how often times
I am incapable of avoiding the observation of the disproportionate number of Jewish people in
banking.. I guess that makes me anti-semite too, but i don't think of myself that way.. I
think the obsession with money is killing the planet.. I don't care who is responsible for
keeping it going, it is killing us...
Just so long as you remember that most of the strongest and most moving condemnations
of greed and money in the ancient and (today) western world are also Jewish--i.e. Isaiah,
Jeremiah, Micah, the Gospels, Letter of James, etc.
The history of Jewish banking after the fall or Rome is inextricable from cultural
anti-judaism of Christian west and east and de facto marginalization/ghettoization of Jews from
most aspects of social life. The Jewish lending of money on interest to gentiles was both
necessary for early mercantilist trade and yet usury was prohibited by the church. So Jewish
money lenders were essential to and yet ostracized within European economies for
centuries.
Now Christianity has itself long given up on the tradition teaching against usury of
course.
I too greatly admire the work of Hudson but he consistently errs and oversimplifies
whenever discussing the beliefs of and the development of beliefs among preNicene followers
of the way (as Acts puts is) or Christians (as they came to be known in Antioch within
roughly eight or nine decades after Jesus' death.) Palestinian Judaism in the time of Jesus
was much more variegated than scholars even twenty years ago had recognized. The gradual
reception and interpretation of the Dead Sea Scrolls in tandem with renewed research into
Phili of Alexandria, the Essenes, the so-called Sons of Zadok, contemporary Galilean zealot
movements styles after the earlier Maccabean resistance, the apocalyptism of post exilic
texts like Daniel and (presumably) parts of Enoch--all paint a picture of a highly diverse
group of alternatives to the state-Church once known as Second Temple Judaism that has been
mistaken as undisputed Jewish "orthodoxy" since the advent of historical criticism.
The
Gospel of John, for example, which dates from betweeen 80-120 and is the record of a much
earlier oral tradition, is already explicitly binitarian, and possibly already trinitarian
depending on how one understands the relationship between the Spirit or Advocate and the Son.
(Most ante-Nicene Christians understood the Spirit to be *Christ's* own spirit in distributed
form, and they did so by appeal to a well-developed but still largely under recognized strand
in Jewish angelology.)
The "theological" development of Christianity occurred much sooner
that it has been thought because it emerged from an already highly theologized strand or
strands of Jewish teaching that, like Christianity itself, privileged the Abrahamic covenant
over the Mosaic Law, the testament of grace over that of works, and the universal scope of
revelation and salvation as opposed to any political or ethnic reading of the "Kingdom."
None
of these groups were part of the ruling class of Judaean priests and levites and their
hangers on the Pharisees.
In John, for instance most of the references to what in English is
translated as "the Jews" are in Greek clearly references to "the Judaeans"--and especially to
the ruling elite among the southern tribe in bed with the Romans.
So the anti-Judaism/Semiti
of John's Gispel largely rests on a mistranslation. In any event, everything is much more
complex than Hudson makes it out to be. Christian economic radicalism is alive and well in
the thought of Gregory of Nysa and Basil the Great, who also happened to be Cappadocian
fathers highly influential in the development of "orthodox" Trinitarianism in the fourth
century.
I still think that Hudson's big picture critique of the direction later Christianity
took is helpful and necessary, but this doesn't change the fact that he simplifies the
origins, development, and arguably devolution of this movement whenever he tries to get
specific. It is a worthwhile danger given the quality of his work in historical economics,
but still one has to be aware of.
Newly elected Representative Alexandria Ocasio-Cortez recently
said that Modern Monetary Theory (MMT) absolutely needed to be "a larger part of our
conversation." Her comment shines a spotlight on MMT. So what is it? According to Wikipedia , it is:
"a macroeconomic theory that describes the currency as a public monopoly and unemployment as
the evidence that a currency monopolist is restricting the supply of the financial assets
needed to pay taxes and satisfy savings desires."
It is uncontroversial to say that the Federal Reserve has a monopoly on the dollar. So let's
look at the second proposition. Unemployment, MMT holds, is evidence that the supply of dollars
is restricted.
In other words, more money causes more employment!
This does not sound very different from what the New Keynesians say. Keith analyzed former
Fed Chair Janet Yellen's seminal paper on the economics of labor for
Forbes :
"Here is their [Yellen and co-author Ackerloff] tenuous chain of logic:
Disgruntled employees don't work hard, and may even sabotage machinery.
So companies must overpay to keep them from slacking.
Higher pay per worker means fewer workers, because companies have a finite budget.
Yellen concludes -- you guessed it:
inflation provides corporations with more money to hire more people."
As a footnote, MMT is referred to as neo-Chartalism, and there is some evidence that Keynes
was influenced by Chartalism (which goes back to at least
1905).
On Thursday, Marketplace published a piece on
MMT . Things are heating up for this hot new (old) idea. Marketplace presented a "bathroom
sink" model of the economy (yes, really!)
To wrap your brain around this concept, picture a bathroom sink. Think of the government and
its ability to create more money whenever it needs to as the faucet and that bucket area of the
sink where the water goes as the economy.
The government controls how much money, or water, is flowing into the economy. It spends
money into the economy by building interstates or paying farm subsidies or funding
programs.
"And so as those dollars reach the economy, they begin to fill up that bucket, and what you
want to do is be very mindful about how full that bucket is getting or you're going to get an
inflation problem," [Bernie Sanders economic advisor Stephanie] Kelton said.
Inflation is where the sink overflows. If that happens, Kelton said there are two ways to
fix it: "You can slow the flow of dollars coming into that bucket. That means the government
then has to start slowing it's [sic] rate of spending, or you can open up the drain and let
some of those dollars out of the economy. And that's what we do when we collect taxes."
This sounds a lot like the Quantity Theory of Money (QTM). This view often paints a picture
of pouring water into a container. The higher the water level, the higher the general price
level.
QTM by itself does not promote the idea that more money causes more employment. Only that
more money causes more rising prices. But Keynes did. And the New Keynesians like Yellen
do.
So what makes MMT unique?
According to Stephanie Kelton, in the Marketplace article:
"If you control your own currency and you have bills that are coming due, it means you can
always afford to pay the bills on time," Kelton said. "You can never go broke, you can never be
forced into bankruptcy. You're nothing like a household."
Keynes taught us about government deficits to bolster employment and government deficits to
respond to a crisis. MMT teaches us how to get to the next level. The voters want free goodies.
Traditional economics says "there ain't no such thing as a free lunch."
MMT says "oh yes there is!"
At least until you get to too much inflation . The Monetarists would agree, don't print too
much money or you get too much inflation . Much of the gold community also agrees. If you print
too much money, then you get skyrocketing inflation .
Never mind that this prediction was proven wrong in the post-2008 policy response. We want
to highlight that the Keyesians, the Monetarists, the MMTers, and even many Austrians largely
agree. The problem with too much money printing is too much inflation . They quibble about what
is too much, but they agree on the "bathroom sink" model of the economy.
In the words of early 20 th century physicist Wolfgang Pauli, QTM "is not even
wrong ."
We define inflation as the counterfeiting of credit. That is, fraudulently taking money from
a saver. It is called borrowing , but the borrower hasn't got the means or intent to repay.
Additionally, when everyone thinks that the government's debt paper is money , the saver
doesn't even know or consent to the borrowing.
There are lies, damnlies, and statistics. Then there are a few pugnacious, in your face,
gaslighting make-you-believe-in-unreality cargo cults. We will explore this in full, below.
During World War II, the US military set up operations on certain Pacific islands. They
built landing strips, where they landed planes bringing in supplies and men. They hired the
local tribesmen as labor, and paid them stuff that was ordinary to Americans, but wondrous to
the islanders. Like canned food. The islanders really looked forward to when a plane would
land, and they would get some cargo.
After the war, the US military pulled up stakes and left. But the islanders still wanted the
cargos. So they set up these elaborate charades, with tiki torches instead of flashlights, and
coconut shell mockup headphones. They went through the motions that they thought the Americans
did. To try to bring back the cargos.
Huh. What does that remind you of? An elaborate charade, with bogus props, going through the
motions of a civilization they don't understand to try to produce desired results -- free
goodies?
Modern Monetary Theory is a cargo cult.
It's ironic that the name includes the word modern . If we said that a pile of greasy rags
sealed in a dark closet would spontaneously generate rats, would you call that a modern theory?
If we said that sickness is caused by bad humors, and the cure is bloodletting by leaches,
would you say this is modern ? How about the idea that the Sun and the planets orbit the Earth.
Is this modern , too?
Not only are these not modern -- they are, in fact, old ideas that were tossed into the
garbage heap -- they are not theories either. A theory is an explanation of reality, which
integrates many observed facts and contradicts none. Modern Monetary Theory is neither modern
nor a theory .
MMT is not an attempt to explain reality, but to deny it.
Even a child understands something. Even people in the ancient world understood it, too. If
you lend a bushel of wheat to your neighbor, and he does not repay it, you suffer a loss. You
are worse off, compared to before. And so is the borrower (who at the least ruins his
credit).
MMT is based on denying this universal truth. Common sense says that if Peter lends to Paul,
and Paul does not repay, then Peter is impoverished. Common sense says that Peter would not
lend to Paul if he knew that Paul would renege on his obligation.
MMT says that a modern economy has a modern currency, which is just the state's paper. And
in a modern economy, the modern state can print more with no concerns other than "overflowing
the bathroom sink". Get that, the only concern is prices could rise too fast. And so long as
this does not occur, then the state can get away with it. Only, there is nothing to get away
with. It's perfectly fine.
In a cargo cult, the people did not recognize the difference between fake coconut shell
headphones, and real headphones. Or flashlights and tiki torches. So they made crude copies as
best they could. They went through the motions to summon the sky gods to come down to earth,
with cargo.
Let's look at the mental gymnastics. They imbued magical -- that is outside the principle of
cause and effect -- characteristics to their props. Failing to understand that airplanes are
created by men, and that it takes a great deal of planning (not to mention wealth) to fly a
plane full of cargo from America to the middle of the Pacific, they imagined that, somehow, the
act of using the headphones and the flashlights caused the plane and its cargo to come. The
headset is tokenized, viewed as a magical talisman.
What a cargo cult does to headphones, MMT does to money. First, the cargo cult substitutes
coconut shells held together with twisted vine for headphones. What they wear when attempting
to summon the sky gods is not a headset, but a surrogate. MMT (as does Keynesianism and
Monetarism) substitutes government debt paper for money.
As an aside, even a gold-redeemable certificate is not money. Think about it. You can bring
this piece of paper to the teller window. You push it across the counter. The teller pushes
back the gold coin. If the word for the paper is money, then what is the word for the gold for
which it redeems?
Anyways, modern monetary systems use irredeemable paper. It's not gold-redeemable, but even
worse. And they treat this paper as if it were money .
And it goes even farther. Previous theories felt the need to at least pay lip service to
repaying debt. They couldn't quite get to the point of openly admitting that the debt is never
to be repaid. Keynes famously quipped that, "in the long run, we are all dead," creating
ambiguity about the intention to repay. Monetarists generally promote the idea that if the
economy grows fast enough, the debt will shrink as a proportion of GDP.
The Keynesians don't have the intention to repay. And the Monetarists don't look at
Marginal
Productivity of Debt , which would show them that their idea isn't working. But they don't
go as far as the MMT'ers.
MMT says that the government is unlike deadbeat-debtor Paul. There is no need for the
government to repay. It's the same as the cargo cult. The cargo cult has no concept for
capital. The islanders do not produce in excess of what they consume, accumulating tools and
technology to increase their productivity. They subsist, and assume that this is how the world
works.
MMT has no concept for capital either. It puts blinders on, declaring that consumer prices
are the only thing to measure. The only risk is if they rise too fast. And the MMT'ers refuse
to see anything else.
In our discussion of Yield Purchasing Power , we
introduced a farmer who sells off the back 40 (acres), chops down the apple orchard to sell the
fruitwood, tears down the old barn to sell the planks, and even dismantles the tractor. And why
does he do this? He gets cash in exchange. And the cash is far in excess of his crop yield. Why
struggle and sweat to produce $20,000 a year by growing food, when you can sell off the piece
of the farm for $20,000,000.
The monetary system incentivizes the farmer to trade productive capital for paper credit
slips. The incentive is that this paper has a greater purchasing power than what he can earn by
operating the farm. He can trade his farm for far more groceries, than the food he could grow
on it.
This is the same old game. But MMT gives it a new name -- and asserts a bolder defense.
MMT'ers don't want to see, and they want you not to see, that the lender gives up good capital
but the borrower is just consuming it.
MMT justifies the naked consumption of capital.
Supply and Demand Fundamentals
The prices of the metals rose this week, especially on Friday. The exchange rate of gold
went up twenty two US dollars, and that of silver 41 US cents.
As we will discuss below, we think that there is a rethinking of gold occurring in the
market. And we don't just mean celebrities like Sam Zell buying gold for the first time.
There is a sense of déjà vu. Starting in mid-2004, the Fed went on one of its
rate-hiking sprees. It did not manage to get as high as the previous peak of 6.5%, set prior to
the previous crisis. In 2006, this rate topped out at 5.25%. In both the crisis of 2001, and
the crisis of 2008, the Fed had begun cutting rates before the official indication of recession
, and the cuts occurred more rapidly than the preceding hikes.
The cuts were too little and/or too late to avert disaster.
The problem is that during the period of low rates, firms are incentivized to borrow. They
finance projects which generate a low rate of return. These projects would not be financed, but
for the even-lower cost of borrowing. When rates rise, it does not increase the rate of return
produced by marginal projects (likely the opposite). So borrowers are squeezed.
The Fed eventually comes along with its fix -- even lower rates. While this is too late to
save firms that are teetering into default, it does enable the next wave of borrowing for
even-poorer-projects.
And now, here we are. Since its first tepid hike in December 2005, the Fed has been hiking
for just over three years so far. It has hit a rate well under half of the peak of 2006-2007.
The president has publicly urged the Fed to reverse policy course. And the Fed said it is
listening to the market, and may have paused hiking for now.
Meanwhile, the Fed Funds rate may be lower than the previous peak but it is much higher than
it was from the end of 2008 through the end of 2015. For seven years, it was basically zero.
Nobody knows how many dollars' worth of projects were financed that were only justified, only
possible, due to this zero interest-rate policy. But it was surely a lot (we would guess at
least trillions).
And now the rate is up to 2.25%. Many of those projects are no longer justified, and can no
longer service the debt that finances them.
And none of this is a secret. It is well known to the borrowers, of course. And their
creditors. And the Fed. And hedge funds and other sophisticated speculators. And not just in
general theory, but lists of specific companies and the rollover dates of their bond
issues.
Rollover is key to this. After decades of falling interest, everyone has learned the game of
using short-term financing. But the risk is that it must be rolled over. And when it is rolled,
the previous low-rate is replaced with the higher, current rate. And that's when we find out
which businesses can still pay.
So what will the Fed do? The next programs will have a new name, but the Fed must lower the
cost of capital if it wants to keep the game going.
Is this time going to be the total collapse of the dollar? We don't believe so, as there is
still a lot of capital remaining and more is flooding in as people abandon the
dollar-derivative currencies. So we think of it as déjà vu, the Fed is likely to
do something similar to last time.
And that is an environment where even the non-goldbugs see clear and compelling arguments
for owning gold.
It could be that the timing is not now. It could be that it will take months or years to
arrive at this point. We make no predictions of timing. However, we note that the Monetary
Metals Gold Fundamental Price has been in a rising trend since mid-October. Its low was on
October 9 ($1,266).
Silver is similar, but a bit different. The low in its fundamental occurred in late November
($14.37). But it's up like a rocket since then, now about two bucks higher.
We are at an interesting point.
Let's take a look at the only true picture of the supply and demand fundamentals of gold and
silver. But, first, here is the chart of the prices of gold and silver.
@tac The Torah,
biblical and Quran stories were written in agrarian societies where capitalistic enterprise
hardly existed.
Loans were for not dying of hunger in the period between when the food of the last harvest
had been used completely, and the new harvest was still in the future.
Thus interest was seen as blackmailing people, they needed money to prevent dying of
starvation.
There was enterprise long ago, and trade over long distances, in the early centuries for
example swords from Damascus were famous in Europe, and exported to Europe.
Investment for business was the exception, even the first iron smelting installations were
simple, those who wanted them could build them by themselves.
The idea that invested money could yield money came later, when installations became more
complex, ships bigger, etc.
With investment came risk, there was not much risk in consumptive loans, they normally could
paid out of the coming harvest.
And so the problem began, a church not understanding capitalism, an agrarian society based on
barter changing into a money using capitalistic society.
Commercial people had no problem with interest, even now Muslims do not have problems with
interest.
What they do is simply giving interest other names, such as a fine for repaying late.
It has been agreed that the repayment will be late, so anybody is happy.
@renfro And
there you have it in a nutshell: usary -- the usurper of civilization, the enslaver of
humanity, the seed of ultimate degeneracy. It seems humanity is adverse to learn from
history. It is an interesting side-note that both Christianity and Islam both prohibit the
use of usury (a consideration worthy of mention when one contemplates the ongoing wars in the
ME) and some who here take shots at Farakhann, 'neo-nazis', blue-hair and other deplorables.
Our dilemma today is the same that occurred in Rome. Our country and people will
suffer the same fate if usury continues as it has. From the onset of history, it has
been the moneychangers, who have exploited mankind for pure profit. Usury is an abomination
against God's statutes, which manipulates and destroys people, families, and nations. It is
by the profits made from usury used to attack Christianity. One needs only to ask- who is
in control of usury worldwide? Didn't Rome suffer from these same people? Usury brings
forth an insidious side to all people. The temptation to borrow is powerful, and it always
polarizes lender against borrower where the former becomes the master and the later, the
slave. As a vice, neighbor is pitted against his neighbor, and nation against nation.
[...]
The Roman government was far too corrupt already with its politicians bought by
moneychangers for any fledgling Christian sect to have an affect on its decline. The
moneychanger's demand was perpetually self-serving, which was disparate to the common good
of the populace. Originally, Rome was founded as a republic. The unchecked influence of the
moneychangers caused it to change into a democracy. A republic is derived through the
election of public officials whose attitude toward property is respected in terms of law
for individual rights. A democracy is derived through the election of public officials
whose attitude toward property is communistic and respects the "collective good" of the
population instead of the individual. This is the resultant system that moneychangers bring
to civilization. The subversion of power is a sleight of hand that changes the right of the
individual into what is often called the "collective good" of the people (communistic),
which is always controlled by an alliance of powerful interests.
There is no reference in the article to the moneychangers and their lawyers sowing the
seeds for Roman society to suffocate under its own lethargic weight. Lawyers were indeed a
problem to Rome. The Romans were so concerned by lawyers' opprobrious effect on public
morale that they attempted to curb their influence. In 204 BC, the Roman Senate passed a
law prohibiting lawyers from plying their trade for money. As the Roman republic declined
and became more democratic, it became increasingly difficult to keep lawyers in check and
prevent them from accepting fees under the table. Indeed, they were very useful to the
moneychangers. The lawyers fed upon corruption and accelerated the downward plunge of Roman
civilization. Some wealthy Romans began sending their sons to Greece to finish their
schooling, to learn rhetoric (Julius Caesar was one example) -- a lawyer's cleverness in
oration. This compounded Rome's growing woes.
[...] The moneychangers destroyed Rome from within by first monopolizing usury, monopolizing
the precious mineral trade and then disproportionately magnifying the temporal businesses
of prostitution (including pedophilia and homosexuality), and slavery. Constantine
(306-337 AD) was the first Roman emperor to issue laws, which radically limited the rights
of Jews as citizens of the Roman Empire, a privilege conferred upon them by Caracalla in
212 AD. The laws of Constantius (337-361 AD) recognized the Jewish domination of the slave
trade and acted to greatly curtail it. A law of Theodosius II (408-410 AD), prohibited Jews
from holding any advantageous office of honor in the Roman state. Always the impetus was
buying influence concerning their trade.
[...] Usury has been the opiate that has ruined the ingenuity of many of its civilizations. As
this Jewish craft spread, the people increasingly suffered from the burdens of
indebtedness. So troubling was the effects of usury that Lex Genucia outlawed usury in
342 BC. Nevertheless, ways of evading such legislation were found and by the last period of
the Republic, usury was once again rife. Emperors like Julius Caesar and Justinian tried to
limit the interest rate and control its devastating effects (Birnie, 1958).
Entertainment was a way to temporarily set aside the burdens of indebtedness. It was a
way to festively indulge in all the glory that Rome had to offer. Rome soon became drunk on
hedonism. Collectively, entertainment helped disguise the collapsing of a great power.
Spectator blood sports, brothels, carnivals, festivals, and parties substituted for
everything that was wrong with Rome.
[...] Rome became a multi-cultural state much like our own in the United States. Indeed, it
was truly an international city. Foreigners of every nation resided and worked there. The
Romans soon intermarried and had children with the many foreigners. This included
concubines from the numerous slaves won through war. Rome had an extraordinary large
slave population and was estimated to make up about two-thirds of its population at one
time.
[...] Eventually, the Romans lost their tribal cohesion and identity. The population of Rome
had changed and so did its character. Increasing demands were made of the ruling
patricians. The aristocrats tried to appease the masses, but eventually those demands could
not be sustained. Rome had become bankrupt. The effects of usury polarized the patrician
class against an increasingly dispossessed and burdened class of citizens.
[...]
Rome was bankrupt and was collapsing. The parasitic nature of usury and its effect on
government was too complex for the uneducated plebeians to understand (see Addendum for
an illustration of usury's power). Indeed, it was the moneychangers with the use of
their lawyers that destroyed pagan Rome. The Jewish interests did not control all
usury. However, they were a people well recognized as being extremely loyal to each
other and adept in the black craft of usury. To all others (gentiles) they showed hate and
enmity. Throughout history the weapon of usury is used again and again to destroy
nations.
[...]
Fortunately, the writings of Cicero survived the burning of libraries. In the case against
Faccus, we can see the crafts of the Jews are the same today. The Jews clearly held
great influence in politics as a result of their professions and profited immensely at the
expense of Rome. We can further deduce by the case of Faccus that the Jews were not
concerned with the interests of Rome, but rather for their own interests. The Jewish
gold was being shipped from Rome and its provinces throughout the empire to Jerusalem. Why?
We also know that the Jews had utter contempt and hatred of the Romans. This contempt is
demonstrated by their breaking of Roman law, which Faccus tried to uphold. If we look
closer, we see that gold has a very special meaning to all Jewry unlike any other
people.
[...] There are enough records for us to piece together what actually occurred in Rome that
led to its downfall. Rome fell as a result of corruption and the lack of cohesion of its
own people. But, it was the instrument of usury that brought about this corruption and
allowed its gold and silver to be controlled by Jewish interests.
[...] It was Christianity that put an end to the destructive nature of usury on its people
(see addendum for usury example). Rome's treasury became barren as a result of the
moneychangers. It weakened the Roman Empire immeasurably, and thrust untold millions in
poverty, debt, and in prison. It was Christianity that halted the influence of the Jews and
their destructive trades and practices. And, the Christian faith spread throughout the
former Roman Empire. All of the European people eventually became Christianity's vanguard
and champion. Without the strict adherence to the moral ethos, any civilization will
devolve into the religion of Nimrod.
I apologize in advance to Lambert for adding this link to his terrific daily water cooler
topics, but since Yves and NC were specifically mentioned I thought it would be interesting
to share. The video is titled, "Should we trust MMT?" with Joe Bongiovanni. It is 48 minutes
long and I only made it about 20 minutes after becoming too annoyed. Yves/NC are mentioned at
18 minutes and 40 seconds in. Joe says he was part of the NC commentariat for years, but was
banned due to his thoughts that MMT proponents are misleading and don't "tell the real
truth".
Not being an economist or comfortable enough with my understanding of MMT to know if what
he was saying had merit. Plus the style and lack of preparation from the interviewer other
than wanting her expert to debunk MMT for her right wing followers.
I'm 30 min in .skip ahead to that point to get to the meat of his discussion.
He keeps repeating that he wants monetary "reform", so that the money system 'works for
the people'. But he doesn't say what that change is or why MMT gets it wrong in its
understanding of how the system works.
He says "govt doesn't create money by spending". Except, yes, it does. It then chooses to
offset that spending later with bond auctions.
He doesn't make a distinction between public and private debt, doesn't distinguish between
currency users and issuers. No distinction between stocks and flows. No discussion of
capacity constraints, inflation.
He actually fear-mongers about the debt around the 38-39 min mark. Says there's going to
be tough times when we get austerity (in addition to environment collapsing).
He talks a lot about how 'the monetary system works', but it's clear to me he doesn't get
how the banking system works. I don't think you can understand one without the other very
well.
MMT can offer a clear explanation of why:
1) 30 yr treasury bond yields fell rapidly in the 1980s while deficits were exploding.
2) 30 yr treasury bond yields rose in 2000, hitting 7% on the 30 yr at one point, when the
government was running surpluses.
3) Japan has a functional currency and economy with massive debts and deficits for many
years.
Conventional economics has NO explanation for the above phenomenon.
Cheers Johnny – he's been here before and took umbrage to the NC crew saying that
taxation for revenue is obsolete. Don't make me go there.
Said NC doesn't like criticism and Yves had banned him I'd be banned too if I thought
that!!
Got some trolls on Youtube worked up. I'll go and finish them off after I do a little more
digging on Joe and his Kettle Pond Institute for Debt Free Money.
He had a go at Bill Mitchell on this post recently:
IMO, Tvc, if you want some relevant stuff, look at how Jimmy Dore (a comedian turned
activist) gets his head around MMT – Stephanie Kelton was good and has been linked here
and also Chris Hedges
People like JD are very influential and I can see a heightened awareness out there that we
are not going to get anywhere now by being polite and civil.
I don't remember the details, but he was banned for behavior. The problem that so often
happens is that the people on losing sides of arguments here (as in not just the moderators
but the commentariat does a good job of debunking their claims) is they don't give up and
start going into various forms of bad faith argumentation: broken record, straw manning, or
just plain getting abusive. Then they try to claim they were banned due to their position, as
opposed to how they started carrying on when they couldn't make their case.
The AMI people are a real problem, and the worst is that they use enough lingo that sounds
MMT-like that they confuse people about MMT. They are also presumptuous as hell. I was part
of an Occupy Wall Street group, Alternative Banking. Every week, a group came and kept trying
to hijack the discussion to be about Positive Money. They got air time because that's Occupy
but everyone else regarded them as an annoyance.
One Sunday, the president of AMI showed up in a suit, uninvited, and expected to be able
to take over the group and lecture. The rules were everyone on stack got only 2 or 3 minutes
each (I forget how long) and then had to cede the floor. Since everyone else was too polite,
I was the one who had to shut him up by blowing up at him and telling him he was totally out
of line and had no business abusing the group's rules. That is the only time in my WASPy life
I have carried on like that in a public setting. Broke up the meeting, which reconvened only
after he left.
Russian President Vladimir Putin accused Washington of making a "colossal" but "typical"
mistake by exploiting the dominance of the dollar by levying economic sanctions against regimes
that don't bow to its whims.
"It seems to me that our American partners make a colossal strategic mistake," Putin
said.
"This is a typical mistake of any empire," Putin said, explaining that the US is ignoring
the consequences of its actions because its economy is strong and the dollar's hegemonic
grasp on global markets remains intact. However "the consequences come sooner or later."
These remarks echoed a sentiment expressed by Putin back in May, when he said that Russia
can no longer trust the US dollar because of America's decisions to impose unilateral sanctions
and violate WTO rules.
... ... ...
With the possibility of being cut off from the dollar system looming, a plan prepared by Andrei Kostin, the head of Russian
bank VTB, is being embraced by much of the Russian establishment. Kostin's plan would facilitate the conversion of dollar
settlements into other currencies which would help wean Russian industries off the dollar. And it already has the backing of
Russia's finance ministry, central bank and Putin.
Meanwhile, the Kremlin is also working on deals with major trading partners to accept the Russian ruble for imports and exports.
In a sign that a united front is forming to help undermine the dollar, Russia's efforts have been readily embraced by China
and Turkey, which is unsurprising, given their increasingly fraught relationships with the US. During joint military exercises
in Vladivostok last month, Putin and Chinese President Xi Jinping declared that their countries would work together to counter
US tariffs and sanctions.
"More and more countries, not only in the east but also in Europe, are beginning to think about how to minimise dependence on
the US dollar," said Dmitry Peskov, Mr Putin's spokesperson. "And they suddenly realise that a) it is possible, b) it needs to
be done and c) you can save yourself if you do it sooner."
Why does the dollar continue to possess a hegemonic status a decade after the crisis that
seemed to signal an end to U.S.-U.K. dominated finance? Gillian Tett of the
Financial Times offers several reasons. The first is the global reach of U.S.
based banks. U.S. banks are seen as stable, particularly when compared to European banks. Any
listing
of the largest international banks will be dominated by Chinese banks, and
these institutions have expanded their international business . But the Chinese banks will
conduct business in dollars when necessary. Tett's second reason is the relative strength of
the U.S. economy, which grew at a 4.1% pace in the second quarter. The third reason is the
liquidity and credibility of U.S. financial markets, which are superior to those of any
rivals.
The U.S. benefits from its financial dominance in several ways.
Jeff Sachs of Columbia University points out that the cost of financing government deficits
is lower due to the acceptance of U.S. Treasury securities as "riskless assets." U.S. banks and
other institutions earn profits on their foreign operations. In addition, the use of our
banking network for international transactions provides the U.S. government with a powerful
foreign policy tool in the form of sanctions
that exclude foreign individuals, firms or governments from this network .
There are risks to the system with this dependence. As U.S. interest rates continue to rise,
loans that seemed reasonable before now become harder to finance. The burden of
dollar-denominated debt also increases as the dollar appreciates. These developments exacerbate
the repercussions of policy mistakes in Argentina and Turkey, but also affect other countries
as well.
The IMF in its latest Global Financial Stability (see also here )
identifies another potential destabilizing feature of the current system. The IMF reports that
the U.S. dollar balance sheets of non-U.S. banks show a reliance on short-term or wholesale
funding. This reliance leaves the banks vulnerable to a liquidity freeze. The IMF is
particularly concerned about the use of foreign exchange swaps, as swap markets can be quite
volatile. While
central banks have stablished their own network of swap lines , these have been
criticized .
The status of the dollar as the primary international currency is not welcomed by foreign
governments. The Russian government, for
example, is seeking to use other currencies for its international commerce. China and
Turkey have offered some support, but China is invested in promoting the use of its own
currency. In addition, Russia's dependence on its oil exports will keep it tied to the
dollar.
But interest in formulating a new international payments system has now spread outside of
Russia and China.
Germany's Foreign Minister Heiko Maas has called for the establishment of "U.S. independent
payment channels" that would allow European firms to continue to deal with Iran despite the
U.S. sanctions on that country.
Chinese electronic payments systems are being used in Europe and the U.S. The dollar may
not be replaced, but it may have to share its role as an international currency with other
forms of payment if foreign nations calculate that the benefits of a new system outweigh its
cost. Until now that calculation has always favored the dollar, but the reassessment of
globalization initiated by the Trump administration may have lead to unexpected
consequences.
Our commenter psychohistorian and others interested in public banking, and the
concept of money as a public utility rather than a private (and profit-gouging) instrument,
may want to watch the latest Keiser Report, which has an interview with Ellen Brown.
Brown relates that the city of Los Angeles has on its ballot for the November elections a
measure to create a city-owned bank. This was put on the ballot by the city council itself,
prompted by a groundswell of support coming from constituents.
The rapid-fire interview doesn't go deeply into the politics behind this citizen
initiative, but it seems like a happy story of young millennials looking for an alternative
to Wall Street banks, and learning from Brown and others about the strong value of the public
bank.
An interesting turn of events. The interview starts in the second half of the show at
14:40:
"... By L. Randall Wray, Professor of Economics at Bard College. Originally published at New Economic Perspectives ..."
"... Treatise on Money ..."
"... State Theory of Money ..."
"... Money and Credit in Capitalist Economies ..."
"... Understanding Modern Money ..."
"... Modern Money Theory ..."
"... Payback: Debt and the shadow side of wealth ..."
"... Reclaiming the State ..."
"... Austerity: The History of a Dangerous Idea ..."
"... permanent Zirp (zero interest rate policy) is probably a better policy since it reduces the compounding of debt and the tendency for the rentier class to take over more of the economy. ..."
"... that one of the consequences of the protracted super-low interest rate regime of the post crisis era was to create a world of hurt for savers, particularly long-term savers like pension funds, life insurers and retirees. ..."
"... income inequality ..."
"... even after paying interest ..."
"... It seems to me that the US macroeconomic policy has been operating under MMT at least since FDR (see for example Beardsley Ruml from 1945). ..."
"... After learning MMT I've occasionally thought I should get a refund for the two economics degree's I originally received. ..."
"... "Taxes or other obligations (fees, fines, tribute, tithes) drive the currency." ..."
"... "JG is a critical component of MMT. It anchors the currency and ensures that achieving full employment will enhance both price and financial stability." ..."
I was asked to give a short presentation at the MMT conference. What follows is the text
version of my remarks, some of which I had to skip over in the interests of time. Many readers
might want to skip to the bullet points near the end, which summarize what I include in
MMT.
I'd also like to quickly respond to some comments that were made at the very last session of
the conference -- having to do with "approachability" of the "original" creators of MMT. Like
Bill Mitchell, I am uncomfortable with any discussion of "rockstars" or "heroes". I find this
quite embarrassing. As Bill said, we're just doing our job. We are happy (or, more accurately
pleasantly surprised) that so many people have found our work interesting and useful. I'm happy
(even if uncomfortable) to sign books and to answer questions at such events. I don't mind
emailed questions, however please understand that I receive hundreds of emails every day, and
the vast majority of the questions I get have been answered hundreds, thousands, even tens of
thousands of times by the developers of MMT. A quick reading of my Primer or search of NEP (and
Bill's blog and Warren's blogs) will reveal answers to most questions. So please do some
homework first. I receive a lot of "questions" that are really just a thinly disguised pretense
to argue with MMT -- I don't have much patience with those. Almost every day I also receive a
2000+ word email laying out the writer's original thesis on how the economy works and asking me
to defend MMT against that alternative vision. I am not going to engage in a debate via email.
If you have an alternative, gather together a small group and work for 25 years to produce
scholarly articles, popular blogs, and media attention -- as we have done for MMT -- and then
I'll pay attention. That said, here you go: [email protected] .
As an undergraduate I studied psychology and social sciences -- but no economics, which
probably gave me an advantage when I finally did come to economics. I began my economics career
in my late 20's studying mostly Institutionalist and Marxist approaches while working for the
local government in Sacramento. However, I did carefully read Keynes's General Theory
at Sacramento State and one of my professors -- John Henry -- pushed me to go to St. Louis to
study with Hyman Minsky, the greatest Post Keynesian economist.
I wrote my dissertation in Bologna under Minsky's direction, focusing on private banking and
the rise of what we called "nonbank banks" and "off-balance sheet operations" (now called
shadow banking). While in Bologna, I met Otto Steiger -- who had an alternative to the barter
story of money that was based on his theory of property. I found it intriguing because it was
consistent with some of Keynes's Treatise on Money that I was reading at the time.
Also, I had found Knapp's State Theory of Money -- cited in both Steiger and
Keynes–so I speculated on money's origins (in spite of Minsky's warning that he didn't
want me to write Genesis ) and the role of the state in my dissertation that became a
book in 1990 -- Money and Credit in Capitalist Economies -- that helped to develop the
Post Keynesian endogenous money approach.
What was lacking in that literature was an adequate treatment of the role of the
state–which played a passive role -- supplying reserves as demanded by private bankers --
that is the Post Keynesian accommodationist or Horzontalist approach. There was no discussion
of the relation of money to fiscal policy at that time. As I continued to read about the
history of money, I became more convinced that we need to put the state at the center.
Fortunately I ran into two people that helped me to see how to do it.
First there was Warren Mosler, who I met online in the PKT discussion group; he insisted on
viewing money as a tax-driven government monopoly. Second, I met Michael Hudson at a seminar at
the Levy Institute, who provided the key to help unlock what Keynes had called his "Babylonian
Madness" period -- when he was driven crazy trying to understand early money. Hudson argued
that money was an invention of the authorities used for accounting purposes. So over the next
decade I worked with a handful of people to put the state into monetary theory.
As we all know, the mainstream wants a small government, with a central bank that follows a
rule (initially, a money growth rate but now some version of inflation targeting). The fiscal
branch of government is treated like a household that faces a budget constraint. But this
conflicts with Institutionalist theory as well as Keynes's own theory. As the great
Institutionalist Fagg Foster -- who preceded me at the University of Denver–put it:
whatever is technically feasible is financially feasible. How can we square that with the
belief that sovereign government is financially constrained? And if private banks can create
money endogenously -- without limit -- why is government constrained?
My second book, in 1998, provided a different view of sovereign spending. I also revisited
the origins of money. By this time I had discovered the two best articles ever written on the
nature of money -- by Mitchell Innes. Like Warren, Innes insisted that the dollar's value is
derived from the tax that drives it. And he argued this has always been the case. This was also
consistent with what Keynes claimed in the Treatise, where he said that money has been a state
money for the past four thousand years, at least. I called this "modern money" with intentional
irony -- and titled my 1998 book Understanding Modern Money as an inside joke. It only
applies to the past 4000 years.
Surprisingly, this work was more controversial than the earlier endogenous money research.
In my view it was a natural extension -- or more correctly, it was the prerequisite to a study
of privately created money. You need the state's money before you can have private money.
Eventually our work found acceptance outside economics -- especially in law schools, among
historians, and with anthropologists.
For the most part, our fellow economists, including the heterodox ones, attacked us as
crazy.
I benefited greatly by participating in law school seminars (in Tel Aviv, Cambridge, and
Harvard) on the legal history of money -- that is where I met Chris Desan and later Farley
Grubb, and eventually Rohan Grey. Those who knew the legal history of money had no problem in
adopting MMT view -- unlike economists.
I remember one of the Harvard seminars when a prominent Post Keynesian monetary theorist
tried to argue against the taxes drive money view. He said he never thinks about taxes when he
accepts money -- he accepts currency because he believes he can fob it off on Buffy Sue. The
audience full of legal historians broke out in an explosion of laughter -- yelling "it's the
taxes, stupid". All he could do in response was to mumble that he might have to think more
about it.
Another prominent Post Keynesian claimed we had two things wrong. First, government debt
isn't special -- debt is debt. Second, he argued we don't need double entry book-keeping -- his
model has only single entry book-keeping. Years later he agreed that private debt is more
dangerous than sovereign debt, and he's finally learned double-entry accounting. But of course
whenever you are accounting for money you have to use quadruple entry book-keeping. Maybe in
another dozen years he'll figure that out.
As a student I had read a lot of anthropology -- as most Institutionalists do. So I knew
that money could not have come out of tribal economies based on barter exchange. As you all
know, David Graeber's book insisted that anthropologists have never found any evidence of
barter-based markets. Money preceded market exchange.
Studying history also confirmed our story, but you have to carefully read between the lines.
Most historians adopt monetarism because the only economics they know is Friedman–who
claims that money causes inflation. Almost all of them also adopt a commodity money view --
gold was good money and fiat paper money causes inflation. If you ignore those biases, you can
learn a lot about the nature of money from historians.
Farley Grubb -- the foremost authority on Colonial currency -- proved that the American
colonists understood perfectly well that taxes drive money. Every Act that authorized the issue
of paper money imposed a Redemption Tax. The colonies burned all their tax revenue. Again,
history shows that this has always been true. All money must be redeemed -- that is, accepted
by its issuer in payment. As Innes said, that is the fundamental nature of credit. It is
written right there in the early acts by the American colonies. Even a gold coin is the
issuer's IOU, redeemed in payment of taxes. Once you understand that, you understand the nature
of money.
So we were winning the academic debates, across a variety of disciplines. But we had a hard
time making progress in economics or in policy circles. Bill, Warren, Mat Forstater and I used
to meet up every year or so to count the number of economists who understood what we were
talking about. It took over decade before we got up to a dozen. I can remember telling Pavlina
Tcherneva back around 2005 that I was about ready to give it up.
But in 2007, Warren, Bill and I met to discuss writing an MMT textbook. Bill and I knew the
odds were against us -- it would be for a small market, consisting mostly of our former
students. Still, we decided to go for it. Here we are -- another dozen years later -- and the
textbook is going to be published. MMT is everywhere. It was even featured in a New
Yorker crossword puzzle in August. You cannot get more mainstream than that.
We originally titled our textbook Modern Money Theory , but recently decided to
just call it Macroeconomics . There's no need to modify that with a subtitle. What we
do is Macroeconomics. There is no coherent alternative to MMT.
A couple of years ago Charles Goodhart told me: "You won. Declare victory but be magnanimous
about it." After so many years of fighting, both of those are hard to do. We won. Be nice.
Let me finish with 10 bullet points of what I include in MMT:
1. What is money: An IOU denominated in a socially sanctioned money of account. In almost
all known cases, it is the authority -- the state -- that chooses the money of account. This
comes from Knapp, Innes, Keynes, Geoff Ingham, and Minsky.
2. Taxes or other obligations (fees, fines, tribute, tithes) drive the currency. The ability
to impose such obligations is an important aspect of sovereignty; today states alone monopolize
this power. This comes from Knapp, Innes, Minsky, and Mosler.
3. Anyone can issue money; the problem is to get it accepted. Anyone can write an IOU
denominated in the recognized money of account; but acceptance can be hard to get unless you
have the state backing you up. This is Minsky.
4. The word "redemption" is used in two ways -- accepting your own IOUs in payment and
promising to convert your IOUs to something else (such as gold, foreign currency, or the
state's IOUs).
The first is fundamental and true of all IOUs. All our gold bugs mistakenly focus on the
second meaning -- which does not apply to the currencies issued by most modern nations, and
indeed does not apply to most of the currencies issued throughout history. This comes from
Innes and Knapp, and is reinforced by Hudson's and Grubb's work, as well as by Margaret
Atwood's great book: Payback: Debt and the shadow side of wealth .
5. Sovereign debt is different. There is no chance of involuntary default so long as the
state only promises to accept its currency in payment. It could voluntarily repudiate its debt,
but this is rare and has not been done by any modern sovereign nation.
6. Functional Finance: finance should be "functional" (to achieve the public purpose), not
"sound" (to achieve some arbitrary "balance" between spending and revenues). Most importantly,
monetary and fiscal policy should be formulated to achieve full employment with price
stability. This is credited to Abba Lerner, who was introduced into MMT by Mat Forstater.
In its original formulation it is too simplistic, summarized as two principles: increase
government spending (or reduce taxes) and increase the money supply if there is unemployment
(do the reverse if there is inflation). The first of these is fiscal policy and the second is
monetary policy. A steering wheel metaphor is often invoked, using policy to keep the economy
on course. A modern economy is far too complex to steer as if you were driving a car. If
unemployment exists it is not enough to say that you can just reduce the interest rate, raise
government spending, or reduce taxes. The first might even increase unemployment. The second
two could cause unacceptable inflation, increase inequality, or induce financial instability
long before they solved the unemployment problem. I agree that government can always afford to
spend more. But the spending has to be carefully targeted to achieve the desired result. I'd
credit all my Institutionalist influences for that, including Minsky.
7. For that reason, the JG is a critical component of MMT. It anchors the currency and
ensures that achieving full employment will enhance both price and financial stability. This
comes from Minsky's earliest work on the ELR, from Bill Mitchell's work on bufferstocks and
Warren Mosler's work on monopoly price setting.
8. And also for that reason, we need Minsky's analysis of financial instability. Here I
don't really mean the financial instability hypothesis. I mean his whole body of work and
especially the research line that began with his dissertation written under Schumpeter up
through his work on Money Manager Capitalism at the Levy Institute before he died.
9. The government's debt is our financial asset. This follows from the sectoral balances
approach of Wynne Godley. We have to get our macro accounting correct. Minsky always used to
tell students: go home and do the balances sheets because what you are saying is nonsense.
Fortunately, I had learned T-accounts from John Ranlett in Sacramento (who also taught
Stephanie Kelton from his own, great, money and banking textbook -- it is all there, including
the impact of budget deficits on bank reserves). Godley taught us about stock-flow consistency
and he insisted that all mainstream macroeconomics is incoherent.
10. Rejection of the typical view of the central bank as independent and potent. Monetary
policy is weak and its impact is at best uncertain -- it might even be mistaking the brake
pedal for the gas pedal. The central bank is the government's bank so can never be independent.
Its main independence is limited to setting the overnight rate target, and it is probably a
mistake to let it do even that. Permanent Zirp (zero interest rate policy) is probably a better
policy since it reduces the compounding of debt and the tendency for the rentier class to take
over more of the economy. I credit Keynes, Minsky, Hudson, Mosler, Eric Tymoigne, and Scott
Fullwiler for much of the work on this.
That is my short list of what MMT ought to include. Some of these traditions have a very
long history in economics. Some were long lost until we brought them back into discussion.
We've integrated them into a coherent approach to Macro. In my view, none of these can be
dropped if you want a macroeconomics that is applicable to the modern economy. There are many
other issues that can be (often are) included, most importantly environmental concerns and
inequality, gender and race/ethnicity. I have no problem with that.
A JG is to discontinue NAIRU or structural under-unemployment with attendant
monetarist/quasi inflation views. Something MMT has be at pains to point out wrt fighting a
nonexistent occurrence due to extended deflationary period.
Its double entry accounting counting both sides of the equation. Fed deposits money into
bank requires 4 entries, a double entry for the Fed and for the bank. Typical double entry
accounting only looks at the books of 1 entity at a time. Quadruple Entry accounting makes
the connection between the government monetary policy and private business accounting. I'm
not an accountant, I may have butchered that.
think about banks and reserves, your money is on the bank's liability side (and your
asset), while the reserves are on the bank's asset side (and gov't or fed's liability.)
i think its the reserves that quadruple it, reserves are confusing because when you move
$5 from a bank account to buy ice cream its not just one copy of the $5 that moves between
checking accounts, there is another $5 that moves "under the hood" so to speak in reserve
world
Very briefly, double entry bookkeeping keeps track of how money comes in/out, and where it
came from/went. Cash is the determining item (although there may be a few removes). Hence,
say I buy a $20 dollar manicure from you. I record my purchase as "Debit (increase) expense:
manicure $20, credit (decrease) cash, $20". Bonus! If my bookkeeping is correct, my debits
and credits are equal and if I add them up (credits are minus and debits are plus) the total
is zero – my books "balance". So, double-entry bookkeeping is also a hash-total check
on my accounting accuracy. But I digress.
On your books, the entry would be "Debit (increase) cash $20, credit (decrease)
sales, $20".
So, your double-entry book plus my double-entry books would be quadruple-entry
accounting.
#7 was my immediate stopper, too. It drives me nuts when people introduce 2-3-4 letter
acronyms with no explanation (I work for the DoD and I'm surrounded by these "code words". I
rarely know what people are talking about and when I ask, the people talking rarely know what
these TLAs – T hree L etter A cronyms – stand for either!).
Next question regarding #7: What is ELR?
Other than #7, I really appreciate this article. NC teaches and/or clarifies on a daily
basis.
This quick, entertaining read is IMHO nothing less than a "Rosetta Stone" that can bring
non-specialists to understand MMT: not just how , but why it differs from
now-conventional neoliberal economics. I hope it finds a wide readership and that its many
references to MMT's antecedents inspire serious study by the unconvinced (and I hope they
don't take Wray's invitation to skip the 10 bullet points).
This piece is a fine demonstration of why I've missed Wray as he seemed to withdraw from
public discourse for the last few years.
Thank you! The (broad) analogies with my own experience are there. I had a decidedly
"mainstream" macro education at Cambridge (UK); though many of the "old school"
professors/college Fellows who, although not MMT people as we'd currently understand (or
weren't at *that* stage – Godley lectured a module I took but this was in the early
1990s) were still around, in hindsight the "university syllabus" (i.e. what you needed to
regurgitate to pass exams) had already steered towards neoliberalism. I never really
understood why I never "got" macro and it was consistently my weakest subject.
It was later, having worked in the City of London, learned accountancy in my actuarial
training, and then most crucially starting reading blogs from people who went on to become
MMT leading lights, that I realised the problem wasn't ME, it was the subject matter. So I
had to painfully unlearn much of what I was taught and begin the difficult process of getting
my head around a profoundly different paradigm. I still hesitate to argue the MMT case to
friends, since I don't usually have to hand the "quick snappy one liners" that would torpedo
their old discredited understanding.
I'm still profoundly grateful for the "old school" Cambridge College Fellows who were
obviously being sidelined by the University and who taught me stuff like the Marxist/Lerner
critiques, British economic history, political economy of the system etc. Indeed whilst I had
"official" tutorials with a finance guy who practically came whenever Black-Scholes etc was
being discussed, an old schooler was simultaneously predicting that it would blow the world
economy up at some point (and of course he was in the main , correct). I still had to fill in
some gaps in my knowledge (anthropology was not a module, though Marxist economics was), with
hindsight I appreciate so much more of what the "old schoolers" said on the sly during quiet
points in tutorials – Godley being one, although he wasn't ready at that time to
release the work he subsequently published and was so revolutionary. Having peers educated
elsewhere during my Masters and PhD who knew nothing of the subjects that – whilst
certainly not the "key guide" to "proper macro" described in the article – began to
horrify me later in my career.
This is really great. Thanks a ton, as Yves would say.
I know I have used to "rock star" metaphor on occasion, so let me explain that to
me what is important in excellent (i.e., live) rock and roll is improvisational
interplay among the group members -- the dozen or so who understood MMT in the beginning, in
this case -- who know the tune, know each other, and yet manage to make the song a little
different each time. It's really spectacular to see in action. Nothing to do with spotlights,
or celebrity worship, or fandom!
I'm no MMT expert, but I think
this article does a good job of juxtaposing MMT with classic (non-advanced)
macroeconomics. I quote:
In the language of Tinbergen (1952), the debate between MMT and mainstream macro can be
thought of as a debate over which instrument should be assigned to which target. The
consensus assignment is that the interest rate, under the control of an independent central
bank, should be assigned to the output gap target, while the fiscal position, under control
of the elected budget authorities, should be assigned to the debt sustainability target. [
] The functional finance assignment is the reverse -- the fiscal balance under the budget
authorities is assigned to the output target, while any concerns about debt sustainability
are the responsibility of the monetary authority.
What about interest rate fixing? The central bank would remain in charge of that, but in
an MMT context this instrument would lose most of its relevance:
[W]hile a simple swapping of instruments and targets is one way to think about
functional finance, this does not describe the usual MMT view of how the policy interest
rate should be set. What is generally called for, rather, is that the interest rate be
permanently kept at a very low level, perhaps zero. In an orthodox policy framework, of
course, this would create the risk of runaway inflation; but keep in mind that in the
functional framework, the fiscal balance is set to whatever level is consistent with price
stability.
It may be a partial reconstruction of MMT, but to me this seems to be a neat way to
present MMT to most people. Saying that taxes are there just to remove money from the economy
or to provide incentives is a rather extreme statement that is bound to elicit some fierce
opposition.
Having said that, I've never seen anyone address what I think are two issues to MMT: how
to make sure that the power to create money is not exploited by a political body in order to
achieve consensus, and how to assure that the idea of unlimited monetary resources do not
lead to misallocation and inefficiencies (the bloated, awash-with-money US military industry
would probably be a good example).
The best comparison of MMT with neoliberal neoclassical economics, in my view, is Bill
Mitchell's blog post, "How to Discuss Modern Monetary Theory" ( http://bilbo.economicoutlook.net/blog/?p=25961
). I especially recommend the table near the end as a terrific summary of the differences
between the mainstream narrative and MMT.
Thanks! I have enormous respect for Mitchell, given the quantity and quality of his
blogging. However, my only nitpick is that a lot of his blog entries are quite long and "not
easily digestible". I have long thought that one of those clever people who can do those 3
minute rapid animation vids we see on youtube is needed to "do a Lakoff" and change the
metaphors/language. But this post of Mitchell (which I missed, since I don't read all his
stuff) is, IMHO, his best at "re-orienting us".
Saying that taxes are there just to remove money from the economy or to provide
incentives is a rather extreme statement that is bound to elicit some fierce
opposition.
Yes this is a frightening statement. The power to tax is the power to destroy. If this is
a foundation point of the proposal then
Having said that, I've never seen anyone address what I think are two issues to MMT: how
to make sure that the power to create money is not exploited by a political body in order
to achieve consensus, and how to assure that the idea of unlimited monetary resources do
not lead to misallocation and inefficiencies (the bloated, awash-with-money US military
industry would probably be a good example).
Bingo. My thoughts exactly. Too much power in the hands of the few. Easy to slide into
Orwell's Animal Farm – where some people are more equal than others.
MMT is based upon very good intentions but, in my view, there is a moral rot at the root
of the US of A's problems, not sure this can be solved by monetary policy and more
centralized control.
And the JG? Once the government starts to permanently guarantee jobs
I suggest you delve into what is proposed by the MMT – PK camp wrt a JG because its
not centralized in the manner you suggest. It would be more regional and hopefully
administrated via social democratic means e.g. the totalitarian aspect is moot.
I think its incumbent on commenters to do at least a cursory examination before heading
off on some deductive rationalizations, which might have undertones of some book they read
e.g. environmental bias.
Skippy, I read the article, plus the links, including those links of the comments. I will
admit that I am a little more right of center in my views than many on the website.
The idea is interesting, but the administration of such a system would require rewriting
the US Constitution, or an Amendment to it if one thinks the process through, would it not? I
think of the Amendment required to create the Federal Reserve System when I say this.
One thing I really don't like at all -- and I've crossed swords with many over this -- is
that we do tend to take (not just in the US, this is prevalent in far too many
places) things like the constitution, or cultural norms, or traditions or other variants of
"that's the way we've always done this" and elevate them to a level of sacrosanctity.
Not for one moment am I suggesting that we should ever rush into tweaking such devices
lightly nor without a great deal of analysis and introspective consultations.
Constitutions get amended all the time. The Republic of Ireland changed its to renounce a
territorial claim on Northern Ireland. The U.K. created a right for Scotland to secede from
the Union. There's even a country in Europe voting whether to formally change its name right
now. Britain "gave up" its empire territories (not, I would add speedily, without a lot of
prodding, but still, we got there in the end). All of which were, at one time or another,
"unthinkable". Even the US, perhaps the most inherently resistant to change country when it
thinks it's being "forced" to do so, begrudgingly acknowledged Cuba.
Why would a jobs guarantee require a constitutional amendment? The federal government
creates jobs all the time, with certain defined benefits. This would merely expand upon that,
to potentially include anyone who wants a job.
There are a couple different aspects of this that people are getting mixed together, I
think. The core of MMT is not a proposal for government to implement. Rather, it is simply a
description of how sovereign currencies actually operate, as opposed by mainstream economics,
which has failed in this regard. In other words, we don't need any new laws to implement MMT
– we need a paradigm shift.
The Jobs Guarantee is a policy proposal that flows from this different paradigm.
It has been stated many times that it is to inform policy wrt to potential and not some
booming voice from above dictating from some ridged ideology.
Persoanly as a capitalist I can't phantom why anyone would want structural under –
unemployment. Seems like driving around with the hand brake on and then wondering why
performance is restricted or parts wear out early.
Thinking of the Federal Reserve Act being enabled by the Federal Income Tax of the 16th
Amendment.
Using Federal taxes to fund the JG; I do not think that this aspect of it (and others)
would survive a Constitutional challenge. Therefore ultimately an Amendment might be
needed.
Then again I may be wrong. Technically Obamacare should have been implemented by an
Amendment were strict Constitutional law applied.
Rights to health care and jobs are not enumerated in either the Constitution or Bill of
Rights, as far as I am aware.
Not opposed to some of the principles of MMT, just don't understand, in this modern age
where effectively all currency is electronic digits in a banking computer system, the issue
of a currency must be tied to taxes. In years past, where currency was printed and in one's
pocket, or stuffed under a mattress, or couriered by stagecoach, then yes – taxes would
be needed. But today can we not just print (electronically) the cash needed for government
operations each year based upon a fixed percentage of private sector GDP? Why therefore do we
need government debt? Why do we need an income tax?
Skippy, I have lived and worked in countries without income tax (but instead indirect tax)
and where government operating revenue was based upon a percentage of projected national
revenue. I have been involved in the administration of such budgets.
I am in favor of government spending, or perhaps more accurately termed investing, public
money on long-term, economically beneficial projects. But this is not happening. The reality
is that government priorities can easily be hijacked by political interests, as we currently
witness.
While I agree that political highjacking is possible and must be dealt with, this is not
strictly speaking part of an economic theory, which is what MMT is. While MMT authors may
take political positions, the theory itself is politically neutral.
Income taxes, tithes, or any other kind of driver is what drives the monetary circuit.
Consider it from first principles. You have just set up a new government with a new currency
where this government is the monopoly issuer. No one else has any money yet. So, the
government must be the first spender. However, how is this nascent government going to
motivate anyone to use this new currency? Via taxation, or like means, that can only be met
by using the national currency, whatever form that currency may take, marks on a stick,
paper, an entry in a ledger, or the like.
Thank you for this explanation. I understand that, for example, this is why the Federal
Reserve Act of 1913, I believe, created the Federal Reserve and Federal Income Tax at the
same time.
But the US economy functioned adequately, survived a civil war, numerous banking crises,
experienced industrialization, national railways, etc without a central bank or federal
income tax from the 1790's to 1913.
To me, the US's state of perpetual war is enabled by Federal Income Tax. Without it the
MIC would collapse, I am certain.
Functioned adequately
During the 150 yr hard money period we had recessions/depressions that we're both far more
frequent (every three years) and on avg far deeper than what we have had since fdr copied the
brits and took us off the gold standard. Great deprecession was neither the longest or
deepest.
Two reasons
Banks used to fail frequently, a run on one bank typically leading to runs on other banks,
spreading across regions like prairie fires if your bank failed you lost all your money.
Consequences were serious.
During GR so many banks failed in the Midwest, leading to farm foreclosures, the region was
near armed insurrection in 1932. Fiat meant that the fed can supply unlimited liquidity.
Since then banks have failed but immediately taken over by another. Critically, no depositor
has lost a penny, even those with far more exposed than the deposit insurance limit. No runs
on us banks since 1933.
Second, we now have auto stabilizers, spending continues during downturns because gov has no
spending limit. Note previously in an emergency gov borrowed. 10 mil from J.P. Morgan.
But at what cost? no depositor loses money, yet huge amounts are required to be printed,
thus devaluing the "currency". So is the answer inflation that must by necessity become
hyperinflation?
I don't understand why it is important to protect a bank vs. making it perform its function
without risking collapse. This is magical thinking as we have found very few banks in this
world not ready and willing to pillage their clients, be it nations or just the little
folk.
Why would anyone trust a government to do the right thing by its population? When has that
ever worked out in favor of the people?
I can not understand the trust being demanded by this concept. It wants trust for the users,
but in no way can it expect trust or virtue from the issuer of the "currency"
also, I can't help but think MMT is for growth at all costs. Hasn't the growth shown that
it is pernicious in itself? Destroy the planet for the purpose of stabilizing "currency".
Our federal reserve gave banks trillions of dollars, and then demanded they keep much of
it with the Fed and are paid interest not to use it. It inflated the "currency" in
circulation yet again and now it is becoming clear a great percentage of people in our
country can no longer eat, no longer purchase medications, a home, a business
If being on a hard money system as we were causes recessions and depressions, would we
find that it was a natural function to cut off the speculators at their knees?
How does MMT promote and retain value for the actual working and producing people that
have no recourse with their government? I would like to read about what is left out of this
monumental equation.
US had a federal income tax during the civil war and for a decade or so after.
I have always assumed that mass conscription and the Dreadnought arms race led to the
implementation of the modern taxing/monetary system. (gov't needed both warfare and
welfare)
Taxes, just as debt, create an artificial demand for currency as one must pay back their
taxes in {currency}, and one must pay back debt in {currency}. It doesn't have to be an
income tax, and I think a sales tax would be a better driver of demand than an income
tax.
The US had land sales that helped fund government expenditures in the 1800s.
Not all taxes are income taxes. Back in the day (20's/30's/40's),my grandfather could pay
off the (county) property taxes on his farm by plowing snow for the county in the winter --
and he was damned careful to make sure that the county commissioners' driveways were plowed
out as early as possible after a storm.
In the 30's/40's the property tax laws were changed to be payable only in dollars.
So Grandpa had to make cash crops. Things changed and money became necessary.
But today can we not just print (electronically) the cash needed for government
operations each year based upon a fixed percentage of private sector GDP?
The élites could, but it would be totally undemocratic and the economics profession's
track record of forecasting growth is no better than letting a cat choose a number written on
an index card.
Why therefore do we need government debt?
There is no government debt. It's just a record of interest payments Congress has agreed
to make because the wealthy wanted another welfare program.
Why do we need an income tax?
The only logically consistent purpose is because people have too much income.
I think the point they're driving at, is that by requiring the payment of taxes in a
particular currency, a government creates demand for that currency. There are other uses for
federal taxes, not the least of which is to keep inflation in check.
Government debt is not needed, at least not at the federal level. My understanding of it
is that it's a relic from the days of the gold standard. It's also very useful to some rather
large financial institutions, so eliminating it would be politically difficult.
Wray has said in interviews that the debt (and associated treasury bonds), while not
strictly necessary in a fiat currency, is of use in that it provides a safe base for
investment, for pensioners and retirees, etc.
Sure, it could be eliminated by (a) trillion dollar platinum coins deposited at the
Federal Reserve followed by (b) slowly paying off the existing debt when the bonds mature or
(c) simply decreeing that the Fed must go to a terminal and type in 21500000000000 as the US
Gov account balance (hope I got the number of zeroes correct!).
It could be argued that the US doesn't strictly need taxes to drive currency demand as
long as our status as the world reserve currency is maintained (see oft-discussed
petrodollar, Libya, etc). If that status is imperiled, say by an push by a coalition of
nations to establish a different currency as the "world reserve currency") taxes would be
needed to drive currency demand.
I think most of this is covered in one way or another here:
Government debt is not actually a 'real thing'. It is a residue of double-entry
bookkeeping, as is net income (income minus expenses, that's a credit in the double-entry
system). It could as well be called 'retained earnings (also a 'book' credit in the
double-entry system). If everybody had to take bookkeeping in high school there would be far
few knickers in knots!
There are two kinds of government 'debt': the accumulated deficit which is the money in
circulation not a real debt, and outstanding bonds which is real in the sense that it must be
repaid with interest.
However, the government can choose the interest rate and pay it (or buy back the bonds at
any time) with newly minted money at no cost to itself, cf. QE.
seems to me that the guaranteed jobs would be stigmatized, and make it harder for people
to get private sector jobs. "once youre in the JG industry, its hard to get out" etc.
how much of a guarantee is the job guarantee supposed to be? ie. at what point can you get
fired from a guaranteed job?
Yes, my mind wandered into the same territory. While I agree that something needs to be
done, it also has the potential to strike at the heart of a lean, merit-based system by
introducing another layer of bureaucracy. In principle, I am not against the idea, but as
they say, "God (or the Devil – take your pick) is in the details ".
If you haven't already read it, "Reclaiming the State" by Mitchell and Fazi (Pluto Press
2017) provides a detailed and cogent analysis of how neoliberalism came into ascendency, and
how the principles of MMT can be used to pave the way to a more humane and sustainable
economic system. A new political agenda for the left, drawing in a different way upon the
nationalism that has energized the right, is laid out for those progressives who understand
the necessity of broadening their appeal. And the jobs guarantee that MMT proposes has
NOTHING to do with MacJobs and Amazon workers. It has to do with meeting essential human and
environmental needs which are not profitable to meet in today's private sector.
Job guarantee, or govt as employer of last resort -- now there is a social
challenge/opportunity if there ever was one.
Well managed, it would guarantee a living wage to anyone who wants to work, thereby
setting a floor on minimum wages and benefits that private employers would have to meet or
exceed. These minima would also redound to the benefit of self-employed persons by setting
standards re income and care (health, vacations, days off, etc) *and* putting money in the
pockets of potential customers.
Poorly managed it could create the 'digging holes, filling them in' programs of the
Irish Potato Famine
ore worse (hard to imagine, but still ). It has often been remarked that the potato blight
was endemic across Europe, it was only a famine in Ireland -- through policy choices.
So, MMT aside (as being descriptive, rather than prescriptive), we are down to who
controls policy. And that is *really* scary.
In terms of power, the government has the power to shoot your house to splinters, or blow
it up, with or without you in it. We say they're not supposed to, but they have the ability,
and it has been done.
The question of how to hold your government to the things it's supposed to do applies to
issues beyond money. We'd best deal with government power as an issue in itself. I should
buckle down and get Mitchell's next-to-newest book Reclaiming the State .
I don't claim to fully understand MMT yet, but I find Wray's use of the derogatory term
"gold bugs" to be both disappointing and revealing. To lump those, some of whom are quite
sophisticated, who believe that currencies should be backed by something of tangible value
(and no, "the military" misses the point), or those who hold physical gold as an insurance
policy against political incompetence, and the inexorable degradation of fiat currencies, in
with those who promote or hold gold in the hopes of hitting some type of lottery, is
disingenuous at best.
OMT seemingly has no reason to exist being old school, but for what it's worth, the
almighty dollar has lost over 95% of it's value when measured against something that matters,
since the divorce in 1971.
I found this passage funny, as in flipping the dates around to 1791, is when George
Washington set an exchange rate of 1000-1 for old debauched Continental Currency, in exchange
for newly issued specie. (there was no Federal currency issued until 1861)
So yeah, they burned all of their tax revenue, because the money wasn't worth jack.
Farley Grubb -- the foremost authority on Colonial currency -- proved that the American
colonists understood perfectly well that taxes drive money. Every Act that authorized the
issue of paper money imposed a Redemption Tax. The colonies burned all their tax
revenue.
Gold bug is akin to money crank e.g. money = morals. That's not to mention all the
evidence to date does not support the monetarist view nor how one gets the value into the
inanimate object or how one can make it moral.
Gold doesn't historically perform as a hedge but as a speculative trade. Those who think
it can protect them from political events typically don't realize that a gold standard means
public control of the gold industry, thereby cutting any separation from the political
process off at the knees.
When a government declares that $20 is equal in value to one ounce of gold, it also
declares an ounce of gold is equal to $20 dollars. It is therefore fixing, through a
political decision subject to political changes, the price of the commodity.
Nonsense. When fiat currencies invariably degrade, and especially at a fast rate, gold has
proven to be a relative store of value for millennia . All one need do is to look at
Venezuela, Argentina, Turkey, etc., to see that ancient dynamic in action today.
You, and others who have replied to my comment, are using the classical gold standard as a
straw man, as well. Neither I, nor many other gold "bugs" propose such a simple solution to
the obviously failed current economy, which is increasingly based on mountains of debt that
can never be repaid.
gold has proven to be a relative store of value for millennia.
As long as one is mindful that gold is just another commodity, subject to the same
speculative distortions as any other commodity (see Hunt brothers and silver).
But that is obviously false, given that no other commodity has remotely performed with
such stability over such a long period of time.
It is true that over short periods distortions can appear, and the *true* value of gold
has been suppressed in recent years through the use of fraudulent paper derivatives. But
again, I'm not arguing for the return of a classical gold standard.
Don't worry, I'm likely to be at least equally dense!
I didn't mean to suggest that there is some formula from which a *true* value of precious
metals might be derived. I simply meant that gold has clearly been the object of price
suppression in recent years through the use of paper derivatives (i.e. future contracts). The
reason for such suppression, aside from short-term profits to be made, is that gold has
historically acted as a barometer relating to political and economic stability, and those in
power have a particular interest in suppressing such warning signals when the system becomes
unstable.
So, while the Central Banks created previously unimaginable mountains of debt, it was
important not to alarm the commoners.
The suppression schemes have become less effective of late, and will ultimately fail when
the impending crisis unfolds in earnest.
As long as one is mindful that gold is just another commodity, subject to the same
speculative distortions as any other commodity
It sounds good in theory, but history says otherwise.
The value remained more or less the same for well over 500 years as far as an English
Pound was concerned, the weight and value of a Sovereign hardly varied, and the exact weight
and fineness of one struck today or any time since 1817, is the same, no variance
whatsoever.
Thus there was no speculative distortions in terms of value, the only variance being the
value of the Pound (= 1 Sovereign) itself.
" who believe that currencies should be backed by something of tangible value"
As I understand it, MMT also requires that currency be backed by something of tangible
value: a well managed and productive economy. It doesn't matter in the least if your debt is
denominated in your own currency if you have the economy of Zimbabwe.
Sounds reasonable in theory, but that was supposed to be the case with the current
economic system, as well, and we can all see where that has led.
I'm not arguing that there isn't a theoretically better way to create and use
"modern" money, but rather doubt that those empowered to create it out of thin air will ever
do so without abusing such power.
Oh, I agree with you. In no universe that I am aware of would the temptation to create
money beyond the productive capacity of the economy to back it up be resisted. I think
Zimbabwe is a pretty good example of where the theory goes in practice.
That's exactly wrong. Zimbabwe had a production collapse. Same amount of money to buy a
much smaller amount of goods. The gov responded not by increasing goods, but increasing money
supply.
Mark Blyth has a good discussion of the gold standard in his book Austerity: The
History of a Dangerous Idea . He makes the point that, in imposing the adjustments
necessary to keep the balance of payments flowing, the measures imposed by a government would
be so politically toxic, that no elected official in his or her right mind would implement
them, and expect to remain in office. In short, you can have either democracy, or a gold
standard, but you can't have both.
Also, MMT does recognize that there are real world constraints on a currency, and that is
represented by employment, not some artificially-imposed commodity such as gold (or bitcoin,
or seashells, etc). The Jobs Guarantee flows out of this.
As mentioned above, you, among others who have replied to my original comment, are using
the classical gold standard as a straw manl. Neither I, nor many other gold "bugs", propose
such a simple solution for the failed current economic system, which is increasingly based on
mountains of debt that can never be repaid.
increasingly based on mountains of debt that can never be repaid.
Huh? I listed two ways they could be repaid above. In the US, the national debt is
denominated in dollars, of which we have an infinite supply (fiat). In addition, the Federal
Reserve could buy all the existing debt by [defer to quad-entry accounting stuff from Wray's
primer] and then figuratively burn it. Sure, the rest of the world would be pissed and
inflation *may* run amok, but "can never" is just flat out wrong.
Of course it can be extinguished through hyperinflation. I didn't think that it would be
necessary to point that out. No "may" about it, though, as if the U.S. prints tens of
trillions of dollars to extinguish the debt, hyperinflation will be assured.
I didn't think that it would be necessary to point that out.
Sorry, but I'm an old programmer; logic rules the roost. When one's software is expected
to execute billions of times a day without fail for years (and this post is very likely
routed through a device running an instance of something I've written). Always means every
time, no exceptions; never means not ever, no matter what.
I'm sure that there is no one solution proposed, though an alternative to the current
system which seems plausible would be a currency backed by a basket of commodities, including
gold.
Hi Tinky, much late but still. Gold will have value as long as people believe it has
value. But what will they trade it for? The bottom line is your life.
I don't have any gold, too expensive, and it really has no use. But I remember Dimitri Orlov's
advice : I am long in needles, pins, thread, nails and screws, drill bits, saws, files,
knives, seeds, manual tools of many sorts, mechanical skills and beer recipes. Plus I can
sing.
The vast majority of people who hold physical gold are well aware of the value of having
skills and supplies, etc., in case of a serious meltdown. But it's not a zero-sum game, as
you suggest. Gold will inexorably rise sharply in value when today's fraudulent markets
crash, and there will be plenty of opportunities for those who own it to trade it for other
assets.
Furthermore, as previously mentioned, gold's utility is already on full display,
to those who are paying attention, and not looking myopically through a USD lens.
"Mountains of debt that can never be repaid" is a propaganda statement with no reference
to any economic fact. Why do you feel that this "debt" needs to be "repaid"? It is simply an
accounting artifact. The "debt" is all of the dollars that have been spent *into* the economy
without having been taxed back *out*. The word "debt" activates your feels, but has no
intrinsic meaning in this context. Please step back from your indoctrinated emotional
reaction and understand that the so-called national "debt" is nothing more than money that
has been created via public spending, and "repaying" it would be an act of destruction.
I keep telling (boring, annoying, infuriating) people that, in the simplest terms, the
national debt is the money supply and they won't grasp that simple declaration. When I said
it to my Freedom Caucus congress critter (we were seated next to each other on an exit aisle)
his head started spinning, reminding me of Linda Blair in The Exorcist.
As I said to my congress critter, if the debt bother's y'all so much, why not just pay it
off, dust off your hands, and be done with it?
Personally, if I were President for a day, I'd have the mint stamp out 40 or so trillion
dollar platinum coins just to fill the top right drawer of the Resolute desk. Would give me
warm fuzzy feelings all day long.
p.s. I also told him that the man with nothing cares not about inflation. He didn't like
that either.
"those, some of whom are quite sophisticated, who believe that currencies should be backed
by something of tangible value (and no, "the military" misses the point), or those who hold
physical gold as an insurance policy against political incompetence, and the inexorable
degradation of fiat currencies"
I suspect that Wray exactly means that these people are the goldbugs, not the ones who
speculate on gold.
The whole point that currencies should be backed by something of tangible value IMO is
wrong, and I think the MMTers agree with me on this.
If so, then he should clarify his position, as again, lumping the billions –
literally – of people who consider gold to be economically important, together as one,
is disingenuous.
I think people that consider gold to be a risk hedge understand its anthro, per se an
early example of its use was a fleck of golds equal weight to a few grains of wheat e.g. the
gold did not store value, but was a marker – token of the wheat's value – labour
inputs and utility. Not to mention its early use wrt religious iconography or vis-à-vis
the former as a status symbol. Hence many of the proponents of a gold standard are really
arguing for immutable labour tokens, problem here is scalability wrt high worth individuals
and resulting distribution distortions, unless one forwards trickle down sorts of
theory's.
Not to mention in times of nascent socioeconomic storms many that forward the idea of gold
safety are the ones selling it. I think as such the entire thing is more a social psychology
question than one of factual natural history e.g. the need to feel safe i.e. like commercials
about "peace of mind". I think a reasonably stable society would provide more "peace of mind"
than some notion that an inanimate object could lend too – in an atomistic
individualistic paradigm.
I once had an co-worker that was a devout Christian. When he realized I wasn't religious,
he asked me, incredulously, how I was able to get out of bed in the morning. Meaning, he
couldn't face a world without meaning.
I think a lot of people feel that same way about money. They fight over it, lie for it,
steal it, kill for it, go to war over it, and most importantly, slave for it. Therefore, it
must have intrinsic value. I think gold bugs are in this camp.
Talking about Warren's blog ( http://moslereconomics.com/ ), everytime I try to go there,
Cloudflare asks me to prove that I am human. Anyone know what's up with that? It's the only
website I've ever seen do that.
That's a good suggestion. Unfortunately, as I sometimes find, you can pass ALL the major
test-sites but something (a minor, less-used site using out-of-date info?) can give you
grief. NC site managers once (kindly) took the time to explain to me why I might have
problems that they had no ability to address at their end. I had to muck around with a link
given earlier to Bill Mitchell's blog before my browser would load it.
I think there can be quirks that are beyond our control (unfortunately) – for instance
I think a whole block of IP addresses (including mine) used by my ISP have been flagged
*somewhere* – no doubt due to another customer doing stuff that the checker(s) don't
like. (The issue I mentioned above was more likely due to a strict security protocol in my
browser, however.)
Monetary policy in terms of interest rates is not just weak, it also tends to treat all
targets the same. Fiscal policy can be targetted to where it is felt it can do the most
good.
Christine Desan's book, "Making Money," exhaustively documents the history of money as a
creature of the state. Recall as well that creating money and regulating its value are among
the enumerated POWERS granted to our government by we, the people. Money, indeed, is
power.
Hmmm Randy Wray states that " permanent Zirp (zero interest rate policy) is probably a
better policy since it reduces the compounding of debt and the tendency for the rentier class
to take over more of the economy. "
But just last week, Yves stated that " that one of the consequences of the protracted
super-low interest rate regime of the post crisis era was to create a world of hurt for
savers, particularly long-term savers like pension funds, life insurers and retirees. "
[ https://www.nakedcapitalism.com/2018/09/crisis-caused-pension-train-wreck.html
]
So are interest rates today too high, or too low? We're getting mixed messages here.
IMO, interest rates are too low . Beyond the harmful effect to savers, it also
drives income inequality . How? When interest rates are less than inflation, it is
trivial to borrow money, buy some assets, wait for the assets to appreciate, sell the assets,
repay the debt, and still have profit left over even after paying interest . Well,
it's trivial if you're already rich and have a line of credit that is both large and
low-interest. If you're poor with a bad FICO score, you don't get to play the asset
appreciation game at all.
The rates between riskier and less risky borrowers will still be reflected in the
different rates given to each.
The low rates encourage greater risk taking to increase the reward(a higher rate of
return). This is what leads to the gross malinvestment.
Case in point: the low rates led to more investments into the stock market, where the
returns are unlimited. This is what led to the income inequality of Obama's term, as
mentioned above.
I cannot speak for Yves, nor or Randy, but IMO, interest rates are too low for people who
depend on interest for their living -- as an old person, I have seen my expected income drop
to about zilch when I had expected 7 to 10% on my savings. Haha! So yeah, too low for us who
saved for 'retirement'.
Too high for people financing on credit, since a decent mortgage on a modestly-priced
house will cost you almost the same as
the house . And that doesn't even begin to look at unsecured consumer credit (ie, credit
card debt), which is used in the US and other barbaric countries for medical expenses, not to
mention student debt. The banks can create the principal with their keystrokes, but they
don't create the interest. Where do you suppose that comes from? Hint: nowhere, as in
foreclosures and bankruptcies.
Wray's statement reflects his preferences from an operational policy perspective.
Sovereign government debt cares no risk and therefore should not pay interest. The income
earned from that interest is basically a subsidy and all income when spent caries a risk of
inflation induced excess demand. Therefore who unnecessarily add the risk to the economy and
potential risk needing to reduce other policy objectives to accommodate unnecessary interest
income subsidies to mostly rich people?
Yves comment reflects the reality of prior decades of economic history. Even if Wray's
policy perspective is optimal, there are decades of people with pensions and retirement
savings designed around the assumption of income from risk-free government debt. It's this
legacy that Yves is commenting on and is a real problem that current policy makers are just
ignoring.
As for your comments on how low cost credit can be abused, I believe you'll find most MMT
practitioners would recommend far more regulation on the extension of credit for
non-productive purposes.
I just wrote a note to Randy:
The origin of money is not merely for accounting, but specifically for accounting for DEBT --
debt owed to the palatial economy and temples.
I make that clear in my Springer dictionary of money that will come out later this year:
Origins of Money and Interest: Palatial Credit, not Barter
Can somebody help me out here? It seems to me that the US macroeconomic policy has been
operating under MMT at least since FDR (see for example Beardsley Ruml from 1945).
Since then, insofar as I understand MMT, fiat has been printed and distributed to flow
primarily through the MIC and certain other periodically favored sectors (e.g. the Interstate
Highway System). Then, rather than destroying this fiat through taxation, the sectoral
balances have been kept deliberately out of balance: Taxes on unearned income have been
almost eliminated with an eye to not destroying fiat, but to sequestering as much as possible
in the private hands of the 1%. This accumulating fiat cannot be productively invested
because that would cause overproduction, inflation, and reduce the debt burden by which the
1% retains power over the 99%. So the new royalists, as FDR would have styled them, keep
their hoard as a war chest against "socialists".
I get all this, more or less, and I appreciate that it is well and good and important that
MMTers insistently point out that the emperor has no clothes. This is a necessary first step
in educating the 99%.
But I don't see MMT types discussing the fact that US (and NATO) macroeconomic policy
already has a Job Guarantee: if you don't want to work alongside undocumented immigrants on a
roof or in a slaughterhouse or suffer the humiliation of US welfare, such as it is, you can
always get a job with the army, or the TSA, or the police, or as a prison guard, or if you
have some education, with a health unsurance company or pushing drone buttons. You only have
to be willing to follow orders to kill–or at least help to kill–strangers.
(Okay, perhaps I overstate. If you're a medical doctor or an "educator" with university
debt you don't have to actively kill. You can decline scant Medicaid payments and open a
concierge practice, or you can teach to the test in order that nobody learns anything
moral.)
It is difficult to get a man to understand something, when his salary depends on his not
understanding it. Wouldn't it be clarified matters if MMTers acknowledged that we already
have a JG?
We have been operating on MMT since the end of WW2, with 2 exceptions in 1968 when Silver
Certificate banknotes no longer were redeemable for silver, and in 1971 when foreign central
banks (not individuals!) weren't allowed to exchange FRN's for gold @ $35 an ounce
anymore.
It's been full on fiat accompli since then and to an outsider looks absurd in that money
is entirely a faith-based agenda, but it's worked for the majority of all of lives, so nobody
squawks.
It's an economic "the emperor has no clothes" gig.
It seems to me that the US macroeconomic policy has been operating under MMT at
least since FDR (see for example Beardsley Ruml from 1945).
Yup, you are correct, IMO. And about the jobs guarantee, too. The point of MMT is not that
we have to adopt, believe in, or implement it, but that *this is how things work* and we need
to get a %&*^* handle on it *STAT* or they will ride it and us to the graveyard. The
conservatives and neo-cons are already on to this, long-time.
I believe the chant is:
We can have anything we want that is available in our (sovereign) currency and for which
there are resources
What we get depends on what we want and how well we convince/coerce our 'leaders' to make
it so.
JG is geared toward community involvement to create an open-ended collection of potential
work assignments, not top-down provision of a limited number of job slots determined by
bureaucrats on a 1% leash.
About every 80 years, there has been a great turning in terms of money in these United
States
Might as well start with 1793 and the first Federal coins, followed in 1861 by the first
Federal paper money, and then the abandonment of the gold standard (a misnomer, as it was one
of many money standards @ era, most of them fiat) in 1933.
We're a little past our use-by date for the next incarnation of manna, or is it already
here in the guise of the great giveaway orchestrated since 2008 to a selected few?
After learning MMT I've occasionally thought I should get a refund for the two economics
degree's I originally received. One of the primary mainstream teachings that I now readily
see as false is the concept of money being a vale over a barter economy. It's lazy,
self-serving analysis. It doesn't even pass a basic logical analysis let alone archeological
history. Even in a very primitive economy it would be virtually impossible for barter to be
the main form of transaction. The strawberry farmer can't barter with the apple farmer. His
strawberries will be rotten before the apples are ripe. He could give the apple farmer
strawberries in June on the promise of receiving apples in October, but that's not barter
that's credit. The apple farmer could default of his own free will or by happenstance (he
dies, his apple harvest is destroyed by an act of god, etc ). How does the iron miner get his
horse shoed if the blacksmith needs iron before he can make the horse show? Credit has to
have always been a key component of any economy and therefore barter could never have been
the original core.
After learning MMT I've occasionally thought I should get a refund for the two
economics degree's I originally received.
Agreed. Richard Wolff notes that in most Impressive Universities there are two schools,
one for Economics (theory) and another for Business (practice). Heh. I say, go for the
refund, you was robbed.
All the Rupee* has done over time is go down in value against other currencies, and up in
the spot price measured in Rupees even as gold is trending down now, and that whole stupid
demonetization of bank notes gig, anybody on the outside of the fiat curtain looking in, had
to be laughing, and ownership there is no laughing matter, as it's almost a state financial
religion, never seen anything like it.
* A silver coin larger than a U.S. half dollar pre-post WW2, now worth a princely 1.4
cents U.S.
Not an economist, but I appreciate both the applicability of MMT and the fierce, but often
subtle resistance its proponents have encountered academically, institutionally and
politically. However, I have questioned to what extent MMT is uniquely applicable to a nation
with either a current account surplus or that controls access to a global reserve
currency.
How does a nation that is sovereign in its own currency, say Argentina for example (there
are many such examples), lose 60 percent of its value in global foreign exchange markets in a
very short time period?
Is this due primarily to private sector debts denominated in a foreign currency (and if
so, what sectors of the Argentine economy undertook those debts, for what purposes, and to
whom are they owed?), foreign exchange market manipulation by external third parties, the
effective imposition of sanctions by those who control the global reserve currency and
international payments system, or some combination of those or other factors?
MMT makes more sense than orthodox neoliberal accounts of currency and sovereign spending
to me, as it does a better job of acknowledging reality. MMT recognizes that currency is an
artifice and that imagined limitations on it are just that, and real resources are the things
which are limited. Neoliberal economics acts as if all sorts of byzantine factors mean
currency must be limited, but we can think of resources, and the growth machine they feed, as
being infinite.
"Taxes or other obligations (fees, fines, tribute, tithes) drive the
currency."
Specifically, what does "drive" mean? Does it mean:
1. When taxes are reduced, the value of money falls?
2. If taxes were zero, the value of money would be zero?
3. Cryptocurrencies, which are not supported by taxes, have no value?
"JG is a critical component of MMT. It anchors the currency and ensures that achieving
full employment will enhance both price and financial stability."
Specifically, what do "anchors" and "critical component" mean? Do they mean:
1. Since JG does not exist, the U.S. dollar is unanchored and MMT does not exist?
2. Providing college graduates with ditch-digging jobs enhances price and financial
stability?
3. Forcing people to work is both morally and economically superior to giving them money and
benefits?
"Drive" means "creates initial demand for":
1. No, not for an established currency.
2. See 1.
3. Crypto is worth what you can buy with it.
"Anchors" means it acts against inflation and deflation. "Critical component" means the
economy works better if it has it.
1. Yes and no.
2. Yes, if no-one else will hire them.
3. No element of force is implied.
Karlof1 I could be wrong of course but one example of why none of that would matter is
when the US dollar for all practical purposes winks out of existence and that could happen
right now as we speak. Why would that happen you may ask? It would happen whenever someone
"beyond personal wealth" like the usual finance suspects decides it is the way for them to
make enormous amounts of profit out of the resulting worldwide instability before any of
their competitors beat them to it. The longer they wait the more likely someone else will
jump the gun and surprise them.
I don't think the US has two years worth of "blood" left in it before that happens.
In a sense nothing will be left when each and every dollar becomes at least 20 trillion
times less valuable. If the response to that happening is the same as the early 20ieth
century response (Germany) then nothing will be left at all considering the difference in
technology and differences in circumstance (everybody already have the weapons ready). If the
response is the late 20ieth century response (USSR) then maybe something will be left but the
USSR was both lucky and relatively solvent in comparison to the current US. The starting
point for the US is several magnitudes worse in both examples. The world can't afford to
carry the US at cost any more than the US can't right now and like the US haven't been able
to for decades, the required wealth doesn't exist.
The nascent USA had its national capital sacked and presidential residence burnt during
what's known as the War of 1812, yet it continued to exist politically. Same during Civil
War. During the Revolutionary War, the USA had a national government and 13 separate state
governments, all of which continued to function as the war raged. There've been at least two
Coups--1963 and 2000--but the USA continued its political existence. Even the Germany
destroyed by WW2 still existed politically. Destroying political entities is
very--extremely--difficult, which is why it seldom occurs. Rome's central authority ceased in
the mid 6th century but its provinces continued as did the Eastern portion of the Roman
Empire. Russia's governmental system was drastically altered during and after Russia's Civil
War, but Russia continued to exists as a political entity. The USSR was an imperial governing
edifice built atop numerous national political entities. It did vanish, but the nations
comprising it didn't; indeed, new nations were born as a result.
As for the dollar and its international position, even those nations desirous of undoing
dollar hegemony have said it cannot be done overnight as the overall system is both too
complex and too fragile for hasty adjustments to be made stably . Moreover, for better
or worse, the Outlaw US Empire's an integral component of the global economy, which motivates
those changing the system to arrive at a Soft Landing, not a Hard Crash.
Catastrophism belongs in the realm of Geology, not Geopolitics, although the former will
certainly affect the latter. Geopolitics can certainly enable an ecological crisis such as
the Overshoot we're now entering, but that's several magnitudes less than what rates as a
geological catastrophe--and not all such catastrophes are global.
- This is a repost of the recent Palisade
Weekly Letter –
Earlier this week –
news went by relatively unnoticed by the ' mainstream ' financial media (CNCB and such)
that Beijing's started selling their U.S. debt holdings.
Putting it another way – they're dumping U.S. bonds. . .
"China's ownership of U.S. bonds, bills and notes slipped to $1.17 trillion, the lowest
level since January and down from $1.18 trillion in June."
And although they're starting to sell U.S. bonds – expect it to be at a slow and
steady pace. They don't want to risk hurting themselves over this.
I believe China may be selling just enough to get the attention of Trump and the Treasury. A
soft warning for them not to take things too far with tariffs and trade.
Yet already just as news hit the wire that China was selling bonds a few days ago –
U.S. yields spiked above 3%. . .
Don't forget that China's the U.S.'s largest foreign creditor. And this is an asset for
them.
And although them selling is worrisome – the real problems started months ago. . .
Over the last few months, my macro research and articles are all finally coming together.
This thesis we had is finally taking shape in the real world.
I wrote in a detailed piece a few months back that foreigners just aren't lending to the
U.S. as much anymore ( you can read that here ).
I called this the 'silent problem'. . .
Long story short: the U.S. is running huge deficits. They haven't been this big since the
Great Financial Recession of 08.
And it shouldn't come as a surprise to many.
Because of Trump's tax cuts, there's less government revenue coming in. And that means the
increased military spending and other Federal spending has to be paid for on someone else's
tab.
The U.S. does 'bond auctions' all the time where banks and foreigners buy U.S. debt –
giving the Treasury cash to spend now.
But like I highlighted in the 'silent problem' article (seriously, read it if you haven't)
– foreigners are buying less U.S. debt recently. . .
This is a serious problem because if the Treasury wants to spend more while collecting less
taxes, they need to borrow heavily.
This trend's continued since 2016 and it's getting worse. And with the mounting liabilities
(like pensions and social security and medicare), they'll need to borrow trillions more in the
coming years.
So, in summary – the U.S. has less interested foreign creditors at a time when they need
them more than ever.
But wait, it gets worse. . .
The Federal Reserve's currently tightening – they're raising rates and selling bonds
via Quantitative Tightening (QT – fancy word for sucking money out of system).
This is the second big problem – and I wrote about in 'Anatomy of a Crisis' (
read here ). And
even earlier than that
here .
So, while the Fed does this tightening, they're creating a global dollar shortage. . .
As I wrote. . . "This is going to cause an evaporation of dollar liquidity – making
the markets extremely fragile. Putting it simply – the soaring U.S. deficit requires an
even greater amount dollars from foreigners to fund the U.S. Treasury . But if the Fed is
shrinking their balance sheet , that means the bonds they're selling to banks are sucking
dollars out of the economy (the reverse of Quantitative Easing which was injecting dollars into
the economy). This is creating a shortage of U.S. dollars – the world's reserve currency
– therefore affecting
every global economy."
The Fed's tightening is sucking money – the U.S. dollar – out of the global
economy and banks. And they're doing this at a time when Foreigners need even more liquidity so
that they can buy U.S. debt.
How is the Treasury supposed to get funding if there's less dollars out there available? And
how can they entice investors if Foreigners don't have enough liquidity to fund U.S. debt?
These Emerging Markets must use their dollar reserves to prop up their own currencies and
economies today. They can't be worrying about funding U.S. pensions and other bloated spending
when their economies are crumbling.
These two themes I've written about extensively – the decline of foreign investors and
the Fed's tightening – have gotten us to this point today.
And the U.S. is extremely fragile because of both problems. . .
Here's the worst part – China probably knows this . That's why they're selling just
enough U.S. bonds to spook markets.
But if the trade war and soon-to-be a currency war continues, no doubt China will sell more
of their debt – sending yields soaring.
I just got done last week detailing how U.S. debt servicing costs (interest payments) are
already becoming very unsustainable ( click here if you missed it
).
At this point they're literally borrowing money just to pay back old debts – that's
known as a 'ponzi scheme'.
This is why I believe the Fed will eventually cut rates back to 0% – and then into
negative territory. And instead of sucking money out of the economy via QT, they're going to
start printing trillions more.
How else will the Treasury be able to get the funding they need?
I'll continue to keep you up to date with what's going on and how it all fits together.
But I think the two big problems I wrote about above are now converging into a new massive
problem. And I don't see any way out of it unless the Fed monetizes the U.S. Treasury and
outstanding debts. And that will cause massive moves in the markets.
I'm sure Trump will eventually
tweet , "Oh Yeah? Foreigners don't want to buy the U.S. debt? Blasphemy! Who needs you all
when we have a printing press!"
Or something like that. . .
TimeTraveller , 1 hour ago
I'm really starting to get sick of these crap reports from Palisade Research. Again they
are totally wrong on so many levels.
1. China is selling Treasuries, because they are pre-empting a debt crisis in their own
country and need Dollar financing for their overleveraged companies and their banking sector.
Also, China is lending money to every 3rd world country that needs infrustructure for it's
Belt and Road Initiative. Building ports, bridges and railways across Asia and Africa, costs
money.
2. Selling Treasuries will weaken the Dollar, so making the RMB stronger. China does NOT
want the RMB stronger because it erodes their exporters margins and competetiveness. Why
would they want to hurt themselves just to punish their biggest customer?
To even suggest China is "using the Nuclear option" of dumping Treasuries just shows your
total ignorance of the real world.
Palisade are clueless
ConanTheContrarian1 , 1 hour ago
OTOH, the crisis in Emerging Markets and the effect of capital flight on China are just
two of the MANY things not mentioned in this article. There has been tension building into
financial warfare between China and the US ever since they pegged the yuan low to the dollar
in 1987. The US is doing things under the table to China, China to the US, and they're both
quite capable of paying Adam Tumerkan (and others) to write hit pieces against the other
side. Think deeply before choosing a side.
@ Lochearn who is correcting my genealogical representation of empire
Yes, you are more correct than I. That said, does it go back even further to the founding
of monotheistic religions? We are referring to social control by an elite in my mind more
than the Jewish bankers part of your genealogy. I admit to the bankers part but see that
bankers group as the encourage/control entity for the other monotheistic religions.
Has that system dynamic changed/evolved seriously since the Roman era? We have usury. We
have inheritance. We have banking. The concept of private property evolved along with the
mythical moral fig leaf of rule-of-law. We call it the Western form of "civilization".
Psycho Historian: I have been reading a Great Courses book on the history of the Achaemenid
rmpire that ruled Persia and one interesting tidbit from my reading is that temples and their
priests made loans to property (though turned did not accept deposits). So religious
institutions got into the banking business early.
In his talks about his upcoming book, Hudson has said that besides the Palace the Temples
were the first sources of credit. But their relation to society then vastly differs from what
evolved as both Palace and Temple become corrupted by greed.
So religious institutions got into the banking business early.
Achaemenids? I think this was rather late. IIRC temples in Ur, Sumer and Babylon were in
the business long before the Achaemenid period.
However Ur, Sumer and Babylon also seem to have had a general debt amnesty about every 7
years. There was a sound political or economic rationale for this. Something about the idea
that one was not supposed to grind the faces of the poor into the gravel, nor destroy the
fabric of society.
The temples were the only organizations that had the administrative ability to do this.
Temple, at least in Mesopotamia is a bit of a misnomer. As I understand it, the "temple" was
the home of the god, the royal palace and the seat of the civil service all rolled into
one.
You might find David Graeber's book Debt : The First 5,000 Years interesting. He
discusses why the temples were in the money lending business. It's a rather fun read and
comes in hard cover and completely free pdf. https://libcom.org/files/__Debt__The_First_5_000_Years.pdf
did not accept deposits
I never thought of it, but yes of course. Given their functions they would not take
deposits. They were loaning from state resources and did not need deposits. They would not
have even understood the concept.
I am not sure if this applies during the Achaemenid period but it seems likely.
Sunday, August 12, 2018Back That A$$et Up ... From the first sentence of
Michael Sproul's There's No Such Thing as Fiat Money (2007) :
I make the claim that fiat money does not exist, and that the money that is commonly called
fiat money is actually backed by the assets of its issuer.
Who would argue against the premise that modern currencies are backed by the
issuer's assets? The questions that remain are: How broad a definition of "assets" is being
considered? And does "asset backing" justifiably negate the meaning of "fiat", or is this mere
semantics?
In any event, I would counter argue that the meaning of "fiat" is possibly in need of
clarification. And such clarification would then allow for the sensible conclusion that fiat
money does indeed exist. Sproul's premise is a good launch pad for clarifying just what it is
that backs the US Dollar.
Many have said that the US military "backs" the dollar. And indeed, the US Deep State and
its Military Industrial Corporatist alliance represents a huge investment in strategic
worldwide military deployment. That investment is an asset, and it does in part back the
dollar. There are other factors, that are considered in the foreign exchange marketplace, and
there are varying opinions as to which factors bear such weight upon the prime factor :
relative changes in purchasing power. As we have discussed before, usage is a considerable factor in determining a
currency's relative purchasing power, which in turn supports further usage, in a circular
fashion. In times past, there were set fundamentals that established relative fiat currency
exchange value: the country's stability, its industrial base, trade practices and metrics,
population demographics and economic condition, debt to GDP, and so on.
As our real world has progressed into a world of derivative statistic and valuation, through
the rise of financialization, those fundamental factors have evolved to include other factors
that are brought to bear upon a modern digital currency's backing.
Does the depth of a currency in global derivative positions act as a form of backing?
This is a factor which did not exist prior to the existence of derivatives. Does that depth not
guarantee further usage, and that further usage not create greater depth? Does the currency
function successfully as a systemic weapon against other currency issuers? Again, relatively
recent dollar era phenomena.
But there is an incredibly powerful, hugely overlooked factor which begins only around 2008,
which backs the US dollar. I will tell you now that it is the US Government's control
over its people which gives the US dollar the largest share of "asset backing" of any
other factor under consideration - in the FX market and otherwise.
When the US Government publicly bailed out the global banking system and made the
American people the guarantor of that bailout, an incredible precedent was set. It proved to
the families that the issuer of the US Dollar could obligate its tax base to an unrepayable
debt, and that tax base would neither understand, nor care enough about the consequences of
that precedent ... to stand up and fight against the fraud and thievery that keeps the 99% in
perpetual bondage, and the 1% in a risk free position to do as they please.
The issuer has proven to generational wealth that it can divert the attention of the tax
base from the world's most egregious robbery, and do it again every so often, including to
other middle classes who hold wealth, as it moves from country to country. And they will do so
in equally powerful police states, combined with well developed welfare states, as the fiat
wealth concept manages the debt slaves of any culture, keeping them pacified under the doctrine
of "debt as wealth".
You will watch in amazement as China eventually "becomes" the USA in this regard. To the
North, there is one proud people, who thrive on the adversity which shapes their strong
cultural identity - who will be a thorn in the dollar's side - but they will be dealt with, as
opportunity allows.
This modern state of affairs is an incredible asset which the global corporatist banking
cartel (the BIS led global central banking system) has endowed upon the US Dollar - and it's
rival issuers are part and parcel to that system. Until China, India and Russia's central banks
(along with their strategic but smaller allied CBs) achieve a true Coup d'etat (either publicly
- or more likely privately) and begin to act independently from BIS mandate, the world's middle
classes will never have any enduring prosperity - only the fleeting type that comes with
targeted booms, busts and the fraud and bailouts they enable.
Much more importantly ... that Coup will NEVER HAPPEN as long as the American people agree
to the dollar contract they are so deeply sworn to. Americans have been taught to accept the
double standard they now live by. They can default on debt and lose everything they own, but
their lenders can never default - they will be bailed out by whatever wealth remains. There is
no other society on earth who have been so culturally conditioned to accept slavery and
socialism as the generation of Americans whose OBEDIENCE backs the dollar today. That
compliance, coupled with contempt for the wealth of their fellow man, and the social justice
herd mentality, makes the family's smile with exceeding confidence ... that this dollar empire
can milk much more middle class wealth across the globe as it spreads its "debt as wealth"
religion even further into systemic entrenchment.
And this Trump fellow. He and Wilbur are doing well to earn the trust of generational
wealth.
An unexpected wildcard can always be drawn, including an international war. But the
Roacheforque's will profit from war as well - nonetheless, and just the same. Generational
wealth aways profits from the spread of global corporatism, as they are both the authors and
benefactors of it.
This we learn ... from the flower of understanding.
In a press conference this morning, the Russian president said his country doesn't plan to
abandon holding reserves in U.S. dollars though he said that the risk of sanctions is prompting
Russia to diversify its foreign currency assets.
"Russia isn't abandoning the dollar,"
Putin said in answer to a question
about the sharp decline in its holdings of U.S. Treasuries in April and May.
"We need to minimize risks, we see what's happening with sanctions."
"As for our American partners and the restrictions they impose involving the dollar," he
added,
"I think that is a major strategic mistake because they're undermining confidence in
the dollar as a reserve currency."
Putin did however caution that the US is making a big mistake if it hopes to use the dollar as a
political weapon:
"
Regarding our American partners placing limitations, including those on dollar
transactions, I believe is a big strategic mistake
. By doing so, they are undermining
the trust in the dollar as a reserve currency"
In this vein, Putin added that many countries are discussing the creation of new reserve
currencies, noting that China's yuan is a potential reserve currency, but concluded:
"We will continue to use the US dollar unless the United States prevents us from
doing so."
The Russian president also emphasized the need for other currencies in global trade and the
emergence of new reserve currencies like the ruble.
Additionally, President Putin said he's ready to hold a new summit with U.S.
counterpart Donald Trump in either Moscow or Washington,
praising him for sticking to his
election promises to improve ties with Russia.
"One of President Trump's big pluses is that he strives to fulfill the promises he
made to voters, to the American people,"
Putin told a press conference at the BRICS
summit in Johannesburg.
"As a rule, after the elections some leaders tend to forget what they promised the
people but not Trump."
Putin, who said he expects to meet Trump on the sidelines of the G-20
The Anglo Zionist empire not only weaponizes the USD, but
also "democracy" and "human rights".
The golden days of the 1990s
where Uncle Scam could enjoy unrivalled power are gone. Like all
greedy full spectrum empires, abusing unipolar power with wild
abandon and arrogance is now starting to hurt.
Sandbox the Zionist infil
traitors
and take down
the tentacles of the Deep State, and let America join the global
polity of great nations in a new paradigm of peaceful coexistence,
rather than following the directives of that small, paranoid tribe
bent on full spectrum dominance.
One thing that makes me optimistic is that more people are
becoming aware and are questioning the apparatus and narratives of
the old world order. It was alot different 10 years ago, when I felt
like I was a very small minority with a multipolar view, drowned out
in a sea of denial.
Trump and his ZH crybabies
whine on about how "unfairly the rest of the world has been
treating the US" but they 'conveniently' forget that most of
today's problems (wars, financial instability, fiat
currency) originate from the US Reserve Currency Status and
the Breton Woods system which the US has been using UNFAIRLY
to it's advantage for Many DECADES in order to finance wars
and manipulate the price of commodities.
But that's too difficult to grasp for most Trumptards...
They're too busy screaming "sieg heil" for the Orange Jew!
*) They complain about foreign wars and the MIC,
yet vote for someone who promised to INCREASE the
Pentagon's already enormous budget
*) The complain about "the Jews," "Israhell," and
"the ZOG," and yet they vote for someone who is in bed
with Israel and Netanyahu and has a Jewish-American
lawyer who fucks him over
*) They complain about the "banksters," and yet
they vote for someone who makes a Deep State
Goldmanite (Mnuchin) his Treasure Secretary
*) They complain about The Deep State and The
Swamp, and they vote for someone who hires Pompeo,
Haspel and Bolton
*) They complain about the massive amounts of debt
and the fiat currency system, and yet they vote for
someone who calls himself "The King of Debt" and calls
for a massive increase in military spending
I guess now the ZH Trumptards only have one
'weapon' left: downvotes!
I'm not your classic fanboy of Trump, but he has to
work with those cretins somehow, and not turn into
a degenerate pedophile in the process. He was the
lesser of two evils presented in the 2 party
duopoly, sadly, that's what modern 'democracy' has
become; a Hobson's choice.
So far, he's doing
alright, given the circumstances, and everything
stacked against him.
"He was the lesser of two evils presented in
the 2 party duopoly,..."
I completely
agree with that assessment, but what I fail to
understand is how the supposedly "highly
educated readers of ZH," can be so fucking
stupid to blindly believe all the Trump
bullshit.
Being the lesser of two evils is still not
being very good I'm afraid, and being the lesser
of two evils means that he still kinda sucks.
That is what we're witnessing every day: a
stupid narcissistic idiot who can barely play
0,5D chess, let alone 4D chess...
The system that churns out leadership in
America is fundamentally flawed and corrupted
to the bone, yet once in a blue moon, an
"insider outsider" as I like to call them,
like Jackson, Kennedy and Trump, slips
through. And that's when decades happen in a
few years.
Who blindly believes bs? Trump is provably
the most honest politician since the
invention of recording devices. Just having
an uncontested birth certification and school
records is a big head start. Who do you think
would make your paycheck (subsidy?) go higher
than President Trump. Trump is threatening a
lot of people's sinecures and subsidies. Who
wants to guarantee more NPR wannabee hacks a
good paycheck?
What a lot of folks seeem to overlook is that
the lesser of two evils is still, wait for
it, ... evil. This is a highly subjective
measurement of course, the beauty of all that
evil being in the minds eye, of the beholder
..
What do we have ? IMO the jury is still
out on that one. I had hoped that President
Trump would talk straight to the American
people. Particularly in regards to the true
state of the overall economy. But those of us
who have tried to inform friends & family on
these subjects have run up against that solid
wall of denial. Most people don't want to
hear the truth. They fight against it with
everything they've got. Between the Deep
State attacking Trump to maintain their
privileges & power, and a dumbed down
population aggressively in denial - the
president has a Herculean challenge.
Fine, we are Trump fan boyz and Putin fan
boyz, and we'll believe whatever we choose to
believe, for our own reasons, and we don't
owe anyone a stinkin explanation why!
You
can open your eyes, and see why we support,
fight for, defend, and will keep fighting for
Trump! He's the Hope that we can Change the
vampirous system that's defenestrated
everyone playing by the rules!
He's a narcissistic idiot who can barely
play multidimensional chess? You don't say!
Anyhow, even if he were, and he isn't, he's
OUR narcissistic idiot who beat the living
daylights, out of the prissy, elitist,
wicked, and thieving a**holes arrayed against
him!
So how come your folks couldn't win
against a narcissistic idiot? Because your
folks are the narcissistic idiots, who can't
come to terms with the reality that Hope of
True Change is here, and embodied in Trumpus
Maximus Magnus!!
You don't like that he's a Maximux Magnus?
Fine, you can suck my pinkie!...
There is a clear battle going on and at 70+
years of age, I give President Trump a huge
helping of credit just to deal with it all,
without going insane in the process. One thing
though... He had better corral the
dirty-dealers around him, along with the
hag
and those involved from the previous
administration, or it will eventually overwhelm
him. Guaranteed.
Indeed, its a battle for the
soul
of America. The pedophiles, degenerates, Zionists, imperialists must not win. A purge is needed and coming. I hope he survives like Jackson, and doesn't go the way of Kennedy. In any case, he has a big following, but I fear a civil war type scenario is coming no matter what happens. The vitriol and partizanship is at toxic levels.
It's obvious that the NWO crowd weaponizes
populations. Obummer wanted his internal
force 'as well funded & equipped as the
military '. And, theyve been working hard
with their propaganda machine to overturn
the American people's 2nd Amendment.
This is likely one of the most delicate &
dangerous times in American history.
So let's see ... Hillary in conjunction with obama
demonized Iran and Russia (Crimea... have you
forgotten?) for years prior to trump ... overthrew
Libya and stirred the pot in Syria via proxies ...
and Bernie Sanders was against these wars AND
against unfettered globalization ... all part and
parcel of the neoconservative PNAC doctrine ....
but trump trying to implement peace and diplomacy
with Russia and North Korea is 'bad' ... but since
at the same time he increases the budget for the
MIC and he is 'bad' for doing so and he is pissing
off our so-called 'trade partners' as manufacturing
has essentially left the US ... so he is to pick a
fight with the MIC internally to the nation on top
of everything else including pissing of the
globalist cretins in our so called intelligence
(where are those WMDs) ... okie dokie ...
"... Kevin Shipp, former Central Intelligence Agency (CIA) officer, intelligence and counter terrorism expert, held several high-level positions in the CIA. His assignments included protective agent for the Director of the CIA, counterintelligence investigator searching for moles inside the CIA, overseas counter terrorism operations officer, internal security investigator, assistant team leader for the antiterrorism tactical assault team, chief of training for the CIA federal police force and polygraph examiner. Mr. Shipp was the senior program manager for the Department of State, Diplomatic Security, Anti-Terrorism Assistance global police training program. He is the recipient of two CIA Meritorious Unit Citations, three Exceptional Performance Awards and a Medallion for high risk overseas operations. Website/book: fortheloveoffreedom.net ..."
Fake News, Fake Money, How to Tell the Difference Posted on February
21, 2018 | Leave
a comment Why is it so hard these days to tell fact from fiction? Who can be trusted to
tell us what's really going on? Can the New York Times and Washington Post still be believed?
And what about money? Can we still trust the dollar, the euro, the pound sterling? What
supports national currencies, anyway? Is this Bitcoin thing real or fake money, and should I
buy some?
Here's a compelling presentation by Andreas Antonopoulos, that addresses all of these
questions. Antonopoulos is a technologist and entrepreneur and probably the most knowledgeable
and insightful expert on bitcoin, blockchain technology and the profound changes that lie just
ahead.
Now take a deep dive into the political realities of our time by watching this presentation
by CIA officer Kevin Shipp, in which he exposes the Shadow Government and the Deep State. If
you question his credibility here is a brief bio from Information Clearing House:
Kevin Shipp, former Central Intelligence Agency (CIA) officer, intelligence and counter
terrorism expert, held several high-level positions in the CIA. His assignments included
protective agent for the Director of the CIA, counterintelligence investigator searching for
moles inside the CIA, overseas counter terrorism operations officer, internal security
investigator, assistant team leader for the antiterrorism tactical assault team, chief of
training for the CIA federal police force and polygraph examiner. Mr. Shipp was the senior
program manager for the Department of State, Diplomatic Security, Anti-Terrorism Assistance
global police training program. He is the recipient of two CIA Meritorious Unit Citations,
three Exceptional Performance Awards and a Medallion for high risk overseas operations.
Website/book: fortheloveoffreedom.net
(Originally published as [US Dollar Hegemony has to go] in AToL on
April 11. 2002)
There is an economics-textbook myth that foreign-exchange rates are
determined by supply and demand based on market fundamentals. Economics tends
to dismiss socio-political factors that shape market fundamentals that affect
supply and demand.
The current international finance architecture is based on the US dollar
as the dominant reserve currency, which now accounts for 68 percent of global
currency reserves, up from 51 percent a decade ago. Yet in 2000, the US share
of global exports (US$781.1 billon out of a world total of $6.2 trillion) was
only 12.3 percent and its share of global imports ($1.257 trillion out of a
world total of $6.65 trillion) was 18.9 percent. World merchandise exports
per capita amounted to $1,094 in 2000, while 30 percent of the world's
population lived on less than $1 a day, about one-third of per capita export
value.
Ever since 1971, when US president Richard Nixon took the dollar off the
gold standard (at $35 per ounce) that had been agreed to at the Bretton Woods
Conference at the end of World War II, the dollar has been a global monetary
instrument that the United States, and only the United States, can produce by
fiat. The dollar, now a fiat currency, is at a 16-year trade-weighted high
despite record US current-account deficits and the status of the US as the
leading debtor nation. The US national debt as of April 4 was $6.021 trillion
against a gross domestic product (GDP) of $9 trillion.
World trade is now a game in which the US produces dollars and the rest of
the world produces things that dollars can buy. The world's interlinked
economies no longer trade to capture a comparative advantage; they compete in
exports to capture needed dollars to service dollar-denominated foreign debts
and to accumulate dollar reserves to sustain the exchange value of their
domestic currencies. To prevent speculative and manipulative attacks on their
currencies, the world's central banks must acquire and hold dollar reserves
in corresponding amounts to their currencies in circulation. The higher the
market pressure to devalue a particular currency, the more dollar reserves
its central bank must hold. This creates a built-in support for a strong
dollar that in turn forces the world's central banks to acquire and hold more
dollar reserves, making it stronger. This phenomenon is known as dollar
hegemony, which is created by the geopolitically constructed peculiarity that
critical commodities, most notably oil, are denominated in dollars. Everyone
accepts dollars because dollars can buy oil. The recycling of petro-dollars
is the price the US has extracted from oil-producing countries for US
tolerance of the oil-exporting cartel since 1973.
By definition, dollar reserves must be invested in US assets, creating a
capital-accounts surplus for the US economy. Even after a year of sharp
correction, US stock valuation is still at a 25-year high and trading at a 56
percent premium compared with emerging markets.
The Quantity Theory of Money is clearly at work. US assets are not growing
at a pace on par with the growth of the quantity of dollars. US companies
still respresent 56 percent of global market capitalization despite recent
retrenchment in which entire sectors suffered some 80 percent a fall in
value. The cumulative return of the Dow Jones Industrial Average (DJIA) from
1990 through 2001 was 281 percent, while the Morgan Stanley Capital
International (MSCI) developed-country index posted a return of only 12.4
percent even without counting Japan. The MSCI emerging-market index posted a
mere 7.7 percent return. The US capital-account surplus in turn finances the
US trade deficit. Moreover, any asset, regardless of location, that is
denominated in dollars is a US asset in essence. When oil is denominated in
dollars through US state action and the dollar is a fiat currency, the US
essentially owns the world's oil for free. And the more the US prints
greenbacks, the higher the price of US assets will rise. Thus a strong-dollar
policy gives the US a double win.
Historically, the processes of globalization has always been the result of
state action, as opposed to the mere surrender of state sovereignty to market
forces. Currency monopoly of course is the most fundamental trade restraint
by one single government. Adam Smith published Wealth of Nations in
1776, the year of US independence. By the time the constitution was framed 11
years later, the US founding fathers were deeply influenced by Smith's ideas,
which constituted a reasoned abhorrence of trade monopoly and government
policy in restricting trade. What Smith abhorred most was a policy known as
mercantilism, which was practiced by all the major powers of the time. It is
necessary to bear in mind that Smith's notion of the limitation of government
action was exclusively related to mercantilist issues of trade restraint.
Smith never advocated government tolerance of trade restraint, whether by big
business monopolies or by other governments.
A central aim of mercantilism was to ensure that a nation's exports
remained higher in value than its imports, the surplus in that era being paid
only in specie money (gold-backed as opposed to fiat money). This trade
surplus in gold permitted the surplus country, such as England, to invest in
more factories to manufacture more for export, thus bringing home more gold.
The importing regions, such as the American colonies, not only found the gold
reserves backing their currency depleted, causing free-fall devaluation (not
unlike that faced today by many emerging-economy currencies), but also
wanting in surplus capital for building factories to produce for export. So
despite plentiful iron ore in America, only pig iron was exported to England
in return for English finished iron goods.
In 1795, when the Americans began finally to wake up to their
disadvantaged trade relationship and began to raise European (mostly French
and Dutch) capital to start a manufacturing industry, England decreed the
Iron Act, forbidding the manufacture of iron goods in America, which caused
great dissatisfaction among the prospering colonials. Smith favored an
opposite government policy toward promoting domestic economic production and
free foreign trade, a policy that came to be known as "laissez faire"
(because the English, having nothing to do with such heretical ideas, refuse
to give it an English name). Laissez faire, notwithstanding its literal
meaning of "leave alone", meant nothing of the sort. It meant an activist
government policy to counteract mercantilism. Neo-liberal free-market
economists are just bad historians, among their other defective
characteristics, when they propagandize "laissez faire" as no government
interference in trade affairs.
A strong-dollar policy is in the US national interest because it keeps US
inflation low through low-cost imports and it makes US assets expensive for
foreign investors. This arrangement, which Federal Reserve Board chairman
Alan Greenspan proudly calls US financial hegemony in congressional
testimony, has kept the US economy booming in the face of recurrent financial
crises in the rest of the world. It has distorted globalization into a "race
to the bottom" process of exploiting the lowest labor costs and the highest
environmental abuse worldwide to produce items and produce for export to US
markets in a quest for the almighty dollar, which has not been backed by gold
since 1971, nor by economic fundamentals for more than a decade. The adverse
effect of this type of globalization on the developing economies are obvious.
It robs them of the meager fruits of their exports and keeps their domestic
economies starved for capital, as all surplus dollars must be reinvested in
US treasuries to prevent the collapse of their own domestic currencies.
The adverse effect of this type of globalization on the US economy is also
becoming clear. In order to act as consumer of last resort for the whole
world, the US economy has been pushed into a debt bubble that thrives on
conspicuous consumption and fraudulent accounting. The unsustainable and
irrational rise of US equity prices, unsupported by revenue or profit, had
merely been a devaluation of the dollar. Ironically, the current fall in US
equity prices reflects a trend to an even stronger dollar, as it can buy more
deflated shares.
The world economy, through technological progress and non-regulated
markets, has entered a stage of overcapacity in which the management of
aggregate demand is the obvious solution. Yet we have a situation in which
the people producing the goods cannot afford to buy them and the people
receiving the profit from goods production cannot consume more of these
goods. The size of the US market, large as it is, is insufficient to absorb
the continuous growth of the world's new productive power. For the world
economy to grow, the whole population of the world needs to be allowed to
participate with its fair share of consumption. Yet economic and monetary
policy makers continue to view full employment and rising fair wages as the
direct cause of inflation, which is deemed a threat to sound money.
The Keynesian starting point is that full employment is the basis of good
economics. It is through full employment at fair wages that all other
economic inefficiencies can best be handled, through an accommodating
monetary policy. Say's Law (supply creates its own demand) turns this
principle upside down with its bias toward supply/production. Monetarists in
support of Say's Law thus develop a phobia against inflation, claiming
unemployment to be a necessary tool for fighting inflation and that in the
long run, sound money produces the highest possible employment level. They
call that level a "natural" rate of unemployment, the technical term being
NAIRU (non-accelerating inflation rate of unemployment).
It is hard to see how sound money can ever lead to full employment when
unemployment is necessary to maintain sound money. Within limits and within
reason, unemployment hurts people and inflation hurts money. And if money
exists to serve people, then the choice becomes obvious. Without global full
employment, the theory of comparative advantage in world trade is merely
Say's Law internationalized.
No single economy can profit for long at the expense of the rest of an
interdependent world. There is an urgent need to restructure the global
finance architecture to return to exchange rates based on purchasing-power
parity, and to reorient the world trading system toward true comparative
advantage based on global full employment with rising wages and living
standards. The key starting point is to focus on the hegemony of the
dollar.
To save the world from the path of impending disaster, we must:
#
promote an awareness among policy makers globally that excessive dependence
on exports merely to service dollar debt is self-destructive to any economy;
# promote a new global finance architecture away from a dollar hegemony
that forces the world to export not only goods but also dollar earnings from
trade to the US;
# promote the application of the State Theory of Money (which asserts that
the value of money is ultimately backed by a government's authority to levy
taxes) to provide needed domestic credit for sound economic development and
to free developing economies from the tyranny of dependence on foreign
capital;
# restructure international economic relations toward aggregate demand
management away from the current overemphasis on predatory supply expansion
through redundant competition; and restructure world trade toward true
comparative advantage in the context of global full employment and global
wage and environmental standards.
This is easier done than imagained. The starting point is for the major
exporting nations each to unilaterally require that all its exports be
payable only in its currency, so that the global finance architecture will
turn into a multi-currency regime overnight. There would be no need for
reserve currencies and exchange rates would reflect market fundamentals of
world trade.
As for aggregate demand management, Asia leads the world in both
overcapacity and underconsumption. It is high time for Asia to realize the
potential of its market power. If the people of Asia are to be compensated
fairly for their labor, the global economy will see its fastest growth
ever.
"... If Money=Debt, the battle over money can only be won by individuals wisely choosing whom they become indebted too. As the wise Michael Hudson points out, "Debts that can't be paid, won't be paid." ..."
"... Money is the creation of the elite to control the rest of the masses. It screws the rest of the masses by constraining what they can get their hands on while the elite can get their hands on anything they want. ..."
"... IMO the point of the article was to hint that objections (or refusal to engage with) MMT is largely political in nature. ..."
"... Skippy said it above: these are likely bad faith actors who disguise their classism and political desires with talk of "positive money" and the like. Debate clubs won't win this one. ..."
"... As I understand it, MMT is simply a more honest way of explaining the current reality, the problem being that the 1% would like to keep that a secret so that money is only created for the things that they can profit from, like war. ..."
"... MMT necessarily requires the exorbitant privilege of having the US dollar accounting for 60% of world trade & financial transactions with the US economy representing only 20% of world GDP. ..."
"... The Entrepreneurial State ..."
"... money and credit are used almost entirely for speculation, usury, and rent extraction ..."
"... In a normal economy, government spending is financed by taxes and borrowing, meaning that no new spending power has been created, as IS the case with new bank loans. ..."
"... You can fool part of the people all of the time, and all of the people part of the time. ..."
"... handing all credit creation to the central banks is not only technically impossible in a modern economy, it's a dangerous folly ..."
"... Wealth, Virtual Wealth and Debt, 2nd edition. ..."
"... The Order of Time ..."
"... "The debts are owed to government banks. A government can do what the U.S. can't do. The government can forgive debts, at least those that are owed to itself, without creating a political backlash. If a viable corporation has run up too much debt, the government can forgive it. This is better than letting the debt close down a factory or force it be sold to a predatory asset management firm as occurs in the United States. That is the advantage of having public credit and why credit should be public. That's how it was in Babylonia. Rulers were able to cancel debts all the time in the 3rd millennium and 2nd millennium BC, because most debts were owed to the palace or the temples. Rulers were cancelling debts owed to themselves. ..."
"... China can cancel business debt owed to itself. It can proclaim a clean slate. It can minimize debt service to whatever it chooses. But imagine if Chase Manhattan and Goldman Sachs are let in. It would be much harder for the government to raise real estate taxes leading to defaults on the banks. It could save the occupants by making new loans to those who default – based on lower land prices. ..."
"... Well, you can imagine the international furor that would erupt. Trump would threaten to atom bomb Peking and Shanghai to save his constituency. His constituency and that of the Democrats are the same: Wall Street and the One Percent. So China may lose its ability to write down debts if it lets in foreign banks." ..."
"... that this is a Chicago School / Friedmanesque monetary policy is made clear by Positive Money ..."
"... It seems there are greater similarities between China and the US than may be visible at first glance. China builds real estate for a shrinking population, invests for an over-indebted client (the US, which even insists on a drastic reduction of the bilateral trade deficit) and finances all this with money it does not have ..."
The same money that went into TARP would have bought a whole lot of nonperforming
mortgages. You wouldn't have needed a large bailout if the money actually made it's way to
main street.
Slightly off-topic, but if its true that this is a right wing proposal using naïve
left/Green supporters to give a progressive fig leaf, it wouldn't be the first time this has
happened. You can see the same phenomenon with Brexit, where many supposed left wingers have
often bought unthinkingly into many right/libertarian memes about 'freedom' from the EU. The
core reason they could do this is the effective abandonment by the left of arguments about
money and capital to the conservative and libertarian right from the 1980's onward.
One of the many reasons I love NC so much is that it has tried to fill the gap left by so
much of the mainstream left and much of the Greens in analysing economics issues in forensic
technical detail. Articles like this are absolutely invaluable in building up a proper
intellectual program in understanding the central importance of macroeconomics in building a
fairer society.
God, country, apple pie, balanced budget, freedom, democracy, pay-as-you-go, ingredients
in the hash of right/libertarian memes, all supposedly 'common sense' but actually
nonsense, spread thick, intended to distract us while our ruling class steals everything not
tied down.
I think the left saw its audience washed away by a tidal wave of this clever, well-funded
nonsense, so they stopped arguing about money and capital because they found it embarrassing
to be caught talking to themselves.
Of course back in the 1970s, much of the working-class had was doing well enough that they
thought the argument about money had been settled, and in their favor. Little did they know
that their 'betters' were planning on clawing-back every penny of wealth that they'd managed
to accumulate in the post-war years.
So here we are, the working class that was formerly convinced that anyone could live well
if they just worked hard, are finding that you can tug on your boot-straps with all your
might, and get no where.
I think you're right in that the wrong narrative is now dominant.
I don't think this was done intentionally – I think the people pulling the strings
don't know for sure what will happen, either.
The 'common sense' you mention is the best explanation most people have available. They
look at macroeconomics through the lens of their own household budget. Of course a balanced
budget responsible application of money makes sense Most people don't have a money printer in
their basement.
The battle is for the soul of humanity. A leadership that is working toward reducing
inequality and injustice in the world will adopt policies reflecting a more positive outlook
on the human condition. Those implementing austerity revile the masses of humanity, wether
stated or not. The masses are to be controlled, not enlightened or cared for.
The West has gained supremacy in the world by using the strategy of Divide and Conquer.
This thought process is so engrained in the psyche, that it heavily influences every form of
problem solving by using outright war and financial oppression as primary tools to achieve
these ends.
There would need to be a fundamental shift in thinking from Western leadership in order to
bring about a change that would focus on wellbeing over profit, which does not seem
forthcoming.
If Money=Debt, the battle over money can only be won by individuals wisely choosing
whom they become indebted too. As the wise Michael Hudson points out, "Debts that can't be
paid, won't be paid."
The main problem I see is the definition of what "Winning" would be. The definition
determines the policy.
"There would need to be a fundamental shift in thinking from Western leadership in order
to bring about a change that would focus on wellbeing over profit, which does not seem
forthcoming."
Money is the creation of the elite to control the rest of the masses. It screws the
rest of the masses by constraining what they can get their hands on while the elite can get
their hands on anything they want. The tipping point will be when there are sufficient
numbers who understand money isnt necessary to live and have nice things, it actually exists
to deprive them of such.
We've been fighting this same 'war' for a very long time.
Everybody now just has to make up their mind. Is money money or isn't money money.
Everybody who earns it and spends it every day in order to live knows that money is money,
anybody who votes it to be gathered in as taxes knows money is not money. That is what
makes everybody go crazy. -Gertrude Stein – All About Money
As far as I can tell, about 1% of us believe that money is not money, and the rest of us
believe that money is money.
Most of us believe that money is money because as Gertrude Stein said: Everybody who earns
it and spends it every day in order to live knows that money is money
So here's the problem: the 1% of the people, the ones who believe that money is not money,
are in charge of everything.
It's not natural that so few people should be in charge of so much, and that they should
be in charge of 'everything' is truly crazy. (Please excuse the slight digression)
The people who are in charge of everything believe that it's right, proper, indeed
'natural' that they be in charge of everything because they believe that no one could do as
good a job of being in charge of everything because they think they are smarter than
everybody else.
The reason that the 1% of people believe they are smarter than everybody else is rooted
largely in what they believe is their self-evident, superior understanding of money; that is
to say, the understanding that money is not money.
The trouble is, the difference between the 1%'s understanding of money, and the common
man's understanding of money is not evidence of the 1%'s superior intellect, so much as of
their lack of a moral compass and their ability to rationalize the depraved indifference they
show to their fellow man.
Maybe this thought is callous, but perhaps it would be useful to have a real-world
demonstration that this is a bad idea. How systemically important is the Swiss economy? US
abandoned its monetarist "quantity of reserves" experiment after a relatively short time.
Again, it sounds callous, but perhaps a year or two of distress in a small test
environment
(that is starting from a pretty good place and has a good social safety net
would be helpful to the world at large in terms of deprecating a bad idea. Perhaps MMT
will be the last approach standing?
Could it be that Wolf's "we need experiments" rhetoric is actually opposed to "positive
money", but he recognizes that the idea won't go away until it is badly spanked? Even if not,
maybe there is something to the idea that experimentation could be used to distinguish bad
ideas from less bad (the good ideas won't be tested, I reckon, until all the various flavors
of "bad" have been tried and rejected).
IMO the point of the article was to hint that objections (or refusal to engage with)
MMT is largely political in nature. See Marriner Eccles and his observation regarding
the political enemies of full employment.
Skippy said it above: these are likely bad faith actors who disguise their classism
and political desires with talk of "positive money" and the like. Debate clubs won't win this
one.
If the Swiss go through with it and it inevitably fails there will always be an excuse.
They didn't do positive money "hard enough" or whatever.
What I'd like to know is if the Swiss go through with it and it fails, is there anything
other than central bank independence that needs to be changed? Fundamentally it's still fiat,
operating within a democracy. Does it not come down to who decides how much and for what
purpose?
Maybe I'm missing something, but it strikes me as the elites getting their revenge in
first. There go my people and all that. Maybe I am missing it.
the good ideas won't be tested, I reckon, until all the various flavors of "bad" have
been tried and rejected.
So, you don't think current conditions are convincing enough?
As for me, I'm more than convinced, that left to themselves, our elites have an endless
bag of bad ideas, and every one of them results in their further enrichment at our
expense.
I'm convinced; have been persuaded that MMT is the right way to think about "money" since
shortly after I encountered it almost a decade ago.
As I understand it, this is a referendum. If the people don't like the outcome, they
presumably would have power to reverse it. Throw the bastards out and replace with new
bastards who will try something different.
As I understand it, MMT is simply a more honest way of explaining the current reality,
the problem being that the 1% would like to keep that a secret so that money is only created
for the things that they can profit from, like war.
So the issue is that since enough money can be created for the needs of the rest of us,
why is that not happening?
It would appear to me that almost any efforts by the 1% to create a 'new' plan is in
reality, an effort to make sure that the 99% never reap any advantage even if we were to
unanimously come to understand the MMT is really the most realistic perspective.
It's almost as if the 1% has decided to change the rules because the rest of us are
starting to understand that there is no technical reason we can't finance a more equitable
economy.
It's good to explain the current reality more honestly.
Even more honestly would be to explain that reality, which is a man-made system, doesn't
have to be that way, unlike scientific explanations, for example, one for how gravity works.
That particular physics explanation comes with the understanding that we can't change how
gravity works.
The word 'theory' in the sense most people with more than 10 years of education associate
with it is that
1. You will fail to advance to the next grade, or the next class if you don't understand
it.
2. If you don't understand it, you are under pressure to show you agree with the theory, lest
you fail the exam.
3. The reality described by the theory is unalterable, which is often the case with natural
science theories, but not really the case with social/economic/political theories, unless
they deal with human nature, which is hard to change.
If I say there is a theory to explain that on Mars, you drive on the right side of the
road on odd-numbered days, and on the left side on even-numbered days, you would say, I
appreciate the clear explanation of your wonderful theory, but I don't like it, I don't like
how that system is designed. And I want to change it!!!!!!!!!!!!
Yesterday, I watched one of many Mark Blyth videos on YouTube where he was talking about
why people hold on to stupid economic ideas. He offered a variety of interesting hypotheses,
most of which were not necessarily mutually exclusive.
Even a theory that fails basic tests of correspondence with reality -- neoclassical
economics being the prime example -- may prove to be a reliable means of coordinating
behavior on a huge scale. That we indoctrinate people in colleges and business schools in
neoclassical economics has been the foundation for neoliberal politics; even if the theory is
largely rubbish by any scientific standard, the rhetorical engine is easy to operate once you
have a few basic concepts down. And, immunity to evidence or critical reason may actually be
politically advantageous.
Econ 101 is taught as a dogma. The student is under pressure to learn the answers for the
exam, as you say. All the rhetorical tropes -- not just deficit hysteria, but regulatory
burdens, tax incentives, "free markets" (you see many actual markets? no, I didn't think so)
and on and on -- are as easy to recite mindlessly as it is to ride a bicycle.
We have an ideology that prevents thinking or even seeing, collectively.
Well, your wish has been answered – about 160 years ago. Lincoln's issuance of
Greenback's allowed the Union Army to exist. No borrowing, no MMT debt incurred.
MMT experts point out regularly that the Federal government spends out of nothing. Issuing
bonds is a political holdover from the Gold Standard era, but separately, those bonds do have
some use because a lot of investors like holding a risk free asset.
The government spends by the Fed debiting the Treasury's account. That's it.
We don't go around worrying about issuing bonds to pay for the next bombing run in the
Middle East. The US has all sort of official off budget activity as well as unofficial (why
do you think the DoD is not able to account for $21 trillion of spending over time? No one
points out this $21 trillion mystery is proof the USG actually runs on MMT principles).
MMT necessarily requires the exorbitant privilege of having the US dollar accounting for
60% of world trade & financial transactions with the US economy representing only 20% of
world GDP.
Such impunity is changing as we speak so for that reason only (there are others) MMT
should soon find itself non-viable.
That is not correct. Any government that issues its own currency is a sovereign currency
issuer and operates on MMT principles. Canada, Japan, England, Australia, New Zealand .the
constraint on their ability to run deficits is inflation. They will never go bankrupt in
their own currencies. They can create too much inflation.
I have the same reaction to Positive Money ideas as I do to someone who talks about
"parallel currencies". They don't understand money, banking and central banking.
While I agree whole heartedly with Clive that establishing the mini-bot currency is
subject to the law of un-intended consequences and would no doubtedly have a bumpy start and
might not even survive; but it's just another currency. Yes it would likely be subject to a
discount versus the Euro, but so what. From a banking perspective there is nothing magical
about state money or central bank money. These are the dominate means of clearing and
settling payments today, but that's because it's currently cheaper, easier and less risky.
But banking predates central banks by at least one or two hundred years (if not more).
Thinking that if you put an iron fist on the usage of state/central bank money is going to
stop banking only shows you don't understand banking. Most economies already have dual
currencies – state money and bank money – but nobody thinks of them that way
because they trade one for one. But locking the banking system out of using state money to
clear and settle payments created by lending only forces the banking system to find a new
means of acquiring liabilities (I'd suspect they get called something other than "deposits"
of course) and clearing and settling payments. It wouldn't happen overnight but it most
certainly would happen – there's too much "money" to be made.
"Most economies already have dual currencies – state money and bank money" Give me
the ratio please. Other than feeding the parking meter or doing your laundry what else do you
use state money for?
It's not exactly the gold standard, but it would have the same impact, I think. You have
to give them credit, though – they keep finding new ways to dress up this very old
idea.
Hard to get to a new answer if you don't even start with the right question.
Wolf asserts his obvious and unquestionable truth: "Money is debt".
Really?
J. P. Morgan didn't think so. When he was asked:
"But the basis of banking is credit, is it not?" , Morgan replied: "Not always. That is an evidence of banking, but it is not the money itself. Money is
gold, and nothing else" .
Ah yes, the shiny rare metal that served mankind as money for millennia.
I have a gold coin in my hand. I can exchange it for goods and services. But I can't for the
life of me figure out whose debt it is.
And no less than The Maestro (Alan Greenspan) opined the following last month:
"The gold standard was operating at its peak in the late 19th and early 20th centuries,
a period of extraordinary global prosperity, characterised by firming productivity growth and
very little inflation.
But today, there is a widespread view that the 19th century gold standard didn't work.
I think that's like wearing the wrong size shoes and saying the shoes are uncomfortable! It
wasn't the gold standard that failed; it was politics. World War I disabled the fixed
exchange rate parities and no country wanted to be exposed to the humiliation of having a
lesser exchange rate against the US dollar than it enjoyed in 1913.
Britain, for example, chose to return to the gold standard in 1925 at the same exchange
rate it had in 1913 relative to the US dollar (US$4.86 per pound sterling). That was a
monumental error by Winston Churchill, then Chancellor of the Exchequer. It induced a severe
deflation for Britain in the late 1920s, and the Bank of England had to default in 1931. It
wasn't the gold standard that wasn't functioning; it was these pre-war parities that didn't
work.
Today, going back on to the gold standard would be perceived as an act of desperation.
But if the gold standard were in place today we would not have reached the situation in which
we now find ourselves. We would never have reached this position of extreme indebtedness were
we on the gold standard, because the gold standard is a way of ensuring that fiscal policy
never gets out of line."
So let's start with a simpler definition of money: "Money stores labor so it can be
transported across space and time" .
I grew some wheat, and want to store my wheat-labor so I can use it later, or spend it
somewhere that is nowhere near my wheat pile.
But this points out why money that took no labor to produce cannot reliably store labor.
Our system materializes money from thin air. Which is precisely the point of gold: it takes
alot of labor to produce, so it has reliably stored labor for centuries. In A.D. 250 if I
wanted a good-quality men's costume (toga, sash, sandals) the cost was one ounce of gold.
Today one ounce of gold is +/-$1300, probably enough for a pretty good suit and pair of
shoes. That fact is incredible: every other currency, money, government, and country have
come and gone in the interim but gold reliably stored labor across the ages.
Cue the haters: "But gold money allows deadly deflation!!!". Yes, that scourge, when
people benefit from rising productivity (lower costs of goods and services) in what used to
be termed "Progress". Instead we're supposed to love being on a debt treadmill where
everything costs more every year, on purpose .
Just to be clear, I'm not arguing that credit should somehow be abolished. Credit is
critical, and hence so is banking. But separating money and credit would mean that every
banking crisis (extending too much credit) is not automatically also a monetary crisis,
affecting everyone, including people who had nothing to do with extending or accepting too
much debt.
Yes, you are correct. No one in the monetary reform movement wants to abolish credit
– an agreement between two entities – but to have that "credit" backed by the US
government as real money – what a racket!
Of course it should be noted that if you dig up a gold coin from two thousand years ago or
even older, it still has value just for its metal content alone. It still holds value. This
is never true of fiat currencies. In fact, it had never occurred to me before, but when you
think about it – the history of money over the past century has been to get actual
gold, gold coins, gold certificates, silver coins, etc. out of the hands of the average
people and to give them pieces of paper and now plastic as substitutes. Even the coins in
circulation today are only cheap remnants of coins of earlier eras that held value in itself.
I would call that a remarkable achievement.
I think you should avail yourself wrt the history of gold and how humans viewed it over
time, then again you could look at say South America from an anthro observation and the
social changes that occurred between Jade and Gold eras.
As far as value goes that is determined at the moment of price taking which can get blurry
over time and space.
Gold was used as religious iconography for a reason imo.
Just from the stand point that gold was in one anthropological observation – a flec
of gold to equal weight of wheat means the gold got its "value" from the wheat and had
nothing to do with some concept of gold having intrinsic value.
Not particularly in love with gold nor am I a gold bug. My own particular prejudice is
that any money system needs an anchor that will set some sort of boundaries to its growth.
Something that will not blow through the physical laws of natural growth and will acknowledge
that resources can and will be exhausted by limitless credit and growth. Personally I don't
care if it is gold or Electrum or Latinum or even Tribbles so long as it is something.
Yet MMT clearly states that growth is restricted to resources full stop. So I don't
understand your issues with anchor points, its right there in black and white.
Look I think there is a huge difference between informal credit [Greaber] and formal
credit [institutional] and the risk factors that they present. This is also complicated by
not all economies are the same e.g. steady state. In facilitating up lift [social cohesion
with benefits of currant knowlage] vs putting some arbitrary limit on credit because it suits
the perspective of those already with claims on wealth.
In addition I would proffer that MMT is not supply side dependent, just the opposite.
Economics would be much more regional in reference to resources and how that relates to its
populations needs, especially considering the democratic governance of those finite resources
without making money the linchpin to how distribution is afforded.
OpenThePodBayDoorsHAL
How dare you submit such irreverent goldbuggery ?
Your line of thought is not politically correct Sir.
Something for nothing is easier to sell and to live by, don´t you know ? as long as it
lasts.
Problem is ( as HAL would say ? ) the 50 years are almost through, so it just can´t
last much longer no matter how much we pussyfoot around reality.
It has nothing to do with being 'politically incorrect'. It has to do with goldbuggery
being completely ignorant of actual history and facts. It ascribes to gold attributes which
it never truly had even in the West, much less globally.
Some examples from objective reality:
When the Conquistadors arrived in the 'New World', they discovered an entire continent
filled with easily accessible gold and silver, and yet neither was treated by the natives as
money. They were shiny trinkets. Money was cocoa beans and pieces of linen.
When the Vikings reached the Eastern Mediterranean, the Byzantines had a hard time getting
them to accept gold as payment. Before that, the only 'precious' metal they had any interest
in was silver.
Going eastward, in feudal Japan currency was based on rice, not precious metals. Gold and
silver were used as representative tokens of large values of rice. The source of value wasn't
felt to be the metal, it was what the metal represented.
If civilization were to end today, the most well off survivors aren't going to be the ones
who stockpiled gold. It's going to be the ones who stockpiled food and water (and/or the
weapons to protect/seize such stockpiles). Gold has exactly zero inherent value. It's a
luxury item at best, in the same way fine art is. No one in the post-apocalyptic wasteland is
going to be impressed by your lumps of heavy, soft metal.
There's plenty of information available from historians, archaeologists, and
anthropologists (but emphatically not from mainstream economists) on the history of money. If
you want to 'free your mind', you'd best start with one of these fields. Not some libertarian
cesspit, where the 'intellectuals' are even more delusional than mainstream
neoclassicals.
I'll probably get slammed here for this but to tell you the truth, I see no justification
for the shape and character of the present money system in use around the world. In fact, I
absolutely refuse to believe that There Is No Alternative. The present system is one that has
evolved over the centuries and for the greater part was designed by those with wealth to
either solidify or expand their wealth.
Yesterday, in a comment, I made the point that for an economic and financial system to work
it has to be sustainable. Call that General Order Number One. But a survey of the present
system shows a system that by its very nature is seeking to transfer the bulk majority of
wealth to about 1% of the population while pushing about 90% of the population into a
neo-feudal poverty. This is nothing short of self-destructive and is certainly not
sustainable.
We tend to think of money as something permanent but the different currencies in existence
today make up only a fraction of the currencies that have ever existed. All the rest have
gone extinct. I am given to understand that when the US Federal Reserve meets, it is in a
room whose walls are adorned with examples of these extinct currencies. In fact, I even own a
few German Reichsmarks from the hyperinflation era of the early 1920s for an occaisional bit
of perspective.
OK, maybe the Swiss referendum is being used, misused and abused but it is a sign of an
arising discontent. It certainly surprises me that it was the Swiss as when I visited that
country, they were the most conservative people that I have ever met as far as money was
concerned. In any case, perhaps it is time that we all sat down and designed a money system
from the ground up. Throw away the rule book and just take a pragmatic approach. Forget
theories and justifications, just look for stuff that works.
There is no need to "experiment" with other systems of money use: we just need to regulate
the system we have but, unfortunately at present, we are in the midst of de-regulating
everything–finance, environmental protections, healthcare, education, etc., and getting
rid of other groups such as unions. The undermining of many (public) institutions is well on
its way and I do not see it ending well. I think the rich have won this round just as they
planned in the 1970's.
I imagine you would want to start from value (a mental state of persons) and labor, things
persons do to achieve stuff which they value. It would be convenient to have tokens which
represented social agreement about value, valued stuff, and labor. The social agreement could
be brought about by cooperative voluntary institutions ('credit unions') which would oversee
and guarantee the issuance of tokens (debts) by members (persons). We already do this on a
modest scale by writing checks, so it's not unheard-of.
If you want a system which doesn't just feed the elites, you have to create one which
doesn't rely on institutions dominated by or entirely controlled by the elites, such as the
government, the major corporations, large banks, and so on. You want something egalitarian,
democratic, and cooperative. It's not impossible.
Indeed it is possible and has been done in the recent past.
A key insight behind credit unions, mutual insurance and savings and loans back in the day
was that these institutions were loaning people their own money savings and should be run
without assigning hotshot managers the dubious incentive of a profit-motive or talking up
"innovation".
One of the things I object to in Richard Murphy's rhetoric and that of more careless
MMT'ers is that they implicitly concede the premise that Money is usefully thought of as a
quantitative thing, a pile of tokena circulating at some velocity. Financial intermediaries
(and yes, Richard, they are intermediaries) do create "money" in the form of credit by
matching ledger entries. For a savings and loan, which gives a mortgage to a depositor or
just a checking account to a saver, this can be a key idea supporting mutual assistance in
cooperative finance.
But, if you insist that the bank is "creating" a quantity of money that is then set loose
to drive up house prices or some similar narrative scenario, I do not see that your
storytelling is doing anyone any good.
Credit from institutions of cooperative finance -- shorn as they must be of the incentive
toward usury and rent extraction -- is actually a very useful application of money, enabling
people to take reasonable risks over their lifetimes. For example, to enable a young couple
to form a household and buy a house and gradually build up equity in home ownership against
later days. This is sensible and prosaic, a standard use of money to insure by letting a bank
or similar institution help individuals or small businesses to transform the maturities of
their assets and prospects, while certifying their credit. If your understanding of money
does not encompass such prosaic ideas as leverage and portfolios or their application to
improving the general welfare, then the "left" is up a creek without a paddle.
"Financial intermediaries (and yes, Richard, they are intermediaries) do create "money" in
the form of credit by matching ledger entries. "
That is NOT what is meant by the term,"intermediaries" here. The common belief is that banks
merely take in a depositor's money and, as an intermediary, lend that money out. An
intermediary, by definition, does not create anything. That is the accepted meaning of the
term when discussing banking. You are free to use your own definition but it will lead to
confusion.
You are incorrect as to how banking works, and you have also jalbroken moderation, which
is grounds for banning, as is clearly stated in our Site Policies, which you did not bother
to read.
Per your comments on banking, you are also engaging in agnotology, another violation of
site Policies.
Banks do not intermediate. They do not lend out of existing savings. Their loans create
new deposits. Not only has MMT demonstrated, and this has been confirmed empirically, but the
Bank of England has endorsed this explanation as correct.
You are presenting the loanable funds fallacy, a pet idea of monetarists. It was first
debunked by Keynes and later by Kaldor.
Your idea of "accepted meaning" is further confirmation you are way out of your depth here
and are a textbook case of Dunning Kruger syndrome.
The matter of who or what controls money is actually secondary to the matter of what money
is used for. Positive Money correctly identifies the fact that under our present arrangements
in the USA, UK, and most of the West, money and credit are used almost entirely for
speculation, usury, and rent extraction (though they do not, so far as I know, use the
terms). If "the people" somehow were able to gain control of money and credit, and money and
credit continued to be used almost entirely for speculation, usury, and rent extraction,
society and the people would see no net advance economically.
That's the simple overview. Allow me to lay out a couple scenarios to show why just
solving the problem of who controls money and credit does not really address our most urgent
problems.
For the first scenario, assume that it is right wing populists who have triumphed in the
fight to seize control of money and credit. Recall that in the first and second iterations of
the bank bailout proposals in USA, Congress was deluged by overwhelming public opposition to
the bailout. But in the second iteration, the Democrats mostly folded, while on the
Republican side, the closer you got to the Tea Party extreme, the stauncher the opposition to
the bailout you found. So, under right-wing populist control, we would probably see
prosecutions and imprisonment of banksters, which would likely have the intended effect of
lessening rent extraction. But we would probably also see that right-wing populists are not
much concerned about speculation and usury, so those would continue relatively unscathed.
More importantly, we could expect right-wing populist control to result in severe cutbacks
to both government and private funding of scientific research, most especially on climate
change. We would be hurried forward on our course toward climate disaster, not turned away
from it.
For the second scenario, let us assume it is a left-wing populist surge that achieves
control over money and credit. In this scenario, speculation and usury would be suppressed as
well as rent extraction. On science, there would no doubt be a surge in funding for climate
research. But I would greatly fear what left-wing populists might do to funding of space
exploration and hard sciences such as the large Hadron collider at CERN. And what would
happen to funding for military research programs like DARPA?
Can you imagine the implications of cutting those kinds of science programs? Try to think
of doing without all the spinoffs from the NASA Apollo moon landing program and the original
ARPAnet, which includes much of the capability of the miniaturized electronics in the
computer, servers, modems, and routers you are now using.
The point is, that without restoring an understanding of republican (NOT capital R
"R"epublican Party) statecraft, its focus on promoting the general welfare, and the
understanding that promoting the general welfare ALWAYS involves identifying and promoting
the leading edges of science and technology, any success in seizing control of money and
credit away from bankers (whether private or central) does not necessarily result in victory.
For an extended discussion of science and republicanism, see my The
Higgs boson and the purpose of a republic .
There will always be right-wingers, left-wingers, progressives, imperialists, etc.
One or more of them will seize control.
It would seem, then, the first thing to do, is to work on human nature, and not
discovering new devices for them (or us, ourselves), because we can not guarantee no harm to
Nature will come from colliding high energy particles.
I don't really see the left as being anti-science, it seems to me that it's the right that
wants to deny scientific findings such as climate change, etc. There are exceptions of
course, such as new-age/anti-vaxers, chem-trail theorists, etc but they are a small minority,
and I find it hard to envision a scenario where a leftist government would cut science
funding. As it is now, many if not most scientific and technical advances have originated
from what was originally military funding, including the internet we are using at this
moment.
This is a model that needs to change IMHO, there is no reason that cutting-edge science
has to be tied to the military, science could just as easily be funded for its own sake,
without the pentagon getting the money first and then having the tech trickle down to the
rest of us.
I am trying to come up with some examples where technological advances were not induced or
misused by warriors and/or libido, from the dawn of humanity till now.
Stone tools – misused for war.
Bronze/iron tools – the same.
The wheel – war chariots.
Writing – to lord over the illiterate
The steam engine – how the west was won with buffaloes going extinct.
Gun powder – war, and above.
The internet – surveillance and libido.
The smart phone – above.
Aspirin – that's all good .maybe the example I am looking for except I'm allergic to
it.
money and credit are used almost entirely for speculation, usury, and rent
extraction
Certainly on the leading edge, that is what money and credit are used for, but
"entirely"??? In the main, money remains the great lever of coordination in an economy of
vastly distributed decision-making.
The forces of predation and fraud are seriously out-of-control and they use money for
anti-social ends, protected by neoliberal ideology and the cluelessness of what passes for
the political left. Like any normal bank robber, the banksters want the system of money to
continue to work and it does continue to work, in the main, even as they play Jenga with the
towering structures of finance.
Well, I did qualify it with "almost" : ). Still, in the late 1990s I found that there was
around $60 (sixty dollars) of trading in financial markets (including futures and forex) for
every one dollar of GDP. That compares to 1.5 to 1 in 1960. The ratio probably dropped in the
aftermath of the 2007-2008 crashes, but I's be surprised if it has not surpassed 60 to 1 by
now. Have mercy on me: I haven't looked at a BIS report for a few years now.
So your solution is to keep it in the hands of the elite?! Please note that the "central
bank" under the Vollgeld initiative is completely redefined, not a central bank at all but a
government institution controlled by a democratic process.
Many banks around the world started out as state-owned and have been privatised.
I admit it is simplistic, but having a state-run not-for-profit bank being this "government
institution controlled by a democratic process" has a lot of merit to me.
It would have lending guidelines to aid investment in productive endeavours, limit the risk,
and have no part in the insane fringe financial transactions that brought about the GFC, and
who know how many other things that have gone under the radar.
This brings all currency creation into a single place, so it needs transparency and a
(proper) democratic governance.
There would probably be fewer jobs I admit, but many of these would be the top levels
enjoying fat bonuses based on winning zero-sum games.
And as a final comment – should GDP include the transactions within the financial
sector at all? Given the zEro-sum games involved, and the creation of losers as part of that,
does it actually "produce" anything at aLL?
I hate to be a nay-sayer, but the reason there were once many state banks in the US and
there is now only one is that they became cesspools of corruption. And having arm-wrestled
with CalPERS for over four years, which is more transparent than a lot of places, good luck
with getting transparency and good governance.
Mind you, that does not mean they might not be worth trying, but the assumption that they
can just be set up and will work just fine "because democracy" needs to be taken with a
fistful of salt. There needs to be a ton of careful thought re governance and lots of checks
(an inspector general with teeth at a minimum, we can see from CalPERS that boards are very
easily captured).
Bank of North
Dakota has a fascinating history, being founded during the Progressive Era, when ND had a
governor who was a member of the Nonpartisan League, a populist political party, and intended
to save North Dakota's farmers and laborers from the predations of the big banks in
Minneapolis and Chicago.
It remains the only state-owned bank in the country.
The populist
Nonpartisan League remains the most successful third party in history, and had remarkable
impact on politics in North Dakota and Minnesota. It merged with the Democratic Party in the
50s.
Ahem, I acknowledged that. What you miss is that pretty much every other state had a state
bank and they were shuttered because they became embarrassingly corrupt. The fact that past
"state bank" experiments almost universally failed makes me leery of the naive view that
they'll be hunky dory. They could be but the sort of cavalier attitude that they'll be
inherently virtuous is the road to abuse and misconduct.
" Money is debt. It is only created by government spending and bank lending. " --
Richard Murphy
We've jumped through the looking glass. The former money, gold, is NOT debt. Debt-based
money is ersatz, a ghastly fraud on humanity.
In a normal economy, government spending is financed by taxes and borrowing, meaning that
no new spending power has been created, as IS the case with new bank loans.
Daniel Nevins' book Economics for Independent Thinkers discusses how modern
economists got misled into believing the money supply governs everything, whereas earlier
19th century economists understood that bank lending is what drives expansions.
Poor Murphy, starting out with a wonky premise, only succeeds in careering into a briar
patch and wrecking his bike. He should post his pratfall on YouTube.
Fiat money can also be created without debt. That's the whole point of MMT, but it makes
Haygood's head explode so he never acknowledges it (without muttering about hyperinflation,
which never actually happens outside of disasters on the scale of a major war).
When the federal government spends money into existence -- which can be on the basis of a
democratic agenda, in countries that have actual democracies -- there's no need for a
corresponding issuance of government debt. Hence, spending power is indeed created. If the
government does create debt, the bond is an asset on the ledger of whoever buys it, and the
government spends the interest into existence. Which creates additional spending power for
the private sector. The government can choose to, or not, collect a portion of this as taxes,
which extinguishes the money. If the government collected as taxes everything it ever spent
there would be no money in circulation.
> In a normal economy, government spending is financed by taxes and borrowing,
meaning that no new spending power has been created, as IS the case with new bank
loans.
Er, new bank loans also represent borrowing that has to be paid back. The spending power
that gets created is extinguished by paying back the bank loan.
the federal government spends money into existence
a
That's a choice made by the designers of the current system.
But not the only choice.
The people, for example, can be empowered (or perhaps inherit that power, on the basis of
the Constitution amendment clause* that any power not given explicitly to the federal
government is reserved for the people), to spend money into existence.
*The Tenth Amendment declares, "The powers not delegated to the United States by the
Constitution, nor prohibited by it to the states, are reserved to the states respectively, or
to the people."
So do you gold bugs want to dispense with double entry bookkeeping or keep it and adapt it
to gold (would that entail both counterfeit money and counterfeit debt?) – gold as both
credit and debt, or just what exactly? With the gold side weighing down the ledger it's gonna
get wobbly. Maybe have to start a war to fix it? The fog of positive money. Really, JH,
you've been the best voice against war. How do you reconcile all the social imbalance that
would follow with "positive" money?
Fiat money is war finance, made permanent. Even during the gold standard, governments
would suspend gold convertibility during wars. Lincoln's greenbacks and the UK's suspension
during WW I are noteworthy examples.
So the gold standard won't stop governments declaring national security exceptions --
they've always done so. But permanent war finance is what sustains the value-subtraction US
military empire, a gross social imbalance that already plagues us by starving the US
economy of investment.
Double entry bookkeeping doesn't require that every asset have an offsetting liability. A
balance sheet with no liabilities is all equity on the right-hand side. It's what a bank
would look like if it sold off its loan portfolio and paid off its depositors -- cash on the
left side, equity on the right. If the bank then bought some gold, it would be exchanging one
asset (cash) for another (gold), with no effect on the liability/equity side.
Just look up the mintage figures, here's $20 gold coins that contain just under 1 troy oz
of pure gold in content, from 1861 to 1865. You can follow links to other denominations.
There were over 8 million ounces alone in $20 gold coins struck during the Civil War, by
the Union.
We were never on a pure gold standard, nowhere close actually.
The most common money in the land until the Federal Reserve came along, FRN's not being
backed by gold?
Why, that would've been National Banknotes, which was the currency of the land from 1863
to 1935. There were over 10,000 different banks in the country that all issued their own
currency with the same design, but with different names of banking institutions, etc.
Very hard to argue with you, but I'm tripping over this: "If the bank then bought some
gold, it would be exchanging one asset (cash) for another (gold) with no effect o the
liability equity side." Because in my mind cash isn't an asset – it's just money
– a medium of exchange and a unit of account. Where we get all messed up is when the
unit of account starts to slip (due to mismanagement) and people start to demand that money
become a store of value. When the value is society itself. And blablablah.
Sure, the value is society itself, I agree with this. But OTOH, it is for example much
better to be a woman, black person, fill in the blank, even "working class" person with a lot
of money than not in a sexist, racist, etc society.
I can't necessarily compel the forces of sexism, racism, old farts who don't agree with
me, etc through the "political process," thereby bringing my will to bear on society. But I
can move things with my dollars, This is how money gets its magic power. If people played
nice with each other, we wouldn't need money.
What about paper bugs Susan ?
Has paper buggery helped any ever ?
Why do fiat currencies always self-implode (in average) every 50 years ?
" You can fool part of the people all of the time, and all of the people part of the
time. .."
8 white men control > 50% of the world's wealth. Let's just keep going in that
direction, to where it's down to one white guy, and with debt-based money everyone else owes
him all the "money" in the world. Then we can just strangle him in the bathtub and usher in
an era of peace and prosperity.
Richard Murphy says that " handing all credit creation to the central banks is not
only technically impossible in a modern economy, it's a dangerous folly "
What is QE then, Sir ?
Our "modern" economies don´t have business cycles any more, just distorting credit
cycles.
There are no "markets" as such today, nor prices only interventions.
Even interest rates (the price of supposed "money" remember ?) are not priced by markets any
more .
Help me. Gold is not money. And it does not have and never had immutable value. Even in
the days of the gold standard, countries regularly devalued their currencies in gold terms.
It was the money that was used for commerce, not the gold. When the US government devalued
the $ in gold terms by 5%, bread at the store didn't cost more the next day, which is what
your "gold is money" amounts to. It's not correct and you need to drop it.
"The former money, gold, is NOT debt. Debt-based money is ersatz, a ghastly fraud on
humanity."
You've been on NC for years. You have to know by now that this literally, objectively,
isn't true. It just simply isn't. History and anthropology do not at all support your version
of events. People like Hudson and Graeber have extensively documented where money came from.
Debt and credit came first, then money as a token to measure them. We have warehouses full of
the freaking Sumerian transactions tablets that show it! Money is debt, always has been.
Actually, I say you have to know this by now, but given how conspicuously absent you seem
to be in the comments of Michael Hudson articles about the history of debt hosted here, maybe
you just aren't reading them. Or you are and don't like what they say and how it clashes with
your pre-established worldview, so you just ignore them. Though even if the latter, it's
still telling how you don't even attempt to refute them. Perhaps because you can't.
It's not about money; its about creating and distributing wealth. That a trivial thing
like a double-entry bookkeeping operation should stand in the way of creating the wealth the
world and its people need to survive is, of course, insane. But it is also insane to expect
different results from turning over control of the process of money creation to a wholly
owned subsidiary of governments like those of the United States and Great Britain, bent as
they are on global hegemony ("full spectrum dominance") – at ANY cost.
Whether or not China and other developing nations realize it, genuine wealth creation
– not money as debt creation ('finance capitalism') – is THE source of national
power. It is more than a little amusing to watch the neoconservatives fret about the rise of
China after having joined with their neoliberal brothers in off-shoring US and Western wealth
creation potential (in what they must have thought was an oh so clever attack on Western
living standards by forcing 'their' people to compete with the world's most desperate workers
in a global race to the bottom so their 1% patrons would have an excuse to create more money
as debt).
So long as the West remains focused on 'the price of everything and the value of nothing'
(like the human potential of their own people, for example), the developing world is soon
likely to have a monopoly that will put OPEC and its Middle Eastern dictators to shame. In
summary this is about FAR more than just about how a few 'post-industrial' democracies create
their money. The definitive work on this topic remains Soddy's Wealth, Virtual Wealth and
Debt, 2nd edition.
Just as a few days ago Carlos Rovelli, author of " The Order of Time ", has
useful insights of the political significance of LSD, he has advice for this too in the same
book:
The entire evolution of science would suggest that the best grammar for thinking about
the world is that of change, not of permanence. Not of being, but of becoming.
We can think of the world as made up of things. Of substances. Of entities. Of something
that is. Or we can think of it as made up of events. Of happenings. Of processes. Of
something that occurs. Something that does not last, and that undergoes continual
transformation, that is not permanent in time. The destruction of the notion of time in
fundamental physics is the crumbling of the first of these two perspectives, not of the
second. It is the realization of the ubiquity of impermanence, not of stasis in a
motionless time.
In other (his) words:
"The world is made up of networks of kisses, not of stones."
As long as I am feting physicists, this just came over the transom from Sabine
Hossenfelder of backreaction.blogspot.com fame. She's written a book, " Lost in Math
" and was informed that a video trailer is customary in this situation. As the first comment
there says:
"Hey, that is a GREAT statement! (And it applies to SO MUCH in life, not just
physics!)
We've all been focusing on the demand side of the Fed Reserve's liquidity pump: be it for
sound business needs. Or not (pirates).
But what happens when demand for that pump disappears because everyone is over-extended?
Because this is where Bernanke and Japan and the ECB have done "whatever it takes" to keep
that pump from going in reverse. Because in an empire created on naked shorts (currency
creation today is essentially a naked shorting process), the last thing you want is that pump
to go in reverse. That's not just creative destruction. That's house-on-fire destruction.
So Bernanke et. al. have figured out how to keep that pump from going in reverse. Simply
prop up asset prices, e.g. by reducing the asset float in treasuries, MBSs, etc. And it
worked. Yay! Right? If you're an asset holder, you're aces. If you're not an asset holder,
well you're not doing so well. In particular, if you're in that part of the economy which
depends on the velocity of money. Because velocity is at a stand still. As another blogger I
used to follow would say, price sans volume is not the right price. So from my perspective,
Bernanke (and Japan) had to destroy their economies by replacing them with zombie economies
to rescue certain players. Not just players, but playahs – the pirates that pushed us
to this end-game. So the pirates are rescued. And the average joe inherits the after effects.
But hey, those with 401Ks got rescued too, so it's not all bad. And since the 401Kers are
competitive, they generally found safe harbor in the job market too. Yay for them.
If we were not on a debt-based monetary pump, we would not end up with a zombie economy.
One which the Fed Reserve can't figure out how to solve except for creating even more demand
at the debt pump, even more over extension to mask the issue only to fall back within the
same trap again. From what I can tell, we are truly in a doom loop and at present I don't see
any creativity in getting us out of this doom loop.
So the vollgeld initiative would ostensibly be a way to extricate an economy from that
doom loop. I suspect the Swiss don't really need it as much as other nations. But why get in
the way of that type of creativity?
And I would just add that supplanting the federal reserve note with a Lincoln greenback
type of approach would work just as well. Even better since it gives the monetary powers to
the fiscal side of the Fed Gov.
I posted a version of this last night in the previous thread. But suspect nobody is going
to go to that thread anymore. So apologies for a repeat of sort. Not trying to spam.
The idea of a real estate pumped perpetual notion machine, combined with essentially an
interest free savings plan for the proles, persuaded them to come through and help rise all
boats, and who could have figured on vacation rentals helping out housing bubble deux, the
sequel.
Looking @ the real estate listings here in a vacation rental hotspot is indicative, in
that there are only a few $250k-$300k homes for sale now, whereas there used to be a dozen,
always.
Now, on the other hand, we're swimming in $500k to $1m homes that don't make the rental
cut.
You probably read the Bernank's naive confession yesterday that fiscal stimulus "is going
to hit the economy in a big way this year and next year, and then in 2020 Wile E. Coyote is
going to go off the cliff."
Three hundred shocked staffers in the Eccles Building cocked their heads to the side and
gasped, "He said WHAT?" So I wrote this song Technodammerung for rogue banker
Ben:
He was just a Harvard hand
Workin' the QE he planned to try
The years went by
Every night when the sun goes down
Just another lonely quant in town
And rates out runnin' 'round
It's another tequila sunset
Fed's old scam still looks the same
Another frame
Pardners in chime
proseytizing in real time
Preaching, if you can touch a dime
Why wont paper rhyme
But in their zeal and haste
And self-righteous aversion to waste
Recruit disciples in bling bling
Preaching money is a thing thing
While finger wagging the bloat
Preaching fix the rate, dont let it float
But beyond the noise
Preaching with poise
Its all about them
Their stuff, jewels and gem
Might the actions of a bank be restrained more easily by requiring all payments and stock
issuances to the executives and directors be put directly into escrow accounts to be metered
out in small amounts if the bank stays healthy over time? If the bank suffers major losses,
the escrow accounts would be the first source of funds to make up for them. No Federal
Deposit Insurance or other government payments would be made to the bank until the escrow
accounts have been reduced to zero.
Randall Wray could be made Sec Treasury, Stephanie Melton Fed Chairman and if the
plutocrats still run the rest of the political show that sets priorities, we would still be
screwed. The full employment guaranteed jobs could just as easily be strip mining coal from
national parks and forests as installing a national solar grid. It could be done with forced
low paid labor camps that maximize rent for the plutocrats. MMT seems morally neutral on how
the money is spent. For a good portion of the plutocrats, helping the poor is morally suspect
.if they consider it at all. That is the larger problem than acceptance of MMT.
I didn't see any comment here going in depth with ideas on the binding money creation
decisions with socially useful goals (saving TBTF I dont consider such a goal, except for
emergency purposes), by what type of process and stakeholders – to avoid driving us
toward becoming a 3rd world oligarchy.
The rest is just mechanics – but the most important thing is what is the social
control and social purpose of money creation. I am sure we could do just fine even with the
present system (of course since it is a MMT system), if there were some limits on speculation
with asset prices, less military spending, more democratic control of enterprises, including
banks, severe constraints on the FIRE sector, etc, etc.
In the end the problem of managing money well is a political problem. And not much is
changing there for the better, despite a growing awareness that "we have a problem" as a
society. Where are the politicians that will connect the dots and take on the responsibility
to fix the travesty that we have?
More questions than answers, I know. But what we need a change in politics – then
banking will follow.
This is a common fallacy, that MMT is bad because it isn't about communal barter tokens or
some other thing. MMT exists to empirically describe how money works in the existing economy
today. You can be any sort of ideology and embrace it, anyone can use it, just like anyone
can use science, it's not inherently biased toward any ideology unlike neoclassical economics
and its baked in neoliberalism. That doesn't make it bad, that just shows that it is what it
purports to be, an empirical description of money in our existing economy.
You want a brand new type of currency in a whole new economy, well, start organizing your
revolutionary army, because that's what that will take.
The Battle for Money -- that much, it seems to me, is true. Neoliberalism is going down,
brought down by its own (unfortunate in my view) success and hubris, and one consequence,
on-going, is the urgent political need to re-invent the institutions of money.
The institutional systems of monetary/payment/finance systems are always under a lot of
strategic pressure: they tend to develop and evolve quickly and they do not usually last all
that long -- maybe, the span of three or four human generations -- except in the collective
memory of their artifacts and debris.
There's a natural human wish that it could all be made safely automatic -- taken out of
corruptible hands and fixed with some technical governor. Whether you are a fan of democracy
or loyal to oligarchy really doesn't take anyone very far toward devising or understanding a
workable system of money.
As I said in a comment on the earlier Richard Murphy post, money is a language in which we
write (hopefully) "true" fictions to paper over uncertainty. Much of what passes for a theory
of money is just meta-fiction, akin to literary criticism of a particular genre or era. That
is certainly true of Quantity Theory (1.0 re: gold and 2.0 Friedman). It is true of related
fables, like Krugman's favorite, loanable funds.
When Murphy rejects the quantity theory of money and then turns around and talks about the
need to create "enough" money, I pretty much write him off. When he embraces the Truth of
MMT, I know he is hopeless.
It's been discussed on NC before, but despite all the theories and figures, it's really a
battle of values. I'm not pushing religion, just saying it has all the makings of a holy
war.
(come to think of it, isn't religion a big part of the history of monetary theory?)
China has yet to fall under the thumb of private banks the way the west has. State still
holds the reins of regulation tight and the government bank maintains a robust public sector.
Michael Hudson just came back from China and has this to say:
"The debts are owed to government banks. A government can do what the U.S. can't do.
The government can forgive debts, at least those that are owed to itself, without creating a
political backlash. If a viable corporation has run up too much debt, the government can
forgive it. This is better than letting the debt close down a factory or force it be sold to
a predatory asset management firm as occurs in the United States. That is the advantage of
having public credit and why credit should be public. That's how it was in Babylonia. Rulers
were able to cancel debts all the time in the 3rd millennium and 2nd millennium BC, because
most debts were owed to the palace or the temples. Rulers were cancelling debts owed to
themselves.
China can cancel business debt owed to itself. It can proclaim a clean slate. It can
minimize debt service to whatever it chooses. But imagine if Chase Manhattan and Goldman
Sachs are let in. It would be much harder for the government to raise real estate taxes
leading to defaults on the banks. It could save the occupants by making new loans to those
who default – based on lower land prices.
Well, you can imagine the international furor that would erupt. Trump would threaten
to atom bomb Peking and Shanghai to save his constituency. His constituency and that of the
Democrats are the same: Wall Street and the One Percent. So China may lose its ability to
write down debts if it lets in foreign banks."
There are advantages to restoring financial management to the nation-state, as former
Deputy Secretary of the Treasury Frank Newman has pointed out in books and lectures. The
private banks have exhausted QE to the tune of $30 trillion, none of which was invested in
the industrial economy. Why blame the Swiss for wanting to be like China?
that this is a Chicago School / Friedmanesque monetary policy is made clear by
Positive Money
The Chicago Plan of the 1930s and the unrelated Friedman suggestion of 1948 were both
predicated on the false fractional reserve theory of banking. Given that individual banks
create credit unrestrained by reserves those plans would not have had the desired result.
Positive Money knows this, though they do sometimes carelessly use the term 'fractional
reserve banking'. They think their plan is different and, to the extent that it would
actually prevent banks creating credit, it is.
It is silly to suggest that Positive Money is some Neoliberal front. Neutering the banks
is the last thing Neoliberals want, and when they want something they don't bother with
democratic methods like public pressure groups, they use think-tanks and lobbying.
Murphy's main complaint is about handing the 'quantity' decision to the Bank. I don't
think Positive Money is wedded to that idea, it is just an attempt to defuse the 'profligate
politicians' argument.
Being that NC is the place I discovered MMT, and it's been explained and debated so for so
long here, I would have expected NC readers to more broadly understand that what we have
currently would work for everyone if only our masters would allow it.
IOW, it is not necessary to reinvent our system so much as insist that it be used to
finance material benefits for all, as opposed to endless war, political repression and
bail-outs for our criminal finance sector.
How can it be that we can we finance $trillions for war at the drop of a hat, but cannot
afford to 'fix' SS, or provide universal healthcare?
It seems to me that it's a political issue, not a technical problem, or am I missing
something here?
Cui bono?
The current mission of the custodians of our "money" is to keep banks afloat. It's not to
provide general benefit, or to even preserve the buying power of the scrip they issue,
despite what you might hear about the supposed "dual mandate" (which is now a "triple
mandate": prices, employment, and the stock market).
"Financing material benefits for all" could be a bank that extends credit to a small
business. Take a look at commercial credit creation to see how well that's been going. Take a
look at velocity.
The Fed gifted Citi $174 billion on a day when they could have purchased 100% of the Citi
Class A common stock for $4B. This is the difference Michael Hudson points about about China:
their instant ability to swap debt for equity because all banks are state-owned and
because they're Communists and nobody would blink an eye .
Most interesting in The Middle Kingdom are the moves to protect the state-owned banks.
They started about 18 months ago, when people were told they could only have one Tier 1
bank-linked e-commerce account. As a result 7.5 billion (with a B) accounts were closed. Next
they said all payments systems (including WeChat and Alipay) must clear through a new central
bank clearinghouse. Two weeks ago they said not only will everything clear through these but
the actual funds will need to be transferred to the new CB account .
Ant Financial announced that in the future they would be concentrating on services to
finance and e-commerce companies, and away from providing those services themselves. They
even anticipate a name change, from Ant Financial to Ant Lifestyle. All this makes perfect
sense: President Xi will see every financial transaction in the country, and presumably apply
a Social Score filter on whether he allows it to go through. 11 million people have already
been denied the right to purchase train tickets or buy a house because they spat on a
sidewalk, jaywalked, or made the wrong comments on social media.
Wow! We are clearly past the "First they ignore you.." stage and just on the other side of
" then they ridicule you.." phase. What a basket of slurs, gross omissions of fact and
outright falsehoods is this current blog post.
Anytime Milton Friedman is invoked to slur a concept developed before he was even born,
should be an indicator that there is no substance to the argument against the democratization
of money creation.
Thanks to the internet however, one can easily visit the Positive Money site, the American
Monetary Institute and International Movement for Monetary Reform sites to see those fake
progressives in action. While you're at it, go to the Vollgeld site yourself and read what
those wolves in sheep's clothing are really saying instead of the creative writing displayed
in the blog.
How can anyone who claims to be concerned over the excesses of capitalism prostrate
themselves in front of the current banking system, the driver of capitalism as it
rides off the rails.
I can't bring myself to respond to the stream of unsubstantiated assertions presented but
need to remind people that banks, MUST create money first for the most creditworthy. I won't
insult the readers any further by naming who that class represents. A child can see that
this, by definition, must lead to the accelerating inequality we see today.
As a challenge, I ask the author to show specifically in the US code where it permits the
Federal Government to spend before its accounts at the Fed are replenished either by
borrowing or taxing. Stay tuned to these pages for the evidence .
PM just wants OMF (Overt Monetary Financing) with ZIRP and a very small horizontal money
system. MMT analysis suggests OMF with ZIRP and a much more regulated horizontal system is
needed. There is actually very little difference in their policy prescriptions. They just
arrived at them from opposite sides of the track
I'll second that but for different reasons. Buried not far beneath the surface of this
issue (money's creation, how and how much) are hugely important issues. But the discussion
never seems to get beyond everyone's favorite system for creating money. The assumption seems
to run along the lines of: if we can just come up with some scheme for government or gold
backed money, those who possess or produce the real wealth for that money to buy will forever
be content to exchange it for the money we will forever create to pay for it. There seems to
be a belief countries like China or Russia can never escape the 'dollar trap' – or if
they try we can threaten and intimidate them back in line with our "full spectrum dominance"
military. Money IS debt – and sooner or later those who hold it are going to want to
call that debt in.
Both Positive Money and MMT appear to me to just be attempts to continue 'business as
usual', operating without a real definition of wealth and trusting / hoping 'the market' will
sort it out.
Money is debt, both functionally and conceptually. This is true for most of the money used
in the Main Street economy. It is created as debt – yours to a bank when you use your
credit card or borrow money; the bank's to you when you deposit money with one. In its role
as a medium of exchange money serves as a claim on society's goods and services, its real
wealth. You don't exchange real wealth for fiat or bank-created money without the expectation
you will at some future time be able to again exchange that money for real wealth at least
equivalent to what you had to give up in exchange for the money originally.
Rather than a claim on wealth, money could be viewed as a representation of value. Value
exchange is more like a giving/sharing economy, rather than debt-swapping. I think this
psychological improvement will lead to many physical/social/environmental improvements.
Of course, in any case, people need to be willing sellers/exchangers – it's not
automatic or universal; we need some freedom to choose, and the better the conditions are
generally, the better the freedom we will have.
OK but the term, "money is debt" is used too loosely and can be very misleading. Money
does not have to be issued as debt as claimed by MMT. In fact, money can first appear as
equity on the government's balance sheet with no counterbalancing debt. So this concept is
grossly misused to imply money must be issued as debt when, in fact, once issued it may
represent a claim on the wealth of society. Proponents of MMT first make the claim
that money is debt, and that the notion that money can be issued debt-free is therefore false
on its face. Pretty clever. They slyly blur the distinction between the creation of money by
a government and the role of that money once in the economy.
How can money first appear as equity? Isn't the other side of that the deficit? Granted I
am naive on these points but I thought money was a bond of zero duration.See skippy re time
and space
. A question for Paul: Unless it is 'privatized' is there even such a thing as 'government
equity'? The way the West's financial system works nothing that can't be sold appears to have
any value. What's missing from that system – and the discipline of economics (see
below) – is a definition of wealth.
steven –
I believe we know what wealth is – but I don't understand your claim that money needs
to be privatized to be considered equity. The government declares by fiat that the money it
creates can be used to purchase goods and services in the economy.
I don't believe this is anywhere nearly correct. From all over the political spectrum
commentators lament the lost of trillions of dollars (or euros or whatever) of wealth. At
least until the effects of a financial crisis start to take hold, no physical or intellectual
capital is lost. The only thing that is lost are a few zeros on some financial ledgers.
As for money as equity, you may be technically correct, i.e. the rules of accounting may
permit governments to count the stacks of paper currency they print (in any case, small
change in terms of the total money supply) as 'equity'. But for most of us the only thing
governments possess that we would count as equity are asset classes like public
infrastructure. And until the services they provide (or the assets themselves) are sold, that
infrastructure would, from a business accounting standpoint, technically be 'worthless'.
(that last is a question?)
tegnost – There is nothing in the accounting standards that prevents the inclusion
of equity on a balance sheet. If we were under the gold standard and you happened to find a
nugget of gold in your back yard, are you telling me that you would have to imagine some kind
of "debt" to balance your household balance sheet? When Lincoln issued the Greenbacks in the
1860's there was no bond or debt associated with it. It paid soldiers wages and goods and
services during he civil war.
Just as MMT states the government isn't a household, it also isn't a commercial bank either.
It has the constitutional power to coin money as needed, no debt involved.
presumably you bought the nugget of gold when you purchased the property and it's land use
rights so it's not a virgin birth, the debt is what you purchased the land for. Maybe one of
those diamonds in the outback that hardy souls find, but those may have some territorial
claim as well.
The gold nugget has no inherent value. It's just a lump of cold metal. It will only become
valuable when you go to someone else with it and try to exchange it for something, whether it
be a currency or some kind of good. And only if the other person agrees with you that it's
valuable. This is fundamentally what money is: a token of social interaction. The gold
becomes valuable when you go to exchange it for something else. In other words when a debt
comes into play. Money is debt. Or rather, it's a measurement of debt and credit. 'Store of
value' and all that econ 101 rot is so much gibberish.
Once you realize that, then a question arises: "Well, why bother with rare metals or
pressed coins? If it's just a token, you could literally just take a stick and carve marks
into it and it would be the same thing". Yes, exactly. Which is precisely the sort of thing
we see lots of in history.
Murphy sounds like one of those indecisive chaps who dispute with everyone but have no
ideas of their own. I shall ignore him. Good luck to Switzerland. They have the courage and
political system to try the experiment and we will all know the result in early course.
What am I missing? As far as I can tell, the proposal is just Modern Money with the
central bank substituted for the Treasury. Yes, that makes it less democratic.
MMT is inflation-limited, too. That's how you know you've overshot your resources. In
fact, MMT poses a technical problem: how do you know when you've reached resource limits,
EXCEPT by observing inflation? Because without that, you have a ratchet. Of course, that's
just what we have, usually, so maybe that's evidence for the theory.
"First, this puts inflation at the core of economic policy." – is a false claim. As
quoted, it treats inflation as a limitation. The core is promoting adequate economic
activity.
Finally, he treats "money is debt" as doctrine. he doesn't justify it and it makes little
sense, ESPECIALLY in MMT. How can you pay a debt with a debt? Someone's getting cheated. MMT
actually proposes free money, to a point. I've seen elaborations of the idea, but they use a
very extended sense of "debt." And I don't see how it's even relevant to his overall
thesis.
The Swiss are pretty conservative, so I doubt they'll pass it.
No, Positive Money is not remotely MMT. Wash your mouth out.
The Positive Money types want to limit the extension of credit and put it under the
control of what Lambert called "a magic board," a regular gimmick from his days back in
debate where someone needed to be in charge but no one wanted to think hard about who or how.
In practice, a central bank would be in charge. So how democratic is that?
MMT does not fetishize money the way the Positive Money does. MMT despite having Monetary
in the name is about the role of government spending in a fiat currency system. MMT argues
that (as Kalekci did) that businesses have strong incentive (not wanting workers to get
uppity) to keep the economy at less than full employment. So the government can and should
spend to mobilize resources. And it can because its role as the currency issuer means it can
never go bankrupt, it can only create too much inflation. Taxes are what contain inflation in
MMT.
By contrast, the Positive Money types want to do it by limiting credit creation. And thus
Murphy is correct. That means their priority is to preserve the value of financial assets,
not achieve full employment.
I don't believe it is accurate to say that Positive Money "fetishizes money". Irving
Fisher acknowledged his debt to Frederick Soddy for the concept of "100% Money", the
intellectual foundation for the Positive Money movement. Soddy's intent in limiting the
creation of money to the stock of wealth available for it to purchase was to retain
independence from the state in obtaining the means of subsistence. He compared the use of
monetary policy to goose the economy to a merchant putting his or her finger on the scale,
making it difficult to impossible for money to fulfill two of its primary functions: serving
as a medium of exchange and a store of value.
So long as there was wealth available for it to purchase, he – and presumably
Fisher's Positive Money crowd – would have no objection to creating as much money as
needed to keep the economy running. What he and every other respectable economist have been
trying to bring under control is the excess money creation fueling speculation and the
seemingly inevitable boom-bust cycle accompanying the private creation of money.
Rather than curbing that excess, however, the 'solution' that seems to have been adopted
is for the US and other Western governments to absorb the excess credit (money as debt)
creation by taking it on their (governments') own books. Government debt is I believe called
'near money' in the financial markets. But neither the governments nor the bankers of
countries that no longer create real wealth have any logical right to create the money to buy
it. Just retaining the right to 'print' more money or 'near money' doesn't change that,
except perhaps in an absurdly narrow legal sense.
There are, of course, some issues like globalization intimately connected with the
construction of a logical and fair monetary system. But underlying them all, including for
countries other than the US, is a logical definition of 'wealth':
a logical definition of wealth is absolutely needed for the basis of economics if it is
to be a science."
Frederick Soddy, WEALTH, VIRTUAL WEALTH AND DEBT, 2nd edition, p. 102
(Soddy might have added "if government is to be a science".)
Here in lies the rub economics will never be a Science.
Firstly the medium used by most economics – philosophy – does not even have a
functioning model of time and space and is prone to fads. Magnified by scale WRT elite tastes
or self dealing. Wealth or Capital is also a bit complicated by say the Cambridge Controversy
et al. So until some very fundamental flaws are sorted, that have nothing to do with –
money – the concept of "Science of Money" is going to be a non starter.
Worst is those that use such syntax and dialectal style are going to be called into
question – over it.
I mean we had political theory, then some bolted on science to it, and called it economic
science. Which then begat a whole time line of dominance front running the political process
regardless of political incumbents.
I think Scientists that dabble in monetary theory fall victim to the same dilemma that say
religious based views do – their optics are ground before looking.
Probably best to start with the first part of Soddy's (actually John Ruskin's)
observation, "a logical definition of wealth is absolutely needed ". "Most economics" may
indeed disguise its prostitution with a veneer of philosophy or mathematics. But I don't
think you can say that about Soddy's:
A definition of wealth must be based upon the nature of physical or material wealth, in
the sense of the physical requisites which empower and enable human life-that is, which
supply human beings with the means to live, and, as an after consequence of living, to
love, think and pursue goodness, beauty and truth.p. 108
(All citations are from Soddy's Wealth, Virtual Wealth and Debt, 2nd edition- WVWD)
For that matter, according to Michael Hudson, you can not accuse the classical economists of
just dabbling in philosophy. They were ALL about freeing society from free-lunch economic
rent seekers, freeing up the resources so they could be devoted as completely as possible to
the development of "the physical requisites which empower and enable human life".
What we have to do to develop those physical requisites – and increasingly the
limitations imposed by the requirements of sustainability – is pretty well known.
Whether a science of money can be devised to help accomplish that goal or some other
mechanism for distributing the wealth made possible by advances in science and technology is
required is increasingly open to question.
Take a look at Soddy's –THE THREE INGREDIENTS OF WEALTH (DISCOVERY, NATURAL ENERGY
AND DILIGENCE). p. 61 The first two are firmly embedded in time and space.
I have read Soddy, more so I have talked with PM sorts for a long time, hence I'm not
ignorant of the camps views or actions during said time.
Onward
"a logical definition of wealth is absolutely needed ".
I did reference the Cambridge Controversy, are you informed WRT this aspect.
"A definition of wealth must be based upon the nature of physical or material wealth, in
the sense of the physical requisites which empower and enable human life-that is, which
supply human beings with the means to live, and, as an after consequence of living, to love,
think and pursue goodness, beauty and truth.p. 108"
Sorry but . "consequence of living, to love, think and pursue goodness, beauty and truth"
has nothing scientific about it.
I reiterate – Metaphilosophy has no scientific underpinnings and attempts to "brand"
it otherwise in only to burnish its credentials without any empirical satisfaction is just
rhetorical gaming.
"you can not accuse the classical economists of just dabbling in philosophy."
Hay I respect Hudson, that does not mean I worship him, hes been invaluable to the
discovery process, but, that does not mean everything he has to say is the word of dawg, nor
would I surrender my cognitive processes just because someone uses the term classical.
If I have to go that space I would favor say Veblen or Lars P. Syll where if your to own a
thing one must accept the responsibility from a social aspect and not one of atomistic
individualism.
But hay I regress . because I'm still waiting for someone to show me a few decades of a
labour market in "action".
"BTW it would be incumbent of you to redress my concerns above without forging a new path
which excludes them." – Sorry if I did that. It was not my intent. Wikipedia is my only
exposure to the Cambridge Controversy . As
I understand it, science is supposed to be all about observing the real world and then
drawing conclusions from those observations. It looks to me like the participants in the
debate were looking at their models and maybe the logic they used to construct them, not the
world they were supposed to be modeling.
"Most of the debate is mathematical, while some major elements can be explained as part of
the aggregation problem. The critique of neoclassical capital theory might be summed up as
saying that the theory suffers from the fallacy of composition;"
This kind of cant is a far cry from something like:
"Though it was not understood a century ago, and though as yet the applications of the
knowledge to the economics of life are not generally realised, life in its physical aspect
is fundamentally a struggle for energy , in which discovery after discovery brings life
into new relations with the original source. Evolutionary development has been parasitic,
higher and higher organisms arising and obtaining the requisite supplies of energy by
feeding upon the lower. But with man and the development of conscious reason, that process
as regards energy is being reversed. "
Sorry, but where does Positive Money , in any of the publications and articles, propose
any limitations on 'credit' ?
I never saw that.
Or AMI or any of these public money types for that matter?
Thank you.
You are completely correct, they don't. This is all made up propaganda against the
democratization of the money supply. What PM proposes is sound credit creation.
PM wants to establish a non democratic administration of government issuance and then
allow a return to the free banking period of the 1800s. All based on notions of EMH and QTM
contra to all the historical data from that period. So on one had PM wants to lay claim to
scientific methodology WRT money yet still cling to scientifically refuted EMH.
As far as I can discern PM proponents advance the belief that this would compel banks to
become investment entities for "productive" activities. Don't know how that would work out
considering how corporatism views society.
The positive money people have come at it from the other angle. People like Richard Werner
have been studying the problems with privately created money since the Japanese economy blew
up in the 1980s .
They have seen all the problems with privately created money and the positive money people
were very pleased when the BoE confirmed their beliefs in 2014.
The positive money people have come to the wrong conclusion through not understanding
publicly created money.
The MMT people can learn a lot about the problems of privately created money from the
positive money people.
The two camps should merge to get the big picture.
I started looking into all the problems of privately created money after 2008 and was a
latecomer to MMT.
The two merge nicely when you think about it and realise the why the positive money people
came to the conclusion they did. They just didn't understand the way publicly created money
works now.
In the case of Japan, unless I'm misunderstanding things there, presumably they've
embraced MMT out the wazoo, in that they're willing to leverage federal gov debt out the
wazoo. And yet I think the consensus still seems to be that their economy is still zombified
(still not really recovered from the debt overhang from their go go years). In which case,
why is that?
Has Japan been hamstringing their use of MMT, so it's less effective than it could be? Do
they need to up the ante, employ MMT-on-steroids to overcome the trap that they're in, say
like the US needed WWII to get out of its trap?
Withstanding MMT-on-steroids, should it be QE-on-steroids instead that get the animal
spirits rekindled? I don't have a strong sense of whether the US central bank has done more
in that department compared to the central bank of Japan. Or if indeed, the US central bank
has been more successful on that front. It's clear that animal spirits are certainly
rekindled in the US – the usual playahs are back at it. Though whether that's
unzombified our economy, I'm not so sure – I don't think it has.
If these hurdles are so difficult, seems to me we should have a monetary system that
doesn't result in a zombified economy to begin with, per the comment I was making further
above.
And yet I think the consensus still seems to be that their economy is still zombified
(still not really recovered from the debt overhang from their go go years). In which case,
why is that?
Debt Peonage. For it to work there has to be a debt jubilee (a forgiveness of peoples
debt).
" It seems there are greater similarities between China and the US than may be visible
at first glance. China builds real estate for a shrinking population, invests for an
over-indebted client (the US, which even insists on a drastic reduction of the bilateral
trade deficit) and finances all this with money it does not have ."
MMT has always stated to whom the debt is owed is the crux of the matter and in what form
denoted.
I have trouble understanding the dramas with bank issued credit when squared with say
equities, why all the focus on one and not to be inclusive of a wide assortment of other
mediums of exchange and how they are created and why.
So tell me why J – bonds are called the death trade e.g. shorters nightmare –
albeit they will tell you their shorts are being thwarted by ev'bal forces.
Couldn't resist this. That title has me intrigued so, with apologies to Winston
Churchill-
" What (neoliberals have) called the Battle of (Credit) is over the Battle of (Money) is
about to begin. Upon this battle depends the survival of (world) civilisation. Upon it
depends our own (western) life, and the long continuity of our institutions and our
(civilization). The whole fury and might of the enemy must very soon be turned on us.
(Neoliberals) knows that (they) will have to break us in this (idea) or lose the war. If we
can stand up to (them), all (the world) may be freed and the life of the world may move
forward into broad, sunlit uplands.
But if we fail, then the whole world, including the United States, including all that we have
known and cared for, will sink into the abyss of a new dark age made more sinister, and
perhaps more protracted, by the lights of perverted science. Let us therefore brace ourselves
to our duties, and so bear ourselves, that if the (United Nations) and its (Countries) last
for a thousand years, men will still say, "This was their finest hour." "
Yet then some say AET and Neoclassical economics just needs to implement PM and all will
be well.
I've yet to see any PM advocate or proponent criticize an executive or corporatism, only
banksters and some politicians. On the other hand I've seen many PM sorts back crypto based
on the argument of decentralization. So which is it, counterfeiting of national money with a
side of corruption or a case of counterfeiting ex nihilo via some arbitrary computational
source with a predominate side of corruption.
I am completely at a loss to understand how the debate about money proceeds things like
Marginalism, supply and demand as a monolith, rational agent models, theoclassical opinions
elevated to truisms [economic laws] and a reduction of human experience as a binary condition
set in stone.
I also have issues with PM advocates and their UBI agenda, due to its original proponents
views on the need to water down democracy more to keep the unwashed from just voting
themselves more money. It is in my opinion logically incoherent, that is just what has
occurred during the neoliberal period and corporatists via the democracy of money through
lobbyists – every dollar is a vote – et al.
In light of that I can only surmise that PM is actually pro elitist, not that I have
issues with some being elite, that is another story altogether, but money itself is not the
bar.
Looks like Trump adopted Victoria Nuland "Fuck the EU" attitude ;-). There might be nasty
surprises down the road as this is uncharted territory: destruction of neoliberal
globalization.
Trump proved to be a really bad negotiator. he reduced the USA to a schoolyard bully who
beats up his gang members because their former victims have grown too big.
As the owner of world reserve currency the USA is able to tax US denominated transactions both via conversion fees and
inflation. As long as the USA has dollar as a reserve currency the USA has so called "exorbitant priviledge" : "In the
Bretton Woods system put in place in
1944, US dollars were convertible to gold. In France, it was called "America's
exorbitant privilege"[219]
as it resulted in an "asymmetric financial system" where foreigners "see themselves supporting American living standards and
subsidizing American multinationals"."... "De Gaulle openly criticised the
United States intervention in Vietnam and the "exorbitant
privilege" of the United States dollar. In his later years, his support for the slogan "Vive
le Québec libre" and his two vetoes of Britain's entry into the
European Economic
Community generated considerable controversy." Charles de Gaulle -
Wikipedia
Notable quotes:
"... Errrr, that so-called "piggy bank' just happens to; ..."
"... have the world's reserve currency ..."
"... dominates the entire planet militarily since the end of the Cold War ..."
"... dictates "regime change" around the world ..."
"... manipulates and controls the world's entire financial system, from the price of a barrel to every financial transaction in the SWIFT system. ..."
"... And Trump has the ignorance, the arrogance and the audacity to be pleading 'poverty?' ..."
"We had productive discussion on having fair and reciprocal" trade and market access.
"We're linked in the great effort to create a more just and prosperous world. And from the
standpoint of trade and creating more prosperous countries, I think they are starting to be
committed to more fair trade. We as a nation lost $870 billion on trade...I blame our leaders
and I congratulate leaders of other countries for taking advantage of our leaders."
"If they retaliate they're making a tremendous mistake because you see we have a
tremendous trade imbalance...the numbers are so much against them, we win that war 1000 times
out of a 1000."
"We're negotiating very hard, tariffs and barriers...the European Union is brutal to the
United States....the gig is up...there's nothing they can say."
"We're like the piggy bank that everybody's robbing."
"I would say the level of relationship is a ten - Angela, Emmanuel and Justin - we have a very good relationship. I won't
blame these people, unless they don't smarten up and make the trades fair."
Trump is now making the 20-hour flight to Singapore, where he will attend a historic summit with North Korea leader Kim Jong
Un. We'll now keep our eye out for the finalized communique from the group. The US is typically a leader in the crafting of the
statement. But this time, it's unclear if the US had any input at all into the statement, as only the leaders from Britain,
Canada, France, Germany, Italy and Japan as well as the presidents of the European Commission and European Council remain at the
meeting. But regardless of who writes it, the statement will probably be of little consequence, as UBS points out:
Several heads of state will be heading off on a taxpayer-financed "mini-break" in Canada today. In all of its incarnations
(over the past four years, we've gone from G-8 to G-6+1) the group hasn't really accomplished much since an initial burst of
enthusiasm with the Plaza Accords and Louvre Accords in the 1980s.
By the way, Trump is right on the tariffs in my view, Europeans should lower their tariffs
and not having the US raising it.
Trump: "We're The Piggy Bank That Everybody's Robbing"
Isn't Trump great in catch phrases? Trump's base will now regurgitate it to death.
Now reconcile Trump's remarks with reality:
Professor Werner: Germany is for instance not even allowed to receive delivery of US
Treasuries that it may have purchased as a result of the dollars earned through its current
account surplus: these Treasuries have to be held in custody by the Federal Reserve Bank of
New York, a privately owned bank: A promise on a promise. At the same time, German influence
over the pyramid structure of such promises has been declining rapidly since the abolition of
the German currency and introduction of the euro, controlled by an unaccountable
supranational international agency that cannot be influenced by any democratic assembly in
the eurozone. As a result, this structure of one-sided outflows of real goods and services
from Germany is likely to persist in the short and medium-term.
To add insult to injury:
Euro-federalists financed by US spy chiefs
The documents show that ACUE financed the European Movement, the most important federalist
organisation in the post-war years. In 1958, for example, it provided 53.5 per cent of the
movement's funds.
Okay, everyone set your "team" aside for a few minutes and let's look at the facts and
reality.
Do you really believe the rest of the world has trade advantages over the US? Well, let's
consider major industries.
Agriculture.....maybe, but only sightly. Our farmers are the richest in the workd....by
far.
Manufacturers.....probably so....because we gave it away to countries with slave labor.
Manufacturers jobs were jobs where people could earn a decent living...and that had to
go..can't be cutting into corporate profits with all that high cost labor.
Defense.....need I go here? We spend more than the next 11 countries combined! We sell
more as well.
Energy.....we rule thus space because we buy it with worthless printed fiat
debt...whenever we want to....and nd if you deny us, we will bomb the hell out of you and
take it.
Technology. ....Apple, Microsoft, Intel, Google, Amazon, Oracle, Dell, Cisco.....who can
touch that line up....not to mention all the on-line outfits like Facebook and Twitter.
Finance.....the best for last. We control the printing press that prints the dollar the
rest of the world needs. We control energy and foreign policy. Don't do what we like and we
will cut you off from SWIFT and devalue the hell out of your currency...and then move in for
the "regime" change to some one who plays ball the way we like it. 85% of all international
trade takes place in dollars everyday. We have the biggest banks, Wall Street, and infest the
world with our virus called the dollar so that we can Jeri their chain at will.
Now I ask you....just where the hell is the "trade imbalances"? Sure there are some
companies or job sectors that get a raw deal because our politicians give some foreigners
unfair trade advantages here and there, but as a whole, we dominate trade by far. The poor in
our country lives like kings compared to 5.5 billion of the world's population. Trump knows
this.....or he is stupid. He is pandering to his sheeple voting base that are easily duped
into believing someone is getting what is their's.
Hey, I am thankful to be an American and enjoy the advantages we have. But I am not going
to stick my head up Trump's ass and agree with this bullshit. It is misdirection (corporate
America and politicians are the problem here, not foreign countries) and a major distraction.
Because all the trade in the world isn't going to pull us out of this debt catastrophe that's
coming.
But, if we cut through all the verbiage, we will arrive at the elephant in the room.
American manufacturing jobs have been off-shored to low wage countries and the jobs which
have replaced them are, for the most part, minium wage service jobs. A man cannot buy a
house, marry and raise a family on a humburger-flippers wage. Even those minimum wage jobs
are often unavailable to Americans because millions of illegal aliens have been allowed into
the country and they are undercutting wages in the service sector. At the same time, the
better paid positions are being given to H-1B visa holders who undercut the American worker
(who is not infrequently forced to train his own replacement in order to access his
unemployment benefits.)
As the above paragraph demonstrates the oligarchs are being permitted to force down
American wages and the fact that we no longer make, but instead import, the things we need,
thus exporting our wealth and damaging our own workers is all the same to them. They grow
richer and they do not care about our country or our people. If they can make us all into
slaves it will suit them perfectly.
We need tariffs to enable our workers to compete against third world wages in countries
where the cost-of-living is less. (American wages may be stagnating or declining but our
cost-of-living is not declining.) We need to deport illegal aliens and to stop the flow of
them over our borders. (Build the wall.) We need to severely limit the H-1B visa programme
which is putting qualified Americans out of work. (When I came to the US in 1967 I was
permitted entry on the basis that I was coming to do a job for which there were not enough
American workers available. Why was that rule ever changed?)
You are making my point. China didn't "off shore" our jobs....our politicians and
corporations did. You can't fix that by going after other countries. You fix that by
penalizing companies for using slave labor workers from other countries. Tariffs are not
going to fix this. They will just raise prices on everyone.
I can't believe you Trumptards can't see this! Once again we will focus on a symptom and
ignore the real problem. Boy, Trump and his buddies from NYC and DC have really suffered
because of unfair trade practices, right? Why can't you people see that "government is the
problem" and misdirection your attention to China, Canada, Germany, Mexico, or whomever is
just that....misdirection.
I would tax the shit out of companies like Apple that make everything overseas with slave
labor and then ship it in here to sell to Americans at ridiculous prices.
Plenty of down votes but no one has proven that I am wrong on one point.
The EU countries have free college, health care, day care and just about everything else.
All paid for because they have no military spending.
It's all on the backs of the US tax payer. Or the fed, if you prefer.
Trump is working both angles. Forcing them to pay for their own defense. Forcing them to
allow US products with no trade disadvantages. Go MAGA and fuck the EU.
"... By Lynn Parramore, Senior Research Analyst, Institute for New Economic Thinking. Originally published at the Institute for New Economic Thinking website ..."
"... Jim Chanos, founder and managing partner of New York-based Kynikos Associates, has spent much of his career studying financial fraud. He shares his thoughts with the Institute for New Economic Thinking -- where he is a member of the ..."
"... Global Partners Council ..."
"... -- on cryptocurrency, fraud coming from China, and why fraudsters may currently be on the rise. Chanos teaches a course on the history of financial fraud at Yale University and the University of Wisconsin. ..."
Jim Chanos, founder and managing partner of New York-based Kynikos Associates, has spent
much of his career studying financial fraud. He shares his thoughts with the Institute for New
Economic Thinking -- where he is a member of theGlobal Partners Council-- on cryptocurrency, fraud coming from China, and why
fraudsters may currently be on the rise. Chanos teaches a course on the history of financial
fraud at Yale University and the University of Wisconsin.
Lynn Parramore: As someone who pays a lot of attention to financial fraud, you've noticed
that this activity has a connection to business cycles. Can you explain that and say where you
think we are right now?
Jim Chanos: I've found in my research and my teaching that what I would call the "fraud
cycle" -- instances of large-scale financial fraud over multiple platforms and companies in the
financial markets in the modern era (the last 500 years) -- follows the financial cycle with a
lag. That means that as business and particularly financial markets improve, peoples' sense of
disbelief and caution that they've often earned from the previous downturn begins to erode.
Schemes that before might have seemed too good to be true begin to be embraced.
LP: So people relax their financial vigilance.
JC: Exactly. The longer the cycle goes on, the easier it becomes for the dishonest and the
fraudsters to ply their trade because people will begin to believe in things that they
shouldn't financially. As cycles go on, we tend to see higher instances of fraud. In recent
memory, there were clearly, from a legal and prosecutorial point of view, more cases of fraud
after the dot-com bull market of the late '90s, which went from 1991 to 2000. Many of the
dot-coms turned out to be fraudulent. We then saw the Enrons and the WorldComs and the Tycos.
Frauds generally come to light after the financial cycle turns down. We saw this again after
the crisis following the bull market of 2003 to 2007.
What happens is that the new capital going into these things dries up. Many frauds are, by
their nature, Ponzi schemes that require new money and new investors to pay off the old
investors. When people want their money back, the insolvency of the venture is discovered. John
Kenneth Galbraith has this wonderful term called "the bezzle" [inventory of undiscovered
embezzlement]. That's the heart of the fraud, the nature of the fraud in the company. He points
out that in the up phase, there's this wonderful period where both the fraudsters and the
defrauded think they're getting richer. An interesting observation, right?
Of course, it works the other way on the down side. That's what I mean when I tell my
students to follow the cycles and be on guard the longer a financial and business cycle lasts
because people will get a little bit jiggy with their capital. They're willing to take risks,
willing to believe things. So today we've got bitcoin and ICOs [initial coin offerings], which
went ballistic in 2017. I suspect going forward we're going to see more and more evidence of
questionable companies as this bull market keeps advancing and aging. We're now nine years into
this bull market, same as the '90s, so I suspect that now things are starting to percolate. I
think bitcoin and the ICOs are just one manifestation of that.
LP: I just passed a huge crowd gathered around the New York Hilton Midtown for "Blockchain
Week NYC," a series of events put on to showcase the city as a hub for blockchain jobs. You
could feel the excitement in the air with all the attendees and reporters jostling on the
sidewalk. What's your take on all this hype?
JC: At one blockchain gathering there were a set of rented Lamborghinis parked outside to
entice the traders and day traders and retail investors: this, too, can be yours if you hop
aboard the blockchain and bitcoin bonanza!
I teach about a guy from the early 18th century called John Law. He was the architect of one
of the great financial frauds of all time -- the Mississippi scheme of 1718-20 in Paris. (He's
also the guy who founded New Orleans. He sent settlers there who named it after his benefactor,
the Duc d'Orléans).
Law was the first person to write about the need for foreign governments to have fiat
currencies and not be tethered to gold and silver. Because of the power of taxation and the
power of the governments through enforcement and force of arms, they could enforce their
currency to be used, and because of their ability to expand the monetary base and do all the
kinds of things that central banks now do, it was in their best interest to do so.
This was revolutionary back then. Law's failed experiment, which added lots of fraudulent
bells and whistles to that scheme in France, put the idea on the backburner for a while. But
economic historians have revisited it now and his early papers are genius. They're up there
with some of the stuff Keynes wrote in the 20th century in terms of the way he envisioned
monetary systems to work. Law points out sort of obliquely the positive ways in which the
citizenry would come to accept and trust paper money. Not only would the power of the state
compel you to accept it, but the power of the state also acted as a third party to adjudicate
problems, fraud and act as a lender of last resort in times of crisis instead of going down
into a deflationary spiral. That was the positive side.
In the new bitcoin and crypto-craze, the whole idea is that we need to get away from fiat
currencies by creating our own fiat currency for which there is no lender of last resort, no
third party adjudicator. For those who believe it's a store of value in the coming apocalypse,
the idea is that you're going to have to safeguard your key under a mountain with fingerprint
and eye scan security while the hordes are outside your bunker trying to get in to use it --
for what, I have no idea. Because for those who believe that you need to own digital currency
as a store of value in the worst-case scenario, that's exactly the case in which a digital
currency will work the least. Food would work the best!
LP: Sounds like a libertarian fantasy.
JC: That's exactly what it is. And if you say, well, fiat currency is going to bring the
world down, which could, of course, happen, then I say the last thing I'd want to own is
bitcoin if the grid goes down.
LP: It also sounds like the perfect realm for people looking to commit fraud.
JC: Well, there you go. Bitcoin is still the area for people who are trying to avoid
taxation or other examinations of their transactions. That's one thing where I think it
probably still has utility, but the governments have figured that out.
Last year, just as the mania was really going, an early convert who had gotten in early and
had made a lot of money wrote this humorous blog about trying to cash in his winnings, if you
will. He chronicled telling the exchange that he wanted to convert his bitcoins into U.S.
dollars and have them wired into his U.S. bank. It took something like eight or ten days and
numerous follow-ups and phone calls. The funniest part was his having to fax his passport to
Lithuania.
LP: That doesn't sound very high-tech or efficient.
JC: Exactly. Using a fax machine to Eastern Europe struck me as kind of the antithesis of
what you're trying to do here. So this is simply a security speculation game masquerading as a
technological breakthrough in monetary policy. Someone at Grant's interest rate conference
recently said that it was as if we had intentionally created a "monetary Somalia."
LP: So buyer beware.
JC: I think so.
LP: You recently appeared in a fascinating documentary, " The China Hustle ," which concerns the reverse
merger boom in which I believe 400 Chinese companies came to market on the U.S. stock exchange.
Can you say a bit about what these mergers are and how U.S. investors got conned?
JC: A reverse merger is simply when the company in question merges into a defunct,
U.S.-listed corporation, typically on NASDAQ, which has been moribund for years but has still
been filing with the SEC, so it may have a listing somewhere.
We can see these reverse mergers in the late '90s when they became dot-com companies, and
also in the late '70s, when gold was a hot asset and they became gold mining companies. In the
last ten years, they started to appear to take advantage of the growth of Asia and the growth
of China. It's very easy to sell small, retail investors on this idea. It sounds very
appealing.
What happens is you merge the Happy Flower High Tech Company into some defunct company and
you rename the old company with the Chinese name. Voila! The Chinese company is now public in
the U.S. without having to file an IPO [initial public offering] prospectus with the SEC. You
don't go through underwriters, a due diligence process, or a vetting process where the SEC asks
questions on the IPO. But you now have a company on NASDAQ or the U.S. Stock Exchange.
This is what "The China Hustle" was about -- this raft of companies that merged with
companies you've never heard of and created, instantaneously, reasonably large-capitalization
companies operating in China but trading in the U.S. Of course, therein lies the rub. How do
you really know what was going on in the operating company? How good was the accounting? How
good were the representations of the outside auditors and representatives of the boards? It
turned out that a lot of them were frauds.
LP: So I'm an investor and I hear that this Chinese company has come to market in the U.S.
and it has been audited by Pricewaterhouse, Deloitte, or some other well-known auditing firm. I
think it must be legit. What's wrong with this assumption?
JC: There are two big problems there. When people always ask me about the large frauds we've
dealt with, they ask, who were the auditors? And I say, who cares? Every great fraud was
basically audited, most of the time by major firms. In China it's even worse than that because
although the statements might say Pricewaterhouse, if you read the fine print it actually says,
"Pricewaterhouse reviewed the work by an affiliate in China." So it's often a smaller firm that
has a relationship with the big firm that actually does the auditing. Pricewaterhouse just puts
its stamp of approval on that.
LP: Sounds kind of like what the big credit ratings agencies did by giving triple-A ratings
to securities that were fraudulent in the lead-up to the financial crisis.
JC: Right. But you have to remember that auditors are not the financial check that most
people think they are. The financial statements are not prepared by auditors. The financial
statements in publicly traded firms are prepared by management and the auditors review the
statements. Unless they have reason to believe something is amiss or are pointed to something
being amiss by a whistleblower or short seller or journalist, they're not going to detect
anything most of the time.
LP: Auditors are not detectives.
JC: No they're not. They're really paid by the company to review the company's own financial
statements. So at the end of the day, this still comes back to the management and the board. Do
you trust them? Do you believe what they're telling you? What is your ability to check?
LP: In the case of the Happy Flower Company, I can't really check.
JC: Not only that, one of the points that the movie made very well was that even if you find
the smoking gun and the chairman runs off with all the money and you're left with nothing, the
recourse to western investors is virtually nil. None of these CEOs are prosecuted. The view of
the Chinese court system, which, I should point out, is an arm of the Communist Party, not the
Chinese state, is, "sorry, but no jurisdiction here. You're a western investor and you ought to
know better."
LP: Can the SEC do anything?
JC: The SEC did announce a crackdown after the fact, but besides monitoring companies'
ongoing disclosures and trying to halt trading in the securities if there is evidence of a
problem, there isn't a lot that the SEC can do. These are Chinese companies.
LP: How do you view the climate for financial fraud under the Trump administration? I note
that Trump's SEC nominee, who was sworn in as chair last May, was an Alibaba IPO advisor -- the
Silicon Valley lawyer Jay Clayton. You've expressed skepticism about Alibaba.
JC: I have, and so far I've been wrong, at least with respect to the stock price. But I
challenge anyone to explain to me cogently what Alibaba is doing with all its capital and
flipping companies back and forth to insider and revaluing the prices of companies upward.
Be that as it may, the real issue is, what is the sense of the administration? I'll say one
thing, when the George W. Bush administration started -- remember, he was the MBA president --
he came in on a pro-business platform and was seen as very pro-business and anti-regulation,
similar to the Trump administration. But when the wave of fraud started hitting in '01 and '02,
I have to give the John Ashcroft Justice Department a lot of credit. They did a 180 and went
after the bad guys hard.
I always joke that the two presidents who have put more executives in jail than all the rest
combined were both named Bush. W's father was instrumental in prosecuting the S&L [Saving
and Loan] crooks back in the early '90s and put about 3,000 of them in jail. I think they
realized that the public was losing money in the stock markets, not just because of the frauds,
but because the long dot-com bull market had ended. People were upset. Then when you had the
revelations of WorldCom and Enron on top of it, there was a sense that every corporation was
crooked and this was going to have exogenous impacts on the economy and the market as a whole.
I think they correctly realized that we've got to basically show that we're the cops on the
beat. And they did.
That did not happen, as you well know, after the GFC [Global Financial Crisis], for lots of
reasons, including a Justice Department that actually took the extraordinary step of admitting
that it considered economic and financial market factors in figuring out when, or if, to
prosecute a company. So justice now had an economic angle to it. We sort of know how we think
about the Trump administration -- I noted the other day that the Education Department seems to
have shut down its division investigating fraud at the for-profit education companies, which
are one of the biggest cesspools out there in terms of financial fraud and fraud upon the
taxpayer. So that's not a good sign. On the other hand, public opinion can move things quickly
as it did in the Enron case. We saw a real stepped-up effort to go after the bad guys.
I think a lot depends on circumstances at the time. We're still in the expansionary phase of
the financial cycle and, arguably, the fraud cycle, so we'll have to see what happens once that
rolls over.
LP: Let's talk about emerging markets. Do you think a big crisis could develop as investors
head back to the U.S. as the Federal Reserve raises rates here?
JC: The emerging markets are always sort of the end of the wick, right? They always go down
the most when fear is out there and they go up the most when people are euphoric. Emerging
markets had a really rough go of it from 2011 right on to 2015. They never really recovered a
lot from the GFC. Then someone hit the light switch and whether it was things changing in
Brazil or [former president] Jacob Zuma being ousted in South Africa or South America turning
the corner. I would note that Argentina issued a one hundred-year bond a year ago that was
oversubscribed, and this week Argentina went back hat in hand to the IMF [International
Monetary Fund], so we've had this amazingly quick shot across the bow in the emerging markets.
We'll see if it's the start of something bigger. But it's sort of amazing to me that after only
a two-year respite, places like Argentina and Turkey seem to find themselves in trouble again.
Time will tell.
LP: One thing you said in "The China Hustle" is that we've never seen a credit build-up like
the one we've seen in China today that hasn't been followed by a major financial crisis. That
sounds pretty worrisome.
JC: I'm always told confidently it won't matter because they owe it to themselves. Well, if
that was that were the case, then Zimbabwe would be one of the wealthiest countries in the
world today!
The build-up of China's debt and the speed of that build-up is nothing short of stunning.
There's a new book that I recommend, " China's Great Wall of
Debt ." It does a great job of chronicling just how massive this build-up has been in the
last ten years following China's stimulus in '09 to pull the world out of the GFC. You've heard
me call it the "treadmill to hell" because you have to put more and more debt on the books to
keep the growth going and this is where China is finding itself. If they don't increase the
debt, the economy hits stall speed and for all the talk about innovation and technology and
transferring to a consumer-driven, technology-driven economy, the evidence on that is kind of
scant. It's still basically an economy driven by debt-driven investment, which is still over
40% of GDP. I think when we started talk about China it was 46% and I think the most recent
number is about 43%. So it's improved slightly over the eight or nine years, but not much.
China is still basically a giant construction site and shows no signs of changing. In fact,
with the One Belt One Road Initiative [a project launched in 2013 to develop trade routes to
connect China to the world], they're trying to basically export their construction capabilities
and credit to countries along what we would call the Old Silk Road.
LP: In terms of the overall picture of fraud, are we any better off than we were after the
financial crisis?
JC: Personally, I think we're worse off. I think we were better off after the dot-com era.
Not because we enacted Sarbanes Oxley [passed by the U.S. Congress in 2002 to protect investors
from fraudulent corporate accounting activities] but because the public saw that there was
justice. The bad guys got caught and at least if I lost money, they paid the price of their
freedom. That never happened in '08 and '09 for a variety of reasons. We've just had a
continuation of the cycle and the cycle is still going.
LP: So fraudsters are emboldened?
JC: Right. And now we come back to bitcoin. What's your recourse if you lose money in an ICO
traded on an exchange offshore? If people lose lots of money, there will be an outcry, but no
recourse. So we're building into something. I suspect it's in front of us and it will be
interesting to see what happens.
LP: What happens in a capitalist system to good people who want to behave ethically? How can
they succeed in an atmosphere in which fraud and unethical behavior are constantly
happening?
JC: I think capitalism is still the best game in town, but the very best games have good
sets of rules, and, even more importantly, good umpires and referees. When the game becomes
tilted and the house has the advantage, people tend to stop playing.
When the system is seen as corrupt or dishonest, there's a political price. We saw this
after the GFC. People in New York and San Francisco and Boston might be fine with everything,
but in the South and Midwest, where you're from and where I'm from, there's still this general
sense that "the bastards got away with it and I'm still suffering." So there is an exogenous
cost to this where people don't feel that there was justice. They feel that they were taken
advantage of by those sharpies on the coasts. It brings out some of the worst in people, of
course, so that's one small step, then, away from social problems like anti-Semitism and
anti-immigrant feelings. It's us v. them. Nobody is looking after us.
Economists and financial analysts have a hard time quantifying all these things, but I think
that the point is that fair markets where there's a set of rules, where there's a cop on the
beat, where there are regulators making sure that people are adhering to the rules, are far
better markets than one in which caveat emptor is written above the casino. I think it behooves
us as a society to understand that capitalism is an amazing driver of progress and prosperity
and wealth, but it can be diverted. There's a dark side to it if we don't play by the rules and
if we don't encourage capital formation from all members of society who don't feel they're
getting a fair shake.
Everybody gets that capitalism involves risk-taking. But the asymmetric situation where
people who are dishonest get away with it while people who are honest and provide capital get
left holding the bag will really stunt capitalism. I think that's the issue which the vigilance
on fraud, why it's so important. It is part of the capitalistic system. There will always be
people trying to take advantage of other people. It's still better than when the whole system
is flawed, like totalitarian communism, where corruption starts at the very top in terms of the
planning itself. But on the other hand, the counterfactual is that it could be so much better
if everybody is participating and understands that there is a strong set of rules and penalties
when you break them and justice as well. That's what I think has been lacking in the last
generation.
Only in cryptocurrency can an enterprise that calls itself "ethical" be represented by
someone who is both an "award winning journalist" and "PR relations" pic.twitter.com/9lMcXPWSb3 -- Izabella Kaminska
(@izakaminska) June 5,
2018
Don't laugh so soon This came across my Twitter
feed a couple days ago, and I was a little taken aback.
I really like the idea of community currencies, but I'm wondering why on earth you'd want
to get them tangled up with blockchain for the purpose of trading/conversion ?
Just make a Global CC and have that be that or am I oversimplifying this?
#OrHaveIMissedSomething
PS: I also take exception to using the term Bancor as well, given what it's original purpose was. Not too sure
#JMK would be down with the blockchain .
Why wouldn't a Zimbabwe type country embrace cryptocurrency as money of the iRealm?
Seems like it wouldn't be that hard to get outsiders to believe in it, as long as it was
pretty vague, and most wouldn't know that the very same country issued $100 Trillion
banknotes not so long ago.
Zimbabwe didn't need printing facilities when they were cranking out oodles of currency,
as it was all printed in Germany. (who got stiffed on payment, if memory serves)
'John Law was the first person to write about the need for foreign governments to have
fiat currencies and not be tethered to gold and silver. Law's failed experiment, which added
lots of fraudulent bells and whistles to that scheme in France, put the idea on the back
burner for a while. But economic historians have revisited it now and his early papers are
genius.' -- Jim Chanos
This is bizarre historical revisionism. John Law didn't add "fraudulent bells and
whistles" -- fraud was the whole point of fiat currencies, then [1720 -- Mississippi
bubble] and now.
Fiat currencies were born in original sin, that is. When Bubble III blows like Kilauea,
the central banksters who engineered this global calamity may find themselves (like Law)
involuntarily expatriated by angry mobs of peasants with pitchforks.
Currency is born in sin, and may only be cleansed by the divine power of God, err, Gold.
Only by having supreme faith in its shininess will your economy be saved. Do not question how
or why, as Gold works in mysterious way. Au men.
I don't understand Jim . central banks have been staffed largely by monetarist and quasi
monetarists throughout the entire neoliberal period. Then you have the vast majority of the
politicians holding the same view.
But anyway I thought quality held true in both cases, so what agenda threatened the
quality of fiat – at onset. I mean what mob forwarded all the innovation [tm],
completely ignored poor or criminal underwriting standards, completely miss-priced risk, was
completely oblivious to obvious gaming everything for "personal" profit.
I really can't see how fiat forced some people to act in such an anti social manner by its
will alone. I mean that sort of broad social dominance is usually reserved for social
narratives.
Sorry but I really never understood the logic behind the money did it thingy .
I do wonder about folks who describe alternative forms of governance with a very clear
lack of understanding of political/economic arrangements.
You can't really have a totalitarian communism. Chanos should do some history homework on
what the USSR was, and why the system was doomed to fail starting all the way back with
Lenin. Lenin didn't believe that the Russians were ready for the revolution, he considered it
a holding pattern waiting for the revolution to happen in Germany.
Just because you (or an autocrat like Stalin) call something a communism or socialism,
doesn't make it so.
"But the asymmetric situation where people who are dishonest get away with it while people
who are honest and provide capital get left holding the bag will really stunt
capitalism."
Good. I can't think of any better evidence that the system is archaic and if left
unchecked eats itself. Chanos might think about re-reading some Marx.
"I'm always told confidently it won't matter because they owe it to themselves." Isn't
that the basis of MMT? Heck, that means Murica is heading towards eternal prosperity.
I'm still wondering if the long game is to use a crypto currency as a petro currency, to
supplant the US dollar. That way, countries (and corporations) with trade surpluses with the
US can hoard their surpluses in the crypto-cum-petro currency rather than US assets (bonds
and stocks). In an asset that has neutrality with respect to any nation state. Just like gold
used to have.
There's a book that suggests this line of thinking, but doesn't really seem to chase it
down adequately: https://www.amazon.com/dp/B07BPM3GZQ . See review
on Frances Coppola's website.
There is a 25 minute clip here that describes the creation of money and the recording of
transactions (the blockchain) and does not seem fraudulent in any way:
Just when during WW1 the British determined they were going to be backstabbed by their American cousins is unknown to me, but
hopefully my unfinished research into that era will provide an answer. Clearly, Keynes knew what would occur as he observed the
proceedings at Versailles, which prompted him to go to Marseilles to write Consequences. I greatly disagree with most of
Wikipedia's discussion of
Consequences except for this bit in the intro:
"In his book, he argued for a much more generous peace, not out of a desire for justice or fairness – these are aspects of
the peace that Keynes does not deal with – but for the sake of the economic well-being of all of Europe, including the Allied
Powers, which the Treaty of Versailles and its associated treaties would prevent. [My Emphasis]
Thanks to Wilson's stroke, we'll never know how he really felt about the last months of his administration; his wife becoming
the first de facto female president of the USA. One of the better indicators about the nascent Deep States's feeling about Versailles
is their behavior during the 1920s as it laid the ground work for the Great Depression's onslaught with Dollar Diplomacy and Teapot
Dome exemplifying its moral compass. Prohibition's gangsters and coppers provided the required distraction of the masses until
the money vanished. Then came radio, the beginnings of mass media and onset of media conglomeration.
i think what is missing in your analysis "how governments that print their own currency such as US, UK and China can print
as much as they want and use it as they like" is the key acknowledgement that the us$ has been used as world currency.
and Canada.
The US $ is the World Currency because the US is the only country in the World that exports it's currency more than $0.5 Trillion/year.
Like a virus really. It's that simple if the US didn't export $ it wouldn't be the reserve currency.
The other part about sovereigns being able to "print all they want" is a falsehood without context.
First of all, when people refer to "printing" it usually means "spending" although I'm not sure they think of it in those terms.
The actual printing of physical currency/coins moves money from checking accounts in the banking system to petty cash accounts.
No new money is created by that kind of "printing". About 2% of US $ is coins or currency, the rest exists only on balance sheets.
Secondly, a sovereign is able to buy anything for sale in it's own currency as long as the resource being bought exists and
is for sale. You can't buy something that doesn't exist. The constraint on money creation is resources not arithmetic, which is
the most widely misunderstood characteristic of fiat currencies.
Further, a sovereign that HAS NO DEBT IN A FOREIGN CURRENCY has zero risk of insolvency there is no liability (in it's own
currency) a sovereign cannot satisfy. The US holds no foreign debt. Nor does Canada, Australia, Japan, UK, etc. as far as I know.
Every member in the Eurozone is a de-facto holder of foreign debt (the Euro member countries cannot freely create Euro's. They
are more like private borrowers).
gov'ts were in a position to print their own money and not have to pay interest thru the private banking sector for it.
James, this is another myth unless you are talking about the Eurozone. The US Federal government does not pay interest to the
banking sector, it pays interest to holders of Treasury securities. To do so was a CHOICE not a requirement. Paying interest on
previously created monies was voluntary. Congress created the banking system (for the US) through the Federal Reserve Act of 1913,
which created and governs the banking system, and chose to pay interest later after WWI I believe (probably as a give-away to
bankers who didn't think they made enough money off of WWi). MRW knows a lot more about this history if he's around.
Interest paid on the "debt" (all money is debt, interest or not by definition) is a net transfer of funds to the private sector
(those who hold Treasury securities). Those funds increase the money supply. Anyone can hold Treasury securities, not just banks.
They are a risk-free investment vehicle (the only one).
Further, it is the Fed that sets interest rates, not the bond-holders ("bond vigilantes") as they are referred to. 10 years
of zero-interest rates post 2008 should be proof enough of that.
Treasury securities (bonds) move $ from a checking account at the Fed to a savings account at the FED. They are $ that earn
interest. This is all explained in the Mosler pdf I linked to.
In double-entry accounting a National Debt™ for the government is NATIONAL SAVINGS for the citizens, as are the interest payments.
All this worry about sovereign debt is silliness. Without sovereign debt the currency of issue wouldn't exist. Sovereign debt
is our money (although the elites won't let us acquire much of it).
Of course the Marxist critique of and challenge to Capitalism was central in all this ! The West was competing with the East (
simplifying)and when this situation changed with Anglo Hegemony 1990 , these balances that had seen overall development towards
the 'welfare state ' disintegrated .
Once the U S got its opportunistic run at this situation, crudely grasping for further power we rapidly reached the present
situation , with its repeat of World War scenarios , as competing economic / militarised blocs do exactly that !
Yes, Mosler not being an economist is a feature, not a bug. I agree, economists are idiots, but I suspect they're paid idiots.
What's the Upton Sinclair quote ?
From where I sit MMT savvy economists are not idiots. They are however outcasts. If your not an insider you're an outsider,
and outsiders don't get to make the big money, if they don't starve.
Here's a video excerpt regarding our pre-eminent economist Paul Krugman lest you think he isn't in on the con:
@176 paulmeli.. thanks.. i had to read your comment a few times, and it still isn't sinking in fully.. i am getting some of it,
but maybe it is my conspiracy run brain that wants to know how we've been screwed over by the banks.. that is what i believe has
happened...MRW.. haven't seen him in a good while.. every time he would come all my negative stereo types about the private banking
sector were put on hold, as i recall!
i think a lot of this has to do with exporting / importing between countries... especially the part about holding foreign debt..
how does another country pay for something? this is why we read today of how russia, china and iran are getting into financial
arrangements whereby they don't have to go thru the us$.. wasn't this a good part of the reason the usa went to war in iraq, or
libya? iraq and libya wanted to trade in euros, as opposed to us$.. well - hopefully MRW can come and bring me back to reality!
it seems the world financial markets are one big ponzi scheme... think of the derivative markets.. one is not trading in some
actual commodity.. it is increasingly opaque and shrouded in speculation, while run on computers...
i am sorry paul, but i can only go so far in my understanding here.. as i understand it, something is very wrong in the financial
system at present.. it is also the reason these financial sanction games are typically a lead up to war... one group has undue
power and influence over the worlds finances - the usa - and they exercise this clout via sanctions, and if that doesn't work
- war / regime change - etc. etc... obviously i am missing something here, but i will be damned if i buy the official hokum from
an economist! thanks for trying to educate me.. n
I despise Netanyahu but please change the headline from Netanyahoo as Yahoo was used as an antisemtic slur in the past. I'm sure
the author was not aware of this outdated meaning but it does the cause harm. Thank you.
something is very wrong in the financial system at present..
I think it's always been this way but now the corruption is so out in the open it seems like it's worse. I'm not sure it is.
The way finance corrupts is that obscene riches are offered to state leaders to sell out their own citizens for pennies on
the dollar. And they do it, because if they don't regime change will follow. It's similar to the way corporate raiders take over
businesses, sell off the assets and load the business up with debt, then sell what's left. With all of that debt said business
has no chance of success. A handful of financial guys (parasites of the worse kind) walk away with the cash.
Corporate strip-mining - the business plan is simple and it's always the same - no matter if it's a business or a country.
Something to keep in mind about all of this Iran business is that Trump can now move full speed ahead with Bolton and Pompeo in
place. I find it oddly comforting that, generally speaking, Trump and his administration make no attempt to cloak their psychopathy
in coded language. I thought these remarks from Pompeo yesterday as he addressed the lackeys at Foggy Bottom yesterday particularly
illuminating in this regard:
"I talked at my hearing about the fact that this nation is so exceptional, and so incredibly blessed and the facts that derive
from that are that it also creates a responsibility, a duty for America all across the world. And I know for certain that America
can't execute that duty, can't achieve its objectives absent you all. Absent executing America's foreign policy in every corner
of the world with incredible vigor and incredible energy. And I look forward to helping you all advance that."
Money supply increases with debt creation and decreases with debt payment. Wipe out all debt and money supply is zero. Taking
out a loan is an example of money creation. The money does not exist in the system till its deposited into your account. Paying
off the mortgage depletes the money supply.
Its true that the government does not pay interest on money the Fed loans them. Thats why so little is loaned directly to the
government until the last crash. Money is not created by interest. That money does not exist without new debt. The government
borrows the money to pay the interest.
A key reason the US is the reserve currency is OPEC. OPEC serves Big Oil interests which is interlocked with Big Banking and
requires purchases of Oil to be in USD. Hence the name Petro Dollar. OPEC may produce the oil but its The Big Oil (4 sisters)
that transports most of it to market, refines much of it and provides the equipment for OPEC members to get the oil out of the
ground.
We also export a tremendous amount of food that requires payment in USD, and US manufacturing is now in China and consumer
debt allows us to purchase a great amount of goods from China in USD. Manufacturers in China need to pay expenses in RMB so sell
USD to Chinese banks. Chinas Central Bank Prints up RMB at no interest to buy the USD and then loans it to the US at interest.
Its a perfect system and is basically why the USD will never fail unless those in control want it to.
A modern fellow of genus Homo protests his innocence. "I don't work because I worked much
harder before", says he. "I labored for ten years at a crap job earning $30,000 per year and
that earned me the right to live in miserable conditions in which the loss of my job would
have made me destitute in weeks. But, I was not content to labor as my fellows. I got a
second job at $20,000 per year and I was so thrifty that I spent not a penny of it but banked
it all so that at the end of my time I had $300,000, a princely sum. I invested it wisely at
10% and now I can live for the rest of my life, if modestly, off the proceeds of only my own
sweat, my own thriftiness, and my own discipline. And, if there was any luck to it - in my
not facing misfortune or ill health or any other calamity - that was the product of my own
luck too. I owe nothing to anyone. What I have is due to myself alone, and those who have
much more than I, it seems to me that they must have arrived at it the same as I, perhaps
over generations. What is this social power you speak of when it is only individual labor and
individual property that stems from it? It seems to me that you merely envy that which you
are too lazy to earn for yourself."
"My dear independent fellow" says we, "let us understand the simple arithmetic of your
claims. If your story is as you say and we ignore all else that you report, still at the end
of ten years, we see only $200,000. And, if you continue to live at this admittedly low
level, nevertheless, you will have run through your entire accumulated proceeds in only 6
years and eight months. More than this, by your accounting, it would take one and a third
lifetimes to create a single lifetime without labor, and this at the exceedingly low
standards and exceptionally favorable circumstances that you assume. How then are we to
explain those who live without labor for generations, and this at a thousand or ten thousand
times times the level that you report? How many generations of 'thrift' and 'hard work' would
this require? What you claim is impossible for you and beyond impossibility for those who
live above you. Where is this magic of 'individual labor and individual property' that you
speak of?"
"But you forget interest", protests our friend. "My money makes money, and simply by the
act of having some which is not consumed in day to day living, that which I save is
augmented. It is this which grants me my independence."
"We forget as much as your money 'makes'," answers we, "which is nothing at all. Set your
money on the table and leave it there for as long as you like. Nothing happens to it. It
remains the same. It is only by setting it in motion as capital that anything whatever is
'made' and that 'making' is the product of labor, the same as your own. Your interest
comes from the command of the labor of others, just as your own was once commanded and
after 6 years and eight months not a speck of 'hard work', 'thrift', 'good luck' or 'wisdom'
is left. Neither is there any trace of 'independence' or 'personal property' You now live by
the labor of others... by the transformation of your pitiful 'savings' into Capital, no
matter how small the sum. It is your ability to command the labor of others as a social
power that gives you your ability and that you have a poor man's caricature of that
process changes nothing other than to lay fraudulent your claims to the right. You might as
well claim innate superiority or the right of the sword as did the slave master or the
god-given hierarchy of obligations of the lord or even the phases of the moon, if you like.
You eat without working because you have maneuvered yourself into a position in which others
work to feed you. You are the opposite of what you claim."
"You're just trying to make me feel bad.", says our friend.
"We don't give a shit how you feel", says we. "It is modest enough what you do... just as
you claim. It is your willingness to ignore what is closer to your face than your nose that
we tire of. "
Our friend orders another beer and pretends to watch the hockey game though he would be
hard pressed to name two players on either team.
Capital is therefore not only personal; it is a social power.
"... China, Russia, et. al. realized that the debt-saturated U.S. was propped up by the fact that the U.S. "dollar" was the reserve banking and trading currency of the entire world and that the "Petrodollar" was one of the main pillars of it, and that this system was the main source of U.S. influence and power around the world and allowed the U.S. and friends to impose financial sanctions on other countries. They also saw that the U.S. was not using gold or silver as a type of support or backup for the financial system. Therefore, they developed their own computer servers to route orders between banks and financial companies that will operate outside of the SWIFT system dominated by the U.S. It is now operational and is called CIPS (Cross-Border Interbank Payment System)-- ..."
In addition to the common desire of some (or many) human beings to exercise authority over
other groups of people, I think Xi Jinping and his supporters want to complete the large and
complex economic and financial projects they have started. It is not just the road and
railroad and other infrastructure projects tied to the regional trading structure China has
been working on, but a financial structure independent of the existing banking and financial
system that was put together by the U.S. and Britain.
It is my opinion that China, Russia, Iran, and probably additional countries decided to
make a move after the brazen 2003 invasion of Iraq by the U.S. and others, and the massive
financial fraud partly exposed in the U.S. and Britain in 2008 and afterwards, which fraud
was not stopped and the perpetrators were bailed out and none were prosecuted.
China, Russia, et. al. realized that the debt-saturated U.S. was propped up by the
fact that the U.S. "dollar" was the reserve banking and trading currency of the entire world
and that the "Petrodollar" was one of the main pillars of it, and that this system was the
main source of U.S. influence and power around the world and allowed the U.S. and friends to
impose financial sanctions on other countries. They also saw that the U.S. was not using gold
or silver as a type of support or backup for the financial system. Therefore, they developed
their own computer servers to route orders between banks and financial companies that will
operate outside of the SWIFT system dominated by the U.S. It is now operational and is called
CIPS (Cross-Border Interbank Payment System)--
In addition, they are moving to break the Petrodollar. In the early 1970's, the U.S. made
a non-treaty deal with Saudi Arabia that if they got the rest of OPEC to sell oil and gas to
the whole world only in U.S. dollars and would plough some of the money back into U.S.
government debt and into the stock market casino, the U.S. would protect the Saudi ruling
family so it could run the entire country as its private business. This forced the whole
world to get U.S. dollars in order to buy oil and gas, which further put the dollar in as
banking reserves around the world, which further pushed the dollar into being used to settle
much of the trade between countries.
However, now some contracts are being made to buy and sell oil and gas not in the U.S.
dollar, but in other currencies, especially the Chinese renminbi (a/k/a yuan). Also, both
China and Russia have been buying large amounts of gold for several years. To get around some
of the U.S. sanctions prior to the Joint Comprehensive Plan of Action (JCPOA), Iran sold oil
and gas in exchange for gold. Since gold is not a government created and ordered "fiat"
money, it cannot be choked off by the SWIFT system or controlled through numbers on computer
hard drives in banks.
Russia also remembers what happened after the collapse of the Soviet Union when the U.S.
financial "experts" [sic] went there to set up a "wonderful" market-based economy, but what
happened of course was the creation of a system to loot Mother Russia and establish a new
oligarchy tied in with the U.S., Britain, and Israel.
In the early 1990's when the Soviet Union pulled out of eastern Europe, the U.S. had a
chance to help the world be a safer and more peaceful place. The methods of medical diagnosis
and surgical technology developed in the U.S. could have been the basis of a new foreign
policy that would have voluntarily opened doors across the world.
But it was not to be. The desire of some to be king of the world pushed the chance of
improvement aside. Nevertheless, today even autocratic governments see that having financial
and governmental options can be a beneficial thing.
And to our immediate south, a movement has been going on for a while in Mexico to
establish a money based on silver, promoted by Hugo Salinas Price and others--
For obvious reasons, I am not optimistic about Mexico, the deterioration of which has been
a sad thing to see. It needs a new and real revolution.
Xi's move is not a unilateral thing. He had to have the support of the ruling committees
in China. Keep your eye on the financial structure, gold, and silver.
I've been waiting to see what happens with the SDR (Special Drawing Right). The IMF
(International Monetary Fund) added it to the SDR basket in October 2016 after a lot of foot
dragging by the US. The AIIB (Asian Infrastructure Investment Bank) was setup largely as a
Chinese alternative to the US dominated IMF and World Bank because they were not being given
an appropriate "place at the table" in the IMF, which was founded as part of the Bretton
Woods Agreement at the end of WWII.
I see the global monetary reset currently underway as the slowly moving, but
unstoppable, glacier that is forcing all other events.
Sunday, January 21, 2018Blockchain: what it is, what it does, and why you
probably don't need one
Dilbert - by Scott Adams
Interest in blockchain is at a fever pitch lately. This is in large part due to
the eye-popping price dynamics of Bitcoin --the original bad-boy cryptocurrency--which
everyone knows is powered by blockchain ...whatever that is. But no matter. Given that
even big players like Goldman Sachs are getting into the act (check out their super slick
presentation here: Blockchain--The New Technology of
Trust ) maybe it's time to figure out what all the fuss is about. What follows is based on
my slide deck which I recently presented at the Olin School of Business at a Blockchain
Panel (I will link up to video as soon as it becomes available)
Things are a little confusing out there I think in part because not enough care is taken in
defining terms before assessing pros and cons. And when terms are defined, they sometimes
include desired outcomes as a part of their definition. For example, blockchain
is often described as consisting of (among other things) an immutable ledger. This is
like defining a titanic to be an unsinkable ship.
So what do people mean when they bandy about the term blockchain ? I recently had a
chance to learn about the project from a corporate perspective as represented by Ed Corno of
IBM (see IBM Blockchain ), the
other member of the panel I mentioned above. From Ed's slide deck we have the following
definition:
Blockchain: a shared, replicated, permissioned ledger with consensus, provenance,
immutability and finality.
Well, if this is what blockchain is, then maybe I want one too! The issue I
have with this definition (apart from the fact that it confounds descriptive elements with
desired outcomes) is that it glosses over what I consider to be an important defining
characteristic of blockchain: the consensus mechanism. Loosely speaking, there are two
ways to achieve consensus. One is reputation-based (trust) and the other is
game-based (trustless).
I'm not 100% sure, but I believe the corporate versions of blockchain are likely to stick to
the standard model of reputation-based accounting. In this case, the efficiency gains of
"blockchain" boil down to the gains associated with making databases more synchronized across
trading partners, more cryptographically secure, more visible, more complete, etc. In short,
there is nothing revolutionary or radical going on here -- it's just the usual advancement of
the technology and methods associated with the on-going problem of database management.
Labeling the endeavor blockchain is alright, I guess. It certainly makes for good
marketing!
On the other hand, game-based blockchains--like the one that power Bitcoin--are, in my view,
potentially more revolutionary. But before I explain why I think this, I want to step back a
bit and describe my bird's eye view of what's happening in this space.
A Database of Individual Action Histories
The type of information that concerns us here is not what one might label "knowledge," say,
as in the recipe for a nuclear bomb. The information in question relates more to a set of
events that have happened in the past, in particular, events relating to individual actions.
Consider, for example, "David washed your car two days ago." This type of information is
intrinsically useless in the sense that it is not usable in any productive manner. In addition
to work histories like this, the same is true of customer service histories, delivery/receipt
histories, credit histories, or any performance-related history. And yet, people value such
information. It forms the bedrock of reputation and perhaps even of identity. As such, it is
frequently used as a form of currency.
Why is intrinsically useless history of this form valued? A monetary theorist may tell you
it's because of a lack of commitment or a lack of trust (see Evil is the Root of All
Money ). If people could be relied upon to make good on their promises a priori ,
their track records would largely be irrelevant from an economic perspective. A good reputation
is a form of capital. It is valued because it persuades creditors ( believers ) that more reputable agencies are
more likely to make good on their promises. We keep our money in a bank not because we think
bankers are angels, but because we believe the long-term franchise value of banking exceeds the
short-run benefit a bank would derive from appropriating our funds. (Well, that's the theory,
at least. Admittedly, it doesn't work perfectly.)
Note something important here. Because histories are just information, they can be created
"out of thin air." And, indeed, this is the fundamental source of the problem: people have an
incentive to fabricate or counterfeit individual histories (their own and perhaps those of
others) for a personal gain that comes at the expense of the community. No society can thrive,
let alone survive, if its members have to worry excessively about others taking credit for
their own personal contributions to the broader community. I'm writing this blog post in part
(well, perhaps mainly) because I'm hoping to get credit for it.
Since humans (like bankers) are not angels, what is wanted is an honest and immutable
database of histories (defined over a set of actions that are relevant for the community in
question). Its purpose is to eliminate false claims of sociable behavior (acts which are
tantamount to counterfeiting currency). Imagine too eliminating the frustration of discordant
records. How much time is wasted in trying to settle "he said/she said" claims inside and
outside of law courts? The ultimate goal, of course, is to promote fair and efficient outcomes.
We may not want something like this creepy Santa Claus technology , but
something similar defined over a restricted domain for a given application would be nice.
Organizing History
Let e(t) denote a set of events, or actions (relevant to the community in question),
performed by an individual at date t = 1,2,3,... An individual history at date t is denoted
Aggregating over individual events, we can let E(t) denote the set of individual actions at
date t, and let H(t-1) denote the communal history, that is, the set of individual histories of
people belonging to the community in question:
Observe that E(t) can be thought of as a "block" of information (relating to a set of
actions taken by members of the community at date t). If this is so, then H(t-1) consists of
time-stamped blocks of information connected in sequence to form a chain of blocks. In this
sense, any database consisting of a complete history of (community-relevant) events can be
thought of as a "blockchain."
Note that there are other ways of organizing history. For example, consider a cash-based
economy where people are anonymous and let e(t) denote acquisitions of cash (if positive) or
expenditures of cash (if negative). Then an individual's cash balances at the beginning of date
t is given by h(t-1) = e(t-1) + e(t-2) + ... + e(0). This is the sense in which "
money is memory ." Measuring a person's worth by how much money they have serves as a crude
summary statistic of the net contributions they've made to society in the past (assuming they
did not steal or counterfeit the money, of course). Another way to organize history is to
specify h(t-1) = { e(t-1) }. This is the "what have you done for me lately?" model of
remembering favors. The possibilities are endless. But an essential component of
blockchain is that it contains a complete history of all community-relevant events. (We
could perhaps generalize to truncated histories if data storage is a problem.)
Database Management Systems (DBMS) and the Read/Write Privilege
Alright then, suppose that a given community (consisting of people, different divisions
within a firm, different firms in a supply chain, etc.) wants to manage a chained-block of
histories H(t-1) over time. How is this to be done?
Along with a specification of what is to constitute the relevant information to be contained
in the database, any DBMS will have to specify parameters restricting:
1. The Read Privilege (who, what, and how);
2. The Write Privilege (who, what, and how).
That is, who gets to gets to read and write history? Is the database to be completely open,
like a public library? Or will some information be held in locked vaults, accessible only with
permission? And if by permission, how is this to be granted? By a trusted person, by algorithm,
or some other manner? Even more important is the question of who gets to write history. As I
explained earlier, the possibility for manipulation along this dimension is immense. How to
guard against to attempts to fabricate history?
Historically, in "small" communities (think traditional hunter-gatherer societies) this was
accomplished more or less automatically. There are no strangers in a small, isolated village
and communal monitoring is relatively easy. Brave deeds and foul acts alike, unobserved by some
or even most, rapidly become common knowledge. This is true even of the small communities we
belong to today (at work, in clubs, families, friends, etc.). Kocherlakota (1996) labels H(t-1) in
this scenario "societal memory." I like to think of it as a virtual database of individual
histories living in a distributed ledger of brains talking to each other in a P2P fashion,
with additions to, and maintenance of, the shared history determined through a consensus
mechanism. In this primitive DBMS, read and write privileges are largely open, the latter being
subject to consensus. It all sounds so.. . blockchainy.
While the primitive "blockchain" described above works well enough for small societies, it
doesn't scale very well. Today, the traditional local networks of human brains have been
augmented (and to some extent replaced) by a local and global networks of computers capable of
communicating over the Internet. Achieving rapid consensus in a large heterogeneous community
characterized by a vast flows of information is a rather daunting task.
The "solution" to this problem has largely taken the form of proprietary databases with
highly restricted read privileges managed by trusted entities who are delegated the write
privilege. The double-spend problem for digital money, for example, is solved by delegating the
record-keeping task to a bank, located within a banking system, performing debit/credit
operations on a set of proprietary ledgers connected to a central hub (a clearing agency)
typically managed by a central bank.
The Problem and the Blockchain Solution
Depending on your perspective, the system that has evolved to date is either (if you are
born before 1980) a great improvement over how things operated when we were young, or (if you
are born post 1980) a hopelessly tangled hodgepodge of networks that have trouble communicating
with each other and are intolerably vulnerable to data breaches (see figure below, courtesy Ed
Corno of IBM).
The solution to this present state of affairs is presented as blockchain (defined
earlier) which Ed depicts in the following way, Well sure, this looks like
a more organized way to keep the books and clear up communication channels, though the details
concerning how consensus is achieved in this system remain a little hazy to me. As I mentioned
earlier, I'm guessing that it'll be based on some reputation-based mechanism. But if this is
the case, then why can't we depict the solution in the following way?
That is, gather all the agents and agencies interacting with each other, forming them into a
more organized community, but keep it based on the traditional client-server (or hub-and-spoke)
model. In the center, we have the set of trusted "historians" (bankers, accountants, auditors,
database managers, etc.) who are granted the write-privilege. Communications between members
may be intermediated either by historians or take place in a P2P manner with the historians
listening in. The database can consist of the chain-blocked sets of information (blockchain)
H(t-1) described above. The parameters governing the read-privilege can be determined
beforehand by the needs of the community. The database could be made completely open--which is
equivalent to rendering it shared. And, of course, multiple copies of the database can be made
as often as is deemed necessary.
The point I'm making is, if we're ultimately going to depend on reputation-based consensus
mechanisms, then we need no new innovation (like blockchain) to organize a database. While I'm
no expert in the field of database management, it seems to me that standard protocols, for
example, in the form of SQL Server 2017 , can
accommodate what is needed technologically and operationally (if anyone disagrees with me on
this matter, please comment below).
Extending the Write Privilege: Game-Based Consensus
As explained above, extending the read-privilege is not a problem technologically. We are
all free to publish our diaries online, creating a shared-distributed ledger of our innermost
thoughts. Extending the write-privilege to unknown or untrusted parties, however, is an
entirely different matter. Of course, this depends in part on the nature of the information to
be stored. Wikipedia seems to work tolerably well. But its hard to use Wikipedia as currency.
This is not the case with personal action histories. You don't want other people writing your
diary!
Well, fine, so you don't trust "the Man." What then? One alternative is to game the
write privilege. The idea is to replace the trusted historian with a set of delegates drawn
from the community (a set potentially consisting of the entire community). Next, have these
delegates play a validation/consensus game designed in such a way that the equilibrium
(say, Nash or some
other solution
concept ) strategy profile chosen by each delegate at every date t = 1,2,3,... entails: (1)
No tampering with recorded history H(t-1); and (2) Only true blocks E(t) are validated and
appended to the ledger H(t-1).
What we have done here is replace one type of faith for another. Instead of having faith in
mechanisms that rely on personal reputations, we must now trust that the mechanism governing
non-cooperative play in the validation/consensus game will deliver a unique equilibrium outcome
with the desired properties. I think this is in part what people mean when I hear them say
"trust the math."
Well, trusting the math is one thing. Trusting in the outcome of a non-cooperative game is
quite another matter. The relevant field in economics is called mechanism design . I'm not going to get
into details here, but suffice it to say, it's not so straightforward designing mechanisms with
sure-fire good properties. Ironically, mechanisms like Bitcoin will have to build up
trust the old-fashioned way--through positive user experience (much the same way most of us
trust our vehicles to function, even if we have little idea how an internal combustion engine
works).
Of course, the same holds true for games based on reputational mechanisms. The difference
is, I think, that non-cooperative consensus games are intrinsically more costly to operate than
their reputational counterparts. The proof-of-work game played by Bitcoin
miners, for example, is made intentionally costly (to prevent DDoS attacks ) even though
validating the relevant transaction information is virtually costless if left in the hands of a
trusted validator. And if a lack of transparency is the problem for trusted systems, this
conceptually separate issue can be dealt with by extending the read-privilege communally.
Having said this, I think that depending on the circumstances and the application, the cost
associated with a game-based consensus mechanism may be worth incurring. I think we have to
remain agnostic on this matter for now and see how future developments unfold.
Blockchain: Powering DAOs
If Blockchain (with non-cooperative consensus) has a comparative advantage, where might it
be? To me, the clear application is in supporting Decentralized Autonomous
Organizations (DAOs). A DAO is basically a set of rules written as a computer program.
Because it possesses no central authority or node, it can offer tailor-made "legal" systems
unencumbered by prevailing laws and regulations, at least, insofar as transactions are limited
to virtual fulfillments (e.g., debit/credit operations on a ledger).
Bitcoin is an example of a DAO, though the intermediaries that are associated with Bitcoin
obviously are not. Ethereum is a platform that permits the construction of more sophisticated
DAOs via the use of smart contracts . The comparative advantages
of DAOs are that they permit: (1) a higher degree of anonymity; (2) permissionless access and
use; and (3) commitment to contractual terms (smart contracts).
It's not immediately clear to me what value these comparative advantages have for registered
businesses. There may be a role for legally compliant smart contracts (a tricky business for
international transactions). But perhaps the potential is much more than I can presently
imagine. Time will tell.
So. The US economy is just fine. The
post-recession 2010 Dodd-Frank legislation has cured all. Banks have lots of cash. Congress is
your friend and that certain-to-pass Tax Cut and Jobs bill will finally allow you, your family
and America to MAGA.
Really?!
... ... ...
Oh, those evil banks! The shadowy corporatist denizens of New York, London, and Brussels,
all guilty of a staggering set of every-expanding frauds couched in the beneficent language of
greedy short-term materialistic gain. Financial "crimes of the decade," like the Savings and
Loan meltdown, the Enron Collapse, and the Great Recession are nowadays reported almost
monthly. With metered US justice amounting only to a monetary fine for the offending criminal
bank – usually a small fraction of the money it previously stole, hypothecated, leveraged
or manipulated – and with criminal prosecution no longer a possibility, these criminals
continue to shovel trillions – not billions – into off-shore, non-tax paying
accounts of the already uber-rich. There is never enough.
Just in time for Christmas, Americans received the "Tax Cut and Jobs Bill 2017" that, of
course, contains not one word about jobs, but sounds so good to the ignorant who are still
transfixed on the false mantra of MAGA.
LIBOR, FOREX, COMEX, which used high-speed program securities trading combined with insider
manipulation, were the first serious examples of recent bank frauds. Since the Great Recession
magically became the Great Recovery, Wachovia and HSBC banks plead guilty to laundering money
for Mexican drug cartels, dictators, and terrorists. Wells Fargo and Bank of America were also
guilty of defrauding 10's of thousands of homeowners of their properties during the
"robo-signing" scandal; that was a scandal until Wells and BA paid the
mortdita and all returned to business as usual. Example: In July 2017 it was revealed
that more than 800,000 customers who had taken out car loans with Wells Fargo were charged for
auto insurance they did not need. Barely a month later, Wells was forced to disclose that the
number of bogus accounts that had been created was actually 3.5 million, a nearly 70 percent
increase over the bank's initial estimate. Why not? When the predictable result will be a small
percentage fine and keep the rest. Now that's MAGA!
If the individual retail – Mom and Pop – investor actually had a choice of where
to put their cash money, then no one with better than a fifth-grade education would put a penny
into the major stock markets. However, the goal of the many banking manipulations have had one
goal: eliminate financial investment choices to one – stocks.
One choice, Gold and silver, the previous historical champion alternative in preserving
one's wealth, was deliberately eliminated from short-term, private investment. The banks,
issued and sold massive amounts of worthless certificate gold and derivative gold (not
bullion), and the same in silver, at a current ratio of 272 paper instruments to one measly
ounce of real physical gold. All this has been leveraged against real precious metals, and next
used to influence the price of gold-down- by selling huge tranches of these ostensibly
worthless gold contracts (1 contract=100 paper ounces) within seconds when the spot price of
gold begins to rise. The banks have done this so often that gold has not risen to levels it
would likely reach without this manipulation. This has driven massive liquidity that would have
gone to precious metals towards stocks. This is likely evidenced by the advent of the meteoric
rise in the price of BitCoin, one that-like gold- escapes the bank's control and a
super-inflated stock market.
Similarly, thanks to the economic trickery that has been three rounds of Quantitative
Easing, the other two conventional options; the bond market and personal bank savings accounts,
have been manipulated to also produce a very low rate of return, driving these cash funds to
stocks. It is this entire package of criminality – providing no other place for liquidity
to go – that has performed as the plot to push a surging world stock market to obscene
levels that have no basis in factually-based accounting or economic methods or
history.
Banks Are Ready for the Next Crash – You're Not!
The banks know the next crash is coming. Like 2007, they have set in motion the next
great(est) recession. Predator banks know that most people, thanks to the aforementioned
financial control, media omission and an inferior education system, are "stupid,"
especially regarding the nuances of financial fraud. As the majority of Americans and Europeans
live in the illusion that their financial institutions will protect their savings, they miss
their bank's greedy preparations for the next stock market crash slithering through the halls
of their Parliament or Congress. This already completed legislation states in plain English,
and the language of endemic corruption, that your bank intends to steal your money directly
from your savings account. And your government will let them do this to you.
30,000 pages make up the Dodd-Frank post-recession legislation, authored by the banks in the
aftermath of the Great Recession. The Dodd-Frank legislation was touted as eliminating the
massive bail-outs the US gave virtually every ill-defined too big to fail worldwide bank and US
corporation in 2008-9. In reality, Dodd-Frank was as much a fraud against Americans as LIBOR or
COMEX manipulation, et al .
Title II of the media-acclaimed 2010 Dodd-Frank Wall Street Reform and Consumer Protection
Act provides the Federal Deposit Insurance Corporation (FDIC) with new powers and methods to
again guarantee – first and foremost – the massively leveraged derivatives trade
once this massive leverage plummets as it did with AIG in 2007-09. However, that collapse was
singular. The next will include all banking sectors.
The bank's paid-for politicians made sure a post-crash congress did not regulate derivatives
via Dodd-Frank, and thereby encouraged a further increase in this financial casino betting,
despite it being the root cause of the original problem. Thanks to Dodd-Frank and its
predecessor, the 2005 Bankruptcy Act, Congress made sure these new fraudulent bets on stock
market manipulation would surely be paid. But, not to worry; there would be no more "Bail
Outs." Next time, these banks would use their depositors' savings, including yours. Meet:
the "Bail-In."
Really?!
All Americans recall the massive "Bail-Outs" of 2007-9 and how their corporately
controlled Federal Reserve Bank and an equally controlled US Congress threw several trillions
of US taxpayer dollars at US banks, dozens of foreign banks, and any corporation with enough
political pull to be defined as "Too Big To Fail" (TBTF). In the aftermath a year later, the
banks understood that Americans and European citizens had lost enthusiasm for any future
government Bail-Out, most preferring instead that any institution suffering
self-inflicted financial duress should enjoy the fruits of their crimes next time, via the
reality of formal bankruptcy proceedings.
The will or financial safety of the public is, of course, no concern to criminal
corporations, and so easily circumvented via congress and the president. So, the banksters have
redefined their criminality using two newly defined methods, both rebranded to be far more
palatable to the public.
Currently, "Too Big to Fail," (TBTF) has a very fraudulent and elitist connotation
just like, "Bail-Out." To millions across the world who have lost their homes, pension
funds, retirement plans, and dreams, this decade-old moniker for financial oppression and fraud
has now been conveniently re-branded. The bailed-out TBTF banks now have a far more magnificent
definition: TBTFs are now, "Globally Active, Systemically Important, Financial
Institutions" (G-SIFI).
This sounds so much better.
But, "Bail-Out"? No No. Would you not prefer a "Bail-In"? Not if you know
the details. "Bail-Outs," may have also lost their flavour but in the new world of the
G-SIFI, the next one is actually just a "Bail-In," away.
Yes, Bail-Ins, the new "systemically" correct term for publicly guaranteed bank
fraud are already named as such in new national policies and laws, appearing in multiple
countries. These finance laws, such as Dodd-Frank and its pending UK and European Union
version, make upcoming Bail-Ins legal. These Bail-Ins allow failing G-SIFI banks to legally
convert the funds of "unsecured creditors" (that's you) into bank capital (that's
them). This includes "secured" creditors, like state and local government funds.
Really?!
With this in mind, I entered the main branch of Wells Fargo. The two checks in hand. On the
way in I was greeted warmly, one after the other, by three more fresh-faced and eager proteges,
all smartly uniformed to match the Wells décor, and who proffered, "Good morning,
Sir!," again, and again and again. Certainly, these little fish were not in possession of
authority enough to cash my mammoth checks, so I asked for bigger game, the Branch Manager.
Thus, I explained my plight to a very lovely lass who predicted she "would be glad to
help me."
"Cheryl," patiently explained that I had come to the right place and she would be
glad to cash both checks. Regarding my previous polite banking experience, she admitted that it
was indeed bank policy to have limits on the availability of cash for withdrawals and that
different branches had different limits. This was the main branch so my request here was
meritorious. Further, she admitted that whatever daily cash coming into the branches in the
form of deposits was not available for withdrawal, but was sent from the main branch for daily
accounting at a central point common to all area Wells bank branches. Only a prescribed amount
of cash was provided with each bank for daily customer cash withdrawals.
Really?!
"A couple of times your current request," was her cautious response to my question about her
branch's limits on check cashing. Not to be put-off, I asked about a hypothetical US$25,000
check. She admitted this would be beyond her branches authority. "But," she smiled,
"Today, you've come to the right place."
The financial law firm Davis Polk estimates the final length of Dodd-Frank, the single
longest bill ever passed by the US government, is over 30,000 pages. Before passage, the six
largest banks in the US spent $29.4 million lobbying Congress in 2010 and flooded Capitol Hill
with about 3,000 lobbyists prior to Obama predictably signing its final unread version. No US
congressman or senator had read it. But, the bank's congressional minions were told to vote for
it. And dutifully they did.
The major cause of the upcoming financial meltdown, as with the pre-2008 conditions, is
globally systemic gambling against national economies, called derivatives. Derivatives are sold
as a kind of betting insurance for managing fraudulent banking profits and risk. So, why fix
systemic banking fraud when the final result allowed these same banks to make even more money
in the aftermath of the national and personal financial destruction they originated in the
first recession?
Instead, thanks to Dodd-Frank, derivatives suddenly have "super-priority" status in
any bankruptcy. The Bank for International Settlements quoted global OTC derivatives at $632
trillion as of December 2012. Naked Capitalism states that $230 trillion in worthless
derivatives are on the books of US banks alone. Applied to Dodd-Frank this means that all these
bad bank bets on derivatives will be paid-off first before you may have your savings
cash. If there's actually any cash left once you get to the teller's counter.
Normally in a capital liquidation or bankruptcy proceeding, secured creditors such as a
bank's personal depositors are paid off first because these are hard assets, not investments,
and thus normally have a mandated priority. Under these new "Bail-In" Dodd-Frank
mandates, your government has re-prioritized your bank's exposure and your cash deposit.
Derivatives and other similar banking high-risk ventures are now more highly protected than
bank depositor's savings. In the 2013 example of Cyprus, Germany and the ECB also made
depositors inferior to other bank holdings leaving depositors with, after many months, a small
fraction of their deposits.
And then came Greece.
Selling the lie while using the language of Dodd-Frank, we are told by media whores that
banks will not be given taxpayer bailouts next time. True. The preamble to the Dodd-Frank Act
claims "to protect the American taxpayer by ending bailouts." But how, then, to Bail-In the
G-SIFIs without another taxpayer Bail-Out? No problem.
Enter the FDIC and another new banking term, "cross-border bank resolution." As the
sole US agency required to pay back depositors who lose savings up to $250,000, FDIC is armed
with a paltry US$25 billion war chest to pay depositors. Under Dodd-Frank, the FDIC will be the
mechanism to replace deposits lost or squandered by bank fraud. The public, however, has an
estimated total US cash deposits of US$7.36 trillion so, once the banks steal your savings,
FDIC will be just a little bit short of funds. How to fix this mathematical shortfall? With, of
course, more of your money via emergency taxes or a massive new round of Quantitative Easing
(QE). Either way, by the time this happens your money is long gone. And it gets worse.
Really?!
Say, "Goodbye" to your Savings- Two Greedy Methods
It's [FDIC] already indicated that they will confiscate [savings] funds .
-- US congressman Ron Paul
On December 10, 2012, a joint strategy paper was drafted by the Bank of England (BOE) in
conjunction with the Federal Deposit Insurance Corporation (FDIC) titled, "Resolving
Globally Active, Systemically Important, Financial Institutions." Here the plot to steal
depositor savings is clearly laid out.
The report's "Executive Summary" states:
the authorities in the United States (US) and the United Kingdom (UK) have been working
together to develop resolution strategies These strategies have been designed to enable
[financial institutions] to be resolved without threatening financial stability and without
putting public funds at risk.
Sounds good until you read the fine print; i.e., whose risk are they actually
protecting?
While claiming to protect taxpayers, Title II of Dodd-Frank gives the FDIC an enforcement
arm, the Orderly Liquidation Authority (OLA) which is similar to its British counterpart the
Prudent Regulation Authority (PRA). Both now have the authority to punish the personal
depositors of failing banking institutions by arbitrarily making their savings deposits
subordinate – actually tertiary – to bank claims for the replacement value of their
derivatives. Before Dodd-Frank savings deposits were legally senior and primary to these same
claims in a routine bankruptcy.
With the US banks holding only $7 trillion in personal cash savings deposits compared to
$230 trillion is US derivative obligations, FDIC's $25 billion will not be enough. The creators
of Dodd-Frank knew this before it was signed. As John Butler points out in an April 4, 2012,
article in Financial Sense :
Do you see the sleight-of-hand at work here? Under the guise of protecting taxpayers,
depositors are to be arbitrary, subordinated when in fact they are legally senior to those
claims Remember, its stated purpose [Dodd-Frank] is to solve the problem namely the existence
of insolvent TBTF institutions that were "highly leveraged with numerous and dispersed
financial operations, extensive off-balance-sheet activities, and opaque financial
statements.
Oh, but bank depositors can rest easy in the knowledge that replacing their savings will not
come out of their pockets via another bank Bail-Out. Thanks to Dodd-Frank, the first line of
defence will allow Congress to instead replace personal savings with a government paid for $7
trillion bail-in to FDIC to "replace" these savings.
But, that's the good choice.
Worse, Dodd-Frank gives new powers to FDIC and its OLA that allow an even more powerful and
draconian resolution: any deposited funds in a bank, from $1 to $250,000 (the FDIC limit), and
everything above, can instead be converted to bank stock! FDIC has provisions so this can be
done, via OLA, quite literally overnight.
Really?!
An FDIC report released in 2012 ago reads:
An efficient path for returning the sound operations of the G-SIFI to the private sector
would be provided by exchanging or converting a sufficient amount of the unsecured debt from
the original creditors of the failed company [meaning the depositor's cash] into equity [or
stock].
Additionally, per April 24, 2012 IMF report, conversion of bank debt to stock is an
essential element of Bail-Ins included in Dodd-Frank.
The contribution of new capital will come from debt conversion and/or issuance of new
equity, with an elimination or significant dilution of the pre-bail in shareholders. Some
measures might be necessary to reduce the risk of a 'death spiral' in share prices.
Really?!
For affected depositors to retrieve the value of what was formerly the depositor's account
balance, the stock must next be sold. When Lehman Brothers failed, unsecured creditors
(depositors are now unsecured creditors) got eight cents on the dollar.
This type of conversion of deposits into equity already had another test-run during the
bankruptcy reorganization of Bankia and four other Spanish banks in 2013. The conditions of a
July 2012 Memorandum of Understanding resulted in over 1 million small depositors becoming
stockholders in Bankia when they were sold without their permission -- "preferences"
(preferred stock) in exchange for their missing deposits. Following the conversion, the
preferences were converted into common stock originally valued at EU 2.0 per share, then
further devalued to EU 0.1 after the March restructuring of Bankia.
Canada has also stated they are planning a similar "Bail-In" program. The Canadian
government released a document titled the Economic Action Plan 2013 which says, "the Government
proposes to implement a "Bail-In" regime for systemically important banks."
However, don't be getting cute by hiding your cash, precious metals, or passport in a bank
safe deposit box. There are no longer safe either. Dodd-Frank took care of that, too.
Under Dodd-Frank the FDIC, using the auspices of Dept. of Homeland Security (DHS) can
legally, without a warrant, enter the bank vault, have the manager secretly open any and/or all
safe deposit boxes and inventory, or seize the contents. Further, if the manager is honest
enough to inform the depositor of the illegal incursion he is subject to criminal charges and
termination from bank employ. Independent reports reveal that all of America's safe deposit
boxes have already been invaded and inventoried for future confiscation.
This already happened in Greece. Depositors who removed their jewellery or precious metals
were met at the bank's door by security, a metal detector and confiscation.
Really?!
The power of the now remaining G-SIFI banks and FDIC was further evident when, cash finally
in hand, I headed to my bank, JP Morgan Chase, right next door to Wells Fargo. The manager
confirmed that the cash withdrawal policy at Chase was in keeping with that at Wells; very
little cash available on demand. I posed a slight untruth and inquired as to what I should do
about my upcoming need for $50,000 in hard cash. No, her bank would not do that on demand, but
arrangements could be made to have the cash transferred to her bank. That would only take
"about two days." Of course, I would need to fill out a few forms.
What a Difference a Congress Makes!
With the American and UK public again on the hook by law for the anticipated loss of the
banks a distressed depositor might think the plot to defraud them now complete. Au
Contraire .
In its rush to transfer further wealth upwards to off-shore bank accounts, US president
Trump and his recently re-aligned republican bootlickers have left no stone unturned. First,
Trump issued a memorandum that sets in motion his plan to scale back the provisions of
Dodd-Frank and repeal the Fiduciary Rule.
It should be noted that the only voice of economic reason at the White House, Former Fed
Chairman, Paul Volker, divorced himself from this growing scandal of basic mathematics very
publicly. As head of Obama's recession inspired, President's Economic Recovery Advisory Board,
Volker ran into the headwinds of fiscal insanity for too long, resigning in January of 2011 in
disgust. His departure thus coincided with the renewal of the litany of criminal financial
manipulation already discussed here. And now
The House approved legislation on February 2, 2017, to erase a number of core financial
regulations put in place by the 2010 Dodd-Frank Act, as Republicans moved a step closer to
delivering on their promises to eliminate rules that they claim have strangled small businesses
and stagnated the economy. Said Trump:
I have so many people, friends of mine, with nice businesses, they can't borrow money,
because the banks just won't let them borrow because of the rules and regulations and
Dodd-Frank.
Poor banks!
Never mind, of course, that these poor banks are holding derivative exposure thirty-five
times the total cash deposits of US savers nor that their ill-gotten riches – such as the
UBS, Wells Fargo, Bank of America, RBS multi-billion dollar frauds – were taken
off-calendar in Federal court for approximately 15% of the total crime. The banks kept the
rest.
And they want more?!
"We expect to be cutting a lot out of Dodd-Frank," Trump said further defining the
mantra of MAGA. This will likely see the deterioration of the newly created Financial Stability
Oversight Council (FSOC) and the Consumer Financial Protection Bureau (CFPB) since these
agencies curb further excessive risk-taking and the existence of too-big-to-fail institutions
on Wall Street.
Well, depositors, your extreme caution is required. The wording of these new, bank-inspired
sets of legislation is silently waiting to be used by many nations to prioritize banks before
their citizen's. When the time comes, the race to the bank will be a short-lived event
indeed.
With this in mind, I stepped into the bright sunshine outside the walls of JP Morgan/Chase
bank, all but $100.00 of my day's take stuffed deep- and securely- in my pocket, its final
outcome no one's business but my own.
However, for almost everyone else? Well when YOUR bank fails, don't walk, run!
YOU do not want to be second in line.
Really!
Brett Redmayne-Titley is an Independent Journalist, Photographer/ World Citizen. He is a
former columnist: PRESS TV/IRAN; writer and contributor to: Earth First! Journal; Zero Hedge;
Veterans Today; Activist Post; Off-Guardian; Western Journalism; Intellihub; UK Progressive;
Fars News Agency; Russia Insider; Mint Press News; State of the Nation; News of Globe;
Blacklisted News; Before It's News; Common Dreams; Shift Frequency; etc
"... They have behaved badly with an unstable value of bitcoin (huge unpredictable Bitcoin deflation damages any use of bitcoin as a means of exchange as much as huge inflation would). ..."
"... Now no one is really interested in cryptocurrency except as a way to gamble and take money from fools. But if anyone were, linking the blockchain program to prices on an exchange would make it more nearly possible to use the cryptocurrency as a means of exchange. ..."
"... The system is vulnerable to a tacit agreement to trade only on unofficial exchanges. It is necessary that the problem is also made easier if daily trading volume on the official exchange is zero. The problem is the price could shoot up on unofficial exchanges, but this would not affect the price on the official exchange if there were no transactions on the official exchange. ..."
"... The basis was and remains to remove any and all national gov'ts across he globe from any influences on values of currencies, thus pure laissez-faire in the extreme .. as you say libertarian chaos. ..."
"... There is a much more severe problem with bitcoin. As the number mined asymptotically approaches the pre-determined maximum, the cost of mining approaches infinity. As miners are the ones who validate coins, what will happen to the reliability of bitcoin when it becomes uneconomical for anyone to participate in mining? ..."
I am going to make a fool
of myself by suggesting that a cryptocurrency might actually be useful. Bitcoin et al have
negative social utility. They are pure speculative assets which enable people to gamble. Also
bitcoin miners use as much electricity as Denmark. The problem is exactly the aspect which has
made bitcoin famous and which bitcoin enthusiasts consider a strength -- the enormous increase
in the dollar price of bitcoin. This increase, and the recent sharp decline, make bitcoin
useless as a means of exchange. Most firms don't want to gamble.
So I (semi-seriously this time) propose botcoin which might have a more stable dollar
exchange rate. The idea is to link the blockchain verification program to an official
exchange.
Backing up, there are two very different sorts of web-servers related to bitcoin. One set,
the bitcoin miners, implements the original idea using the Bitcoin shareware. They keep a copy
of the ledger of all bitcoin transactions -- the blockchain, race to create new blocks, and
evaluate new blocks and add valid new blocks to the chain. The other servers are bitcoin
exchanges in which bitcoin is traded for regular currency. They are not part of the original
plan in which bitcoin would be traded for goods and services and function as a means of
exchange. They have behaved badly with an unstable value of bitcoin (huge unpredictable
Bitcoin deflation damages any use of bitcoin as a means of exchange as much as huge inflation
would).
I propose linking the blockchain program to an exchange. So there would be an official
botcoin exchange (this means it isn't entirely free-entry shareware libertarian anarchism). If
anyone were interested in a new cryptocurrency designed so that speculators can't become rich
(and pigs fly) there would be other unofficial exchanges.
The bitcoin program regulates the frequency of creation of new blocks to roughly one every
six minutes. It does this by adjusting the difficulty of the pointless arithmetic problem which
must be solved to make a new valid block. The idea was to limit the total amount of bitcoin
which will ever be created (to 21 million for some reason). This was supposed to make bitcoin
valuable. So far it has succeeded all too well (I am confident that in the end bitcoin will
have price 0).
It is possible to make the supply of botcoin flexible so the dollar price doesn't shoot up.
I would aim at a price of, say, 1 botcoin = $1000. The idea is to make the pointless problem
which must be solved to add a block easier if the dollar price of botcoin exceeds the target,
and harder if it falls below the target. This should stabilize the price.
Now no one is really interested in cryptocurrency except as a way to gamble and take
money from fools. But if anyone were, linking the blockchain program to prices on an exchange
would make it more nearly possible to use the cryptocurrency as a means of exchange.
The system is vulnerable to a tacit agreement to trade only on unofficial exchanges. It
is necessary that the problem is also made easier if daily trading volume on the official
exchange is zero. The problem is the price could shoot up on unofficial exchanges, but this
would not affect the price on the official exchange if there were no transactions on the
official exchange.
Lyle , December 25, 2017 11:22 pm
Of course Goldman Sachs and its competitors are doing just this building an options and
futures exchange. (it is not really that much different than any other futures and options
business)
Longtooth , December 26, 2017 5:01 am
But Robert,
then the entire foundation for Bitcoin's purpose disappears entirely, so what advantage
remains?
The basis was and remains to remove any and all national gov'ts across he globe from any
influences on values of currencies, thus pure laissez-faire in the extreme .. as you say
libertarian chaos.
By making crypto-currency values subject to national currency exchange rates they cease to
have any reason to exist at all.
We / globally in fact already use crypto exchange via electronic transactions .. adding
block chain to it would be a benefit but a separate cryptocurrency is a worthless redundancy
if it is subject to valuation by exchange rates of national currencies.
What am I missing?.
likbez , December 26, 2017 5:27 am
Great Article !!! I wish I can write about this topic on the same level. Thank you very much. P.S. Happy New Year for everybody !
rick shapiro , December 26, 2017 10:26 am
There is a much more severe problem with bitcoin. As the number mined asymptotically
approaches the pre-determined maximum, the cost of mining approaches infinity. As miners are
the ones who validate coins, what will happen to the reliability of bitcoin when it becomes
uneconomical for anyone to participate in mining?
So when you cut through all the steam and the boilerplate, how do they plan to do it so it's
fairer to poor Ukrainians, but the state spends less?
Ah. They plan to
raise the age at which you
qualify for a pension
, doubtless among other money-savers. If the state plays its cards
right, the target demographic wil work all its adult life and then die before reaching
pensionable age. But as usual, we must be subjected to the usual western sermonizing about
how the whole initiative is all about helping people and doing good.
This is borne out in one of the other 'critical reforms' the IMF insisted upon before
releasing its next tranche of 'aid' – a land reform act which would allow Ukraine to
sell off its agricultural land
in the interests of 'creating a market'. Sure: as if.
Land-hungry western agricultural giants like Monsanto are drooling at the thought of
getting their hands on Ukraine's rich black earth
plus a chink in Europe's armor against
GMO crops. Another possible weapon to use against Russia would be the growing of huge volumes
of GMO grain so as to weaken the market for Russian grains.
Another element of the plan to reduce pension obligations is the dismantling of whatever
health care system that remain in the Ukraine. That is a twofer – save money on
providing medical services and shortening the life span. This would be another optimization
of wealth generation for the oligarchs and for those holding Ukraine debt.
I can just see Ukrainian health authorities giving away free cigarettes to patients and their
families next!
That remark was partly facetious and partly serious: life these days in the Ukraine sounds
so surreal that I wouldn't put it past the Ministry of Healthcare of Ukraine to come up with
the most hare-brained "reform" initiatives.
I recall a news story about the adverse effects of a reduction in smoking on the US Social
Security Trust Fund. Those actuaries make those calculations for a living. The trouble with
shortening life spans via cancer is that end-of-life treatment tends to be very expensive
unless
people do not have or have very basic health insurance, then there is a likely
net gain. Alcohol, murder and suicides are generally much more efficient economically. I just
depressed myself.
Something does not add up. Any government expenditure is an economic stimulus. The only
potentially negative aspect is taxation. Since taxation is not excessive and in fact too
small on key layers (e.g. companies and the rich), there is no negative aspect to government
spending on pensions. So we have here narrow-definition accounting BS.
Agree that in a world where the people, represented by their governments, are in charge of
money creation and governments ran their financial systems independently of Wall Street and
Washington, any government spending would be welcomed as stimulating economic production and
development. The money later recirculates back to the government when the people who have
jobs created by government spending pay the money back through purchases of various other
government goods and services or through their taxes.
But in capitalist societies where increasingly banks are becoming the sole creators and
suppliers of money, government spending incurs debts that have to be paid back with interest.
In the past governments also raised money for major public projects by issuing treasury bonds
and securities but that doesn't seem to happen much these days.
Unfortunately also Ukraine is surviving mainly on IMF loans and the IMF certainly doesn't
want the money to go towards social welfare spending.
In fact, the IMF specifically intervenes to prevent spending loan money on social welfare, as
a condition of extending the loan. That might have been true since time out of mind for all I
know, but it certainly was true after the first Greek bailout, when leaders blew the whole
wad on pensions and social spending so as to ensure their re-election. They then went
sheepishly back to the IMF for a second bailout. So there are good and substantial reasons
for insisting the loan money not be wasted in this fashion, as that kind of spending
customarily does not generate any meaningful follow-on spending by the recipients, and is
usually absorbed by the cost of living.
But as we are all aware, such IMF interventions have a definite political agenda as well.
In Ukraine's case, the IMF with all its political inveigling is matched against a crafty
oligarch who will lift the whole lot if he is not watched. Alternatively, he might well blow
it all on social spending to ensure his re-election, thus presenting the IMF with a dilemma
in which it must either continue to support him, or cause him to fall.
"... It implies that it is money supply that contributes to inflation. However it is not money supply that contributes to inflation it is income. That is money times the velocity of money ..."
Now I just read an article by some guy with the typical quantitative easing is bad because it
just dilutes everyones wealth , debases the currency value and and all that
This is nonsense
It implies that it is money supply that contributes to inflation. However it is not money
supply that contributes to inflation it is income. That is money times the velocity of money
and in fact it is not income that contributes to inflation it is income times the propensity
to consume of that income
money in bonds is not really actively involved in income except for the interest it's earning
so when the central bank "prints money" and then uses that money to buy bonds all the central
bank is doing is exchanging one form of inactive wealth with another form of inactive wealth
that is neither the value of the bond nor the value of the money that the fed printed by the
bond were actively involved in income anyway, except for the interest earned
therefore they do not affect inflation
in fact the value that bond at this point wasn't about to be used for consumption anyway, it
was just being held
after the fed purchases the bond, that the former bondholder now has cash that is no longer
getting a return, (as now the fed is getting the return)
which will prompt the former bondholder to look for a place to put that money
the idea is that the former bondholder will invest the money, that that money will find its
way into funding ventures that cause increased employment, income and production
and it is that investment that will stimulate the economy
like maybe buy other bonds and the issuer of the bond gets that money and can invest in their
business, creating jobs and income and production for their employees.
Which then will have the usual multiplier effect if we are at less than full employment
and at any point the fed can sell back the bond reducing the money supply
in the meantime we might have been able to keep the economy functioning at a high level, keep
more people from being excluded from the benefits, and not lose all that production that is so
essential to increasing our quality of life
I would say precious metals are subject to tighter physical
constraints (first of all, availability) than most of what
have been considered "fiat" currencies.
E.g. emergency
"fiat" coin has been produced from cheaper metals, e.g. iron,
aluminum, or brass. Forgery-resistant paper currency is not
cheap, but probably still cheaper than precious metals.
All that is beside the point - today's currencies are only
virtual accounting entries (though with a not so cheap
supervision and auditing infrastructure attached to enforce
scarcity, or rather limit issuance to approved parties).
Gold and silver prices are
determined by labor costs of production.
Cartels act to limit global supply to push prices above
labor costs, but even the Cartels have trouble resisting
selling into the market when the price far exceeds labor cost
of the marginal unit of production.
In today's political economy, the barrier to entry is rule
of law which requires paying workers to produce without
causing harm to others. The lowest cost new gold production
is all criminal, involving theft of gold from land the miners
have no property rights, done by causing harm and death to
bystanders, with protection of the criminal operations coming
from criminals who capture most of the profit from the
workers.
Estimates vary, but some believe 90% of all gold mined in
5000 years is still held by humans as property. If a method
of extracting gold from sea water at a labor cost of $300 an
ounce, the "destruction of wealth" would be many trillions of
dollars.
All that's needed is a method of processing sea water that
could be built for $300 per ounce of lifetime asset life. A
$300 million in labor cost processing ship that kept working
for 30 years producing over that 30 years a million ounces of
gold would quickly drive the price of gold to $350-400. If it
doesn't, a thousand ships would be quickly built that would
add a billion ounces to the global supply in 30 years
representing 1/6th global supply after 5000 years.
Unless gold suddenly gained new uses, say dresses that
every upper middle class women had to have, and that cost
more than $300 an ounce to return to industrial gold, such
production would force the price of gold to or below labor
cost.
However, a dollar coin plated one atom thick in 3 cents of
gold will always have a value of a dollar's worth of labor.
The number of minutes of labor or the skills required for
each second of labor can change, but as long as the dollar
buys labor, it will have a dollar of value.
If robots do all the work, then a dollar becomes
meaningless. A theoretical economy of robots doing all the
work means a car can be priced at a dollar or a gigadollars,
but the customers must be given that dollar or that
gigadollars, or the robots will produce absolutely nothing.
Robots producing a million cars a month which no one has the
money to buy means the cars cost zero. To simply produce cars
that are never sold means the marginal cost is zero.
Money is a rationing mechanism to control the use and
distribution of scarce economic resources. Labor (of various
specializations) is a scarce resource, or the scarcest
resource commanding the highest price, only if other
resources are more plentiful.
There are many cases where
labor, even specialized labor, is not the critical
bottleneck, and is not the majority part of the price. E.g.
in the case of patents where the owner can charge what the
market will bear due to intellectual property enforcement. Or
any other part of actual or figurative "toll collection" with
ownership or control of critical economic means or
infrastructure. That's pure rent extraction.
Some things cost a lot *not* because of the labor involved
- a lot of labor (not spent on producing the actual good) can
be involved because the obtainable price can pay for it.
The value of precious metals or gems is also entirely
arbitrary. They only have value because someone says they do,
as they have little utilitarian value.
The initial allure of bitcoin has been "anonymity", until
people figured out that all transactions are publicly
recorded with a certain amount of metadata. This can be
partially defeated by "mixing services", i.e. systematic
laundering. There have also been alleged frauds (complete
with arrests) that got a lot of press in the scene, where
bitcoin "safekeeping services" (I don't quite want to say
"banks") "lost" currency or in any case couldn't return
deposits to depositors. No deposit insurance, not much in the
way of contract enforcement, etc.
Then there were stories
about computer viruses and malware targeted at stealing
account credentials or "wallet files".
FWIW, I regard bitcoin as a colossal folly intended to appeal
to crazed libertarian idiots, goldbug nutters, and criminals
and has little utility or real value. Investing in bubble gum
cards makes more sense.
Posted on
April 25, 2017
by
Yves Smith
Yves here. The article makes a comment in passing
that bears teasing out. The inflation that started
in the later 1960s was substantially if not entirely
the result of Lyndon Johnson refusing to raise taxes
because it would be perceived to be to pay for the
unpopular Vietnam War. Richard Nixon followed that
approach.
By Michael Bordo, Professor
of Economics, Rutgers University. Originally
published at
VoxEU
Scholars and policymakers interested in the
reform of the international financial system have
always looked back to the Bretton Woods system as an
example of a man-made system that brought both
exemplary and stable economic performance to the
world in the 1950s and 1960s. Yet Bretton Woods was
short-lived, undone by both flaws in its basic
structure and the unwillingness of key sovereign
members to follow its rules. Many commentators hark
back to the lessons of Bretton Woods as an example
to possibly restore greater order and stability to
the present international monetary system. In a
recent paper, I revisit these issues from over a
half century ago (Bordo 2017).
The Bretton Woods system was created by the 1944
Articles of Agreement at a global conference
organised by the US Treasury at the Mount Washington
Hotel in Bretton Woods, New Hampshire, at the height
of WWII. It was established to design a new
international monetary order for the post war, and
to avoid the perceived problems of the interwar
period: protectionism, beggar-thy-neighbour
devaluations, hot money flows, and unstable exchange
rates. It also sought to provide a framework of
monetary and financial stability to foster global
economic growth and the growth of international
trade.
The system was a compromise between the fixed
exchange rates of the gold standard, seen as
conducive to rebuilding the network of global trade
and finance, and the greater flexibility to which
countries had resorted in the 1930s to restore and
maintain domestic economic and financial stability.
The Articles represented a compromise between the
American plan of Harry Dexter White and the British
plan of John Maynard Keynes. The compromise created
an adjustable peg system based on the US dollar
convertible into gold at $35 per ounce along with
capital controls. The compromise gave members both
exchange rate stability and the independence for
their monetary authorities to maintain full
employment. The IMF, based on the principle of a
credit union, whereby members could withdraw more
than their original gold quotas, was established to
provide relief for temporary current account
shortfalls.
It took close to 15 years to get the Bretton
Woods system fully operating. As it evolved into a
gold dollar standard, the three big problems of the
interwar gold exchange standard re-emerged:
adjustment, confidence, and liquidity problems.
The
adjustment
problem in Bretton Woods
reflected downward rigidity in wages and prices
which prevented the normal price adjustment of the
gold standard price specie flow mechanism to
operate. Consequently, payment deficits would be
associated with rising unemployment and recessions.
This was the problem faced by the UK, which
alternated between expansionary monetary and fiscal
policy, and then in the face of a currency crisis,
austerity – a policy referred to as 'stop-go'. For
countries in surplus, inflationary pressure would
ensure, which they would try to block by
sterilisation and capital controls.
A second aspect of the adjustment problem was
asymmetric adjustment between the US and the rest of
the world. In the pegged exchange rate system, the
US served as central reserve country and did not
have to adjust to its balance of payments deficit.
It was the
n-1th
currency in the system of
n
currencies (Mundell 1969). This asymmetry
of adjustment was resented by the Europeans.
The US monetary authorities began to worry about
the balance of payments deficit because of its
effect on
confidence
. As official dollar
liabilities held abroad mounted with successive
deficits, the likelihood increased that these
dollars would be converted into gold and that the US
monetary gold stock would eventually reach a point
low enough to trigger a run. Indeed by 1959, the US
monetary gold stock equalled total external dollar
liabilities, and the rest of the world's monetary
gold stock exceeded that of the US. By 1964,
official dollar liabilities held by foreign monetary
authorities exceeded that of the US monetary gold
stock (Figure 1).
Figure 1.
US gold stock and
external liabilities, 1951-1975
Source
: Banking and Monetary
Statistics 1941‐1970, Washington DC Board of
Governors of the Federal Reserve System, September
1976, Table 14.1, 15.1.
A second source of concern was the dollar's role
in providing
liquidity
to the rest of the
world. Elimination of the US balance of payments
deficits (as the French and Germans were urging)
could create a global liquidity shortage. There was
much concern through the 1960s as to how to provide
this liquidity.
Robert Triffin (1960) captured the problems in
his famous dilemma. Because the Bretton Woods
parities, which were declared in the 1940s, had
undervalued the price of gold, gold production would
be insufficient to provide the resources to finance
the growth of global trade. The shortfall would be
met by capital outflows from the US, manifest in its
balance of payments deficit. Triffin posited that as
outstanding US dollar liabilities mounted, they
would increase the likelihood of a classic bank run
when the rest of the world's monetary authorities
would convert their dollar holdings into gold
(Garber 1993). According to Triffin when the tipping
point occurred, the US monetary authorities would
tighten monetary policy and this would lead to
global deflationary pressure. Triffin's solution was
to create a form of global liquidity like Keynes'
(1943) bancor to act as a substitute for US dollars
in international reserves.
Policies to Shore Up the System
The problems of the Bretton Woods system were
dealt with by the IMF, the G10 plus Switzerland, and
by US monetary authorities. The remedies that
followed often worked in the short run but not in
the long run. The main threat to the system as a
whole was the Triffin problem, which was exacerbated
after 1965 by expansionary US monetary and fiscal
policy which led to rising inflation.
After a spike in the London price of gold to
$40.50 in October 1960 – based on fears that John F
Kennedy, if elected, would pursue inflationary
policies – led the Treasury to develop policies to
discourage Europeans from conversing dollars into
gold. These included:
Moral suasion on Germany with the threat of
pulling out US troops;
The creation of the Gold Pool in 1961, in
which eight central banks pooled their gold
reserves in order to keep the London price of
gold close to the $35 per ounce parity price;
The issue of Roosa bonds (foreign currency
denominated bonds);
The General Arrangements to Borrow in 1961,
which was an IMF facility large enough to offer
substantial credit to the US;
Operation Twist in 1962, in which the US
Treasury bought long term debt to lower long
term interest rates and encourage investment,
while the Federal Reserve simultaneously sold
short-term Treasury bills to raise short-term
rates and attract capital inflows; and
The Interest Equalization Tax in 1963, which
imposed a tax on capital outflows.
The US Treasury, aided by the Federal Reserve,
also engaged in sterilised exchange market
intervention.
The main instrument used by the Fed to protect
the gold stock was the swap network. It was designed
to protect the US gold stock by temporarily
providing an alternative to foreign central bank
conversion of their dollar holdings into gold. In a
typical swap transaction, the Federal Reserve and a
foreign central bank would undertake simultaneous
and offsetting spot and forward exchange
transactions, typically at the same exchange rate
and equal interest rate. The Federal Reserve swap
line increased from $900 million to $11.2 billion
between March 1962 and the closing of the gold
window in August 1971 (see Figure 2 and Bordo et al.
2015)
Figure 2.
Federal Reserve swap
lines, 1962 –1973
Source
: Federal Reserve System.
The swaps and ancillary Treasury policies
protected the US gold reserves until the mid-1960s,
and were viewed at the time as a successful policy.
The Breakdown of Bretton Woods, 1968 to 1971
A key force that led to the breakdown of Bretton
Woods was the rise in inflation in the US that began
in 1965. Until that year, the Federal Reserve
Chairman, William McChesney Martin, had maintained
low inflation. The Fed also attached high importance
to the balance of payments deficit and the US
monetary gold stock in its deliberations (Bordo and
Eichengreen 2013). Beginning in 1965 the Martin Fed
shifted to an inflationary policy which continued
until the early 1980s, and in the 1970s became known
as the Great Inflation (see figure 3).
Figure 3
. Inflation rates
Source
: US Bureau of Labor
Statistics, IMF (various issues).
The shift in policy mirrored the accommodation of
fiscal deficits reflecting the increasing expense of
the Vietnam War and Lyndon Johnson's Great Society.
The Federal Reserve shifted its stance in the
mid-1960s away from monetary orthodoxy in response
to the growing influence of Keynesian economics in
the Kennedy and Johnson administrations, with its
emphasis on the primary objective of full employment
and the belief that the Fed could manage the
Phillips Curve trade-off between inflation and
unemployment (Meltzer 2010).
Increasing US monetary growth led to rising
inflation, which spread to the rest of the world
through growing US balance of payments deficits.
This led to growing balance of payments surpluses in
Germany and other countries. The German monetary
authorities (and other surplus countries) attempted
to sterilise the inflows but were eventually
unsuccessful, leading to growing inflationary
pressure (Darby et al. 1983).
After the devaluation of sterling in November
1967, pressure mounted against the dollar via the
London gold market. In the face of this pressure,
the Gold Pool was disbanded on 17 March 1968 and a
two-tier arrangement put in its place. In the
following three years, the US put considerable
pressure on other monetary authorities to refrain
from converting their dollars into gold.
The decision to suspend gold convertibility by
President Richard Nixon on 15 August 1971 was
triggered by French and British intentions to
convert dollars into gold in early August. The US
decision to suspend gold convertibility ended a key
aspect of the Bretton Woods system. The remaining
part of the System, the adjustable peg disappeared
by March 1973.
A key reason for Bretton Woods' collapse was the
inflationary monetary policy that was inappropriate
for the key currency country of the system. The
Bretton Woods system was based on rules, the most
important of which was to follow monetary and fiscal
policies consistent with the official peg. The US
violated this rule after 1965 (Bordo 1993).
Conclusion
The collapse of the Bretton Woods system between
1971 and 1973 led to the general adoption by
advanced countries of a managed floating exchange
rate system, which is still with us. Yet this
outcome (at least at the time) was not inevitable.
As was argued by Despres et al. (1966) in
contradistinction to Triffin, the ongoing US balance
of payments deficit was not really a problem. The
rest of the world voluntarily held dollar balances
because of their valuable service flow – the deficit
was demand-determined. In their view, the Bretton
Woods system could have continued indefinitely. This
of course was not the case, but although the par
value system ended in 1973 the dollar standard
without gold is still with us, as McKinnon (1969,
1988, 2014) has long argued.
The dollar standard was resented by the French in
the 1960s and referred to as conferring "the
exorbitant privilege" on the US, and the same
argument was made in 2010 by the Governor of the
Central Bank of China. However, the likelihood that
the dollar will be replaced as the dominant
international currency in the foreseeable future
remains remote. The dollar standard and the legacy
of the Bretton Woods system will be with us for a
long time.
'Because the Bretton Woods parities, which
were declared in the 1940s, had undervalued the
price of gold, gold production would be insufficient
to provide the resources to finance the growth of
global trade.'
Twenty years on from Britain's "lost decade" of
the 1920s - caused by repegging sterling to gold at
the pre-World War I parity - the same mistake was
repeated at Bretton Woods. (The US had made the
identical error in 1871, which required 25 years of
relentless deflation to sweat out Civil War
greenback inflation.)
Even as the Bretton Woods conference was underway
in 1944, it went unnoticed that the US Federal
Reserve had embarked on a vast buying spree of US
Treasuries. This was done to peg their yield at 2.5%
or below, in order to finance WW II at negative real
yields. By 1945, US Treasuries (shown in blue and
orange on this chart) loomed larger in the Fed's
balance sheet than gold (shown in chartreuse):
Obviously a fixed gold price is utterly
incompatible with a central bank expanding its
balance sheet with government debt, reducing its
gold holdings to the tiny residual that they
constitute today.
Bretton Woods might have worked by limiting
central banks' ability to monetize gov't securities.
Or it might have worked with the gold price allowed
to float with expanding central bank assets,
according to a formula.
What was lost with Bretton Woods was fixed
exchange rates, which are conducive to trade. Armies
of traders seeking to extract rents from
fluctuations between fiat currencies are a pure
deadweight loss to the global economy.
In North America, sharp depreciations of the
Mexican and Canadian currencies against the USD are
fanning US protectionism, in forms ranging from a
proposed border wall to countervailing duties on
Canadian lumber and dairy products. What a mess.
Irredeemable fiat currencies are a tribulation
visited on humanity. When the central bank blown
Bubble III explodes in our fool faces, this insight
will be more widely appreciated.
Fiat currency is a tribulation visited on
capitalist trade advocates and their financial
backers.
International trade, which is hobbled by fiat
currencies as you say, was a rounding error in
most peoples lives until the Thatcher/Reagan
neoliberal innovations.
Since then that rounding error has rounded
away most of the distributive properties of the
economic systems so distorted to facilitate
capital profits through long distance trade that
they are impoverishing enough people that Brits
vote Brexit, Yanks vote Trump and French vote Le
Pen.
Bretton Woods would have worked a lot better
if Keynes had won the argument in favor of
"bancor", but he was arguing from a position of
weakness and lost out.
And yes, when this blows, as it will, it will
all become more widely appreciated.
missing from the article is the decision to
raise the price of oil in order to put most of
the 3rd world into debt slavery. This
exasperated the inflation mentioned, caused by
US deficits. Because the US was still a
manufacturing leader and the Unions were strong
– we had the wage price stagflation of the
70's,. The elites solution – Nixon went to China
– not to open up a market of a billion people
but to make use of a disciplined labor force
that would work for cheap – breaking the power
of the unions with globalisation aided by
computers. The Republicans in the US and
Thatcher in England broke the unions in the
80s.Clinton went along in the 90s. Was that plan
a factor in the decision to leave the gold
standard?
This was most interesting for its lack of regret
for losing a dollar pegged to $35 oz. gold. It is
almost a rationale for letting inflation and deficit
spending occur because in the end the system using a
reserve currency works as good as anything. I do
think the expense of the Vietnam war and the obvious
policy that it was necessary to allow inflation
(from the 70s onward) was incomplete, looking at
everything today, because it was based on an
assumption that we humans could just aggressively
keep growing our way into the future like we had
always done. Already in 1970 there were
environmental concerns, well-reasoned ones, and
global warming was being anticipated. If it had been
possible to use a hard gold standard we might not be
in this ecological disaster today, but there would
have been some serious poverty, etc. The obvious
policy today is to put our money into the
environment and fix it and by doing that put people
to work for a good and urgent cause. As opposed to
bombing North Korea; building a Wall to nowhere;
giving money to corporations which do not contribute
to repairing the planet; and impoverishing people
unnecessarily, etc. Money, in the end, is only as
valuable as the things it accomplishes.
Wrong on your poverty concept. It is the
inflation associated with a reckless fiat
monetary system that causes much of the poverty.
Prior the fiat era there was minimal inflation.
As Keynes explained in his prophetic criticism
of the Treaty of Versailles, The Economic
Consequences of the Peace, when he called
attention to Lenin, of all people:
"By a continuing process of inflation,
governments can confiscate, secretly and
unobserved, an important part of the wealth of
their citizens. By this method, they not only
confiscate, but they confiscate arbitrarily;
and, while the process impoverishes many, it
actually enriches some. The sight of this
arbitrary rearrangement of riches strikes not
only at security, but at confidence in the
equity of the existing distribution of wealth.
Those to whom the system brings windfalls . . .
become 'profiteers', who are the object of the
hatred of the bourgeoisie, whom the inflationism
has impoverished not less than the proletariat.
As the inflation proceeds . . . all permanent
relations between debtors and creditors, which
form the ultimate foundation of capitalism,
become so utterly disordered as to be almost
meaningless.
Lenin was certainly right. There is no
subtler, nor surer means of overturning the
existing basis of society that to debauch the
currency. The process engages all the hidden
forces of economic law on the side of
destruction, and does it in a manner which not
one man in a million is able to diagnose."
The core problem with hard currency is
the power asymmetry of the fixed interest
contract in whatever form.
Because costs are constant and growing
under such contracts, income requirements
become "sticky": in a market reverse, wage
earners, renters, mortgage holders etc are
obligated by these contracts and cannot
accept a cut in their wage unless they have
adequate financial reserves. Recessions soak
these reserves from debtors to creditors
despite the loose underwriting of creditors
in the speculative and ponzi phases of the
Minsky cycle being the root cause of the
business cycle, not profligacy or
irresponsibility by wage earners and small
business people. In a depression, this
liquidationist dynamic starts working its
way up the the industrial supply chain,
dismantling the actual means of production.
The main potential public benefit of fiat
currency is that in such conditions it costs
the state nothing to preserve the wealth of
those not implicated in causing the collapse
and to preserve those means of production.
Unfortunately, what we saw in 2008 was
Bush/Obama using the innocent victims of the
business cycle to "foam the runway" for the
institutions that caused it.
Poverty is a simple result of being cut
off from possible income sources. To the
extent that inflation is managed with what
Keynes called "a reserve army of the
unemployed", high levels of poverty are
assured. In the high wage, high cost era of
the New Deal, the intent was take what
burden of financial risk could be taken off
of workers and small producers and to
provide good paying opportunities for one
cycle's economic losers to get back on their
feet in the next cycle. But this only works
with full employment where labor has the
power to bid for a share of the overall
returns on investments.
I found this fascinating and quite
persuasive.
But unless you can posit the existence
of a state that will reliably act to
"preserve the wealth of those not
implicated in causing the collapse and
to preserve those means of production"
it is just a useless academic exercise.
I do not see any such state anywhere in
view, with the possible exception of the
Chinese, who seem to understand
"preserving the means of production" as
a state priority. For the West however
that idea is a real howler.
If it had been possible to use a hard
gold standard we might not be in this
ecological disaster today, but there would
have been some serious poverty, etc.
Some serious poverty only if because the
elites would have been even more neoliberal.
The last gold-standard-free 50 years of
innovation and growth have made extinct
1. Shoes that last more than a few months
2. Clothes that you can pass on to future
generations
3. Likewise, furniture
4. Milk or Coke in glass bottles
etc.
Isn't that because we have evicted
competition from our global commercial model
and replaced it with planned production so
every factory knows the size of its likely
market?
At what point would China, for example, be able
to assert more of a reserve currency, or at least
alternative, role based on its economic and trade
power and build-up of hard and financial assets? Or
is their near-term internal surplus recycling
through uneconomic lending enough to keep them
off-balance for quite a while on the world financial
stage? Many in the West are watching the development
of the One Belt/One Road infrastructure and shifting
country linkages and alliances with grave concern.
The key to reserve status is large external
holdings of your monetary instruments: for
foreigners to transact in your currency they
must have it. China, thus far, fails profoundly
on this count, no one has its currency.
The inverse of this is that the best way for
the US to end the dollars reserve status is to
eliminate the "National Debt", which is in fact
nothing other than the inventory if dollar
instruments the rest of the world holds in order
to be able to spend dollars into our system:
eliminate that inventory and the dollar will no
longer be a reserve currency.
This raises the large question of whether
"reserve status" is actually beneficial.
Apparently it consists largely of being
enormously in debt – and in fact, it's been
a way for Japanese and Chinese to buy up
large chunks of our "means of production."
The prosperity of my original home town,
Columbus, IN, rests on Japanese
"investment." It does mean some good
Japanese restaurants in town.
To me the question is, who benefits
from it? It has been of great benefit to
a very particular set of people here in
the US and quite destructive since the
70s to most everyone else.
It is a power relationship that has
been used for imperial aims rather than
for the good of citizens. It needn't be
that way, but as US power has become
increasingly unaccountable its abuse of
this particular tool has grown.
First, the US could just as easily
deficit spend. We are not "in debt"
because the US can always create more
dollars to retire Treasury bonds.
The requirement for being a reserve
currency is running trade deficits. That
does require that furriners take and
hold your paper. They prefer bonds or
other investments to cash to get some
yield.
Running ongoing trade deficits also
means that you are using your domestic
demand to support jobs overseas. That is
the problematic feature, not all of this
other noise.
The concept of a reserve currency came
about from resolution 9 of the Genoa
Monetary Conference of 1922. The idea was
that any currency that was convertible to
gold was de facto equivalent to gold and
therefore an acceptable central bank reserve
asset. In other words there is really no
such thing as an international reserve
currency without gold in the system
according to the very reasoning that
established the idea. The U.S. pulled off
the greatest bait and switch in history when
it "suspended" the gold window in 1971. The
whole system because an enormous debt based
Ponzi scheme after that and we are now
dealing with the consequences.
And yes the key to reserve status: is
large external holdings of your monetary
instruments for foreigners to transact in".
But what incentive do they have to hold such
a currency and transact in it? Remember they
don't need it since they generally run trade
surpluses. The answer was, because that
currency was convertible to gold. What about
now when it is not tied to gold? Why hold
the currency of profligate debtor nation?
Answer provided in post below.
And anyone who thinks that running large
trade and budget deficits is the secret to
reserve currency status is a moron.
Argentina or Paraguay could just as easily
produce the necessary surplus liquidity
under that logic.
" But what incentive do they have to
hold such a currency and transact in it?
Remember they don't need it since they
generally run trade surpluses. "
Restart back at the very beginning,
forget everything you know, and try
again.
"They" got foreign reserve currency
by selling to the US and getting paid in
dollars. Their banks then traded the
dollars to the PBoC central bank for
freshly printed renimbi.
yes, but why would the central
bank endlessly collect another
country's debt?
And you inadvertently point out
one of the key frauds in the system.
The dollar supports a double pyramid
of credit, one domestic and the
other foreign. There is also a third
pyramid of credit, the euro dollar
market, which is built on top of the
U.S. domestic pyramid of credit, but
lets ignore that for now.
So "they" give us real stuff made
of raw material and labor inputs and
we give them wampum!!! Greatest scam
in history.
"The dollar supports a double
pyramid of credit, one domestic
and the other foreign. "
Except the PBoC prints the
Many Yuan to buy dollars from
the Chinese banking system. The
value of the Many Yuan is backed
by sales of exports, in that
case. A tiny little subset where
MMT (The imaginary version) is
actually in force. Then the PBoC
buys our debt with these foreign
reserves, which we wisely spend
on our country and citizens.
Next, the Chinese banking
system, thru the power of The
Money Multiplier, uses that base
money to make loans and expand
credit to Chinese.
" The value of the Many
Yuan is backed by sales of
exports, in that case."
WTF? The value the "Many
Yuan" is backed by the sale
of exports which yields
wampum, uh I mean dollars,
and they purchase the
dollars with the many yuan
they created. The PBoC
expands its balance sheet to
buy those dollars with yuan
created from nothing, hence
the double pyramid of
credit. The dollars get lent
back to us in the form of
U.S. government securities
because we issue the word's
"boomerang" currency.
And yes you can run a
system like this; for how
long? That is the big
question.
And you have misunderstood
what those reserves are for. The
Fed also can't spend all of
those US assets it holds on its
balance sheet either, now can
it?
The use of foreign currency
reserves is to defend the
currency and keep the IMF away.
Having a currency depreciate
rapidly leads to a big inflation
spike (unless you are close to
being an autarky) due to the
prices of foreign goods, in
particular commodities, going up
in your currency.
China is not self sufficient
in a whole bunch of things,
including in particular energy.
It had a spell last year when
it was running through its FX
reserves at such a rate that it
would have breached the IMF
trouble level for an economy of
its size if it had persisted for
4-6 months more.
A chemist, a physicist and
economist are ship wrecked on a
deserted island with only some
canned goods for food. They sit down
to figure out how they are going to
open the cans. To which the
economist says: "assume we have a
can opener"
Three MMT Economists are
stranded on a desert island.
They say, "WTF's a can
opener? That sounds like work!"
and live 3 months and are then
rescued by Skipper, Gillian,
Mary Ann and the Perfesser too,
on an Easter Break Tour. Ginger
and Mr. Howe are downstairs busy
downstairs knocking up.
They are living happily ever
after in Kansas City, Mo.
Seems to me the dollar system will work until
it doesn't. And those who run it have been doing
all within their power for about 15 years to
encourage anyone who can to come up with an
alternative.
None look viable, and they won't until
suddenly one is.
The euro isn't one due to the mess its
banking system is in. Japan doesn't want the
job and in any event is a military
protectorate of the US.
China is a minimum of 20 years away. Even
though it would like the status of being the
reserve currency, it most decidedly does not
want the attendant obligations, which are
running ongoing trade deficits, which is
tantamount to exporting jobs. Maintaining
high levels of employment and wage growth
are the paramount goals for China's leaders.
There are underreported riots pretty much
all the time in China due to dissatisfaction
over labor conditions now. The officialdom
is not going to commit political suicide.
Domestic needs always trump foreign goals.
Just getting around to reading Piketty's
doorstopper and was struck by his argument that
prior to WWI there had been very little inflation
worldwide for centuries. It was the need to pay off
all the war debt that shook things up.
Graeber's book on debt also makes the argument
that money as physical circulating metal currency
came about because of the need to pay for wars.
Something similar seems to have been going on
with the Bretton Woods agreement.
I know it's crazy but I'm just going to throw it
out there – maybe if we'd like a more stable economy
we could try starting fewer very destabilizing,
extremely expensive wars???
That is exactly my thought. There is a
disturbing cycle of war, monetary expansion to
pay for the war, post-war deflation leading to
political instability, leading to a repeat of
the cycle, at least in Europe and the U.S.
One can see this even in the period between
the creation of the Bank of England through the
end of the Napoleonic wars.
It is evident as well in the United States
pre- and post-Civil war.
Deficit hawks never seem to have a problem
with war-time deficit spending, only general
welfare deficit spending.
We could have a system where the fiscal power
of the state is fully harnessed for the general
welfare, but that would threaten the current
system which allows a small minority to
overwhelmingly reap the benefits of the money
creation power of the state and private banks.
This renders the issue a political one more
than a purely economic one. If history is any
guide, we will continue to have the kind of
political uncertainty we've experienced until
there has been enough war spending to start the
cycle over again. :(
" The inflation that started in the later 1960s
was substantially if not entirely the result of
Lyndon Johnson refusing to raise taxes "
I'm almost afraid to ask, but how does this make
sense? Any increase in taxes will be passed on to
the consumer to increase prices even more. If you
doubt this, watch what Trump's import taxes do to
prices.
No, you have been propagandized by the right
wing anti tax people.
Taxes drains demand from the economy. Lower
demand means more slack, more merchants having
to compete with each other, some headcount cuts,
etc.
By deficit spending in an economy that was
already at full employment, Johnson basically
guaranteed inflation. Both his own former
economist, Walter Heller, and Milton Friedman
warned against it. But because Heller was a Dem
and an outlier (most Dems weren't gonna
challenge their own party's policies), it was
Friedman's warnings that were publicized.
Another subject that is relevant to the current
post 2008 collapse and FED shenanigans to save the
day. i.e. save their cronies. And what it is
completely missing in this piece written by the
insiders is exactly that Bretton Woods; Cui
Bono:namely US ruling elite and new world order
after WWII.
Bretton Woods was a monetary session of the
overall conference 1944-1945 of new world order
namely a formal switch from British empire global
dominance system into American global dominance
system and trade/monetary policies were just an
important but small part of overall new global
political and military arrangement.
Global pound was killed, global dollar has been
created and blessed by western sphere of influence
and defended by supposedly the most powerful US
militarily in the world, [as was British navy
before] US military of global reach via US navy and
air force.
The political symbolism of Bretton Woods
conference correlated with invasion of Normandy in
June 1944, the last step in defeating Nazism in
Europe cannot be understated.
Also the dominance of two figures of White and
Keynes in this conference is an exemplification of
closing era of British empire as a world [decaying
at that time] leader which was accelerated by the
role of Japanese and German/Italian aggression in
colonial Asia, Africa [also helped by French
surrender to Nazis that spurred western support for
independent French colony of Algeria] and ME boosted
up the anti-colonial movements and political
parties, which like in Vietnam even US supported
during WWII.
Little known fact is that Nazis championed
themselves as anti-colonial force in ME while they
attempted to colonize eastern Europe.The many Arabs
fell for this propaganda siding with Nazis against
British colonialism in Palestine setting themselves
against Jews vehemently anti Nazi at that time.
In other words Bretton Woods was a consequence of
the fact that British empire was collapsing fast
ironically with the help of its allies and that
Included Soviets. Also helped that British were
broke and all the British Gold was already in the US
as a payment for bankrolling British defenses in
Europe since 1940 and elsewhere, so were Soviet gold
payments for military technology and materiel they
received from US and allies.
The political void had to be filled or it would
have been filled by Soviets, and hence the Bretton
Woods system was not based on unfettered
exploitation of slaves of newly expanded US empire
what US Oligarchy would have liked and was freely
practicing before 1929, but for ideological reason
was aimed for economic improvements in order to stem
massive anti-capitalist, communist and anti-colonist
movements that threatened western hegemony over the
world and hence the dreaded anti-capitalist words
used by in Bretton Woods system like fixed exchange
rate or blasphemous capital controls, things the
would crucify you if you utter them today during a
seminar in any Ivy league economy department.
Bretton Woods was primarily a tool into an
ideological war west and Soviets knew they would
have to fight, cold or hot.
This [economic dominance] war ended in mid
nineteen sixties when seeds of collapse of Soviet
Union and betrayal of leftist ideals and
socialist/communists movements all over the world
were sawed and hence Bretton Woods was no longer
needed and brutality of unfettered capitalist could
begin to return starting with Kennedy tax cut
freeing capital in private hands and then FED going
full fiat in later 1960-ties, capital flow
deregulation, free floating currencies, all that for
benefit of oligarchic class and of colossal
detriment to American workers, devastating result of
which we are experiencing now.
One of the great ironies of Bretton Woods is
that Harry Dexter White, the US rep at the talks
was in fact a Soviet agent. I wonder if he
understood monetary economics enough to hope
that the Bretton Woods gold standard system, as
opposed to Keynes bancor proposal, would self
immolate with a run on US gold stocks and take
the West down with it.
Let's think of "root causes", both Keynes
and White were big fans of Soviet-style
command and control top-down planned
economies ("I have seen the future and it
works!"). So that's what they divined and
devised for money: a top-down price-fixing
regime.
So while people would laugh themselves
silly if you told them we were going to
price things the way the Soviets did ("we'll
raise X number of cows because we'll need Y
quantity of shoe leather"), we somehow
accept central planning for the price of the
most important item of all: money itself.
The supreme geniuses at the Fed et al, with
their supreme formulae, can divine at any
moment precisely what the price of money
should be. This, of course, is folly.
And people should understand that the
gold standard (not the gold-exchange
standard it is often confused with) was not
designed, was not somehow imposed, and was
not agreed upon by some collective body. It
simply arose organically because time and
again through painful experience throughout
history it was shown that any system where
people can simply vote themselves more money
ends in tears. Not usually, but always.
You'd think that a 100% historical failure
rate would clue people in to rethink the
head-hammer-hitting approach.
And as Dr. Haygood points out above,
"everything floating against everything
else" is nothing but a colossal waste of
time and money. You wouldn't attempt to
build or make something without an agreed
and immutable unit of measure.
Completely untrue of Keynes. He ran
the UK Treasury twice very pointedly in
the interests of industrial capitalists.
He was however very opposed to financial
rents, a real classicist in that regard.
Keynes ran the UK treasury twice more
or less along classical lines: in favor
of industrial capitalism and against
financial rents. Not top down, not
Soviet. Its not clear where you get your
facts, fiat systems have lasted hundreds
of years many times. They tend to arise
in empires with secure borders. They
depend on the productive relations of
their societies for the value of their
money rather than a commodity hedge.
Warfare favors the commodity hedge
because the productive relations in a
society are frequently destroyed by war.
Because of the stickyness of wages, hard
currency tends to choke economic growth
because a fixed money supply has to be
spread increasingly thin as more real
wealth is created to be denominated with
a fixed quantity of specie, requiring
wages to drop because there is more
stuff to purchase.
Each has benefits and costs, both are
tools and while the one favors growth
and the other war, neither must be used
for either. A representative system will
use either as its constituencies direct,
an authoritarian one according to the
intent of the authority. It isn't tools
that make the problems, though some are
better for some purposes than others. It
is the intent of the powerful that is
expressed and from which others suffer.
@jsn " fiat systems have lasted
hundreds of years many times."
what? can you please back that
statement up. Only major fiat system
in history that I have ever seen
written about is the one that
existed in China several hundred
years ago. If there were others you
need to give some examples.
I think you objected to my
comments without actually refuting
them:
1. We have a top-down price fixing
money system;
2. Keynes and White were a big fans
of Soviet central planning (see The
Battle for Bretton Woods for chapter
and verse);
3. And I've never understood the
"fixed quantity of specie" argument.
Surely it's about price, not
physical quantity. You could easily
run the world economy on 100 tons of
gold if it was priced accordingly.
Michael Hudson's book Superimperialism, published
astonishingly in 1972, nailed it. Details some great
history of FDR's economic diplomacy during the late
Depression and WW2 period that preceded the Bretton
Woods settlement. Worth a read.
yes Michael Hudson is great, but that is why
he must be marginalized/ignored. Can't maintain
control of the official narrative if people like
Hudson were to ever be taken seriously..
"However, the likelihood that the dollar will be
replaced as the dominant international currency in
the foreseeable future remains remote. The dollar
standard and the legacy of the Bretton Woods system
will be with us for a long time."
That is the BIG question and the answer remains
to be seen. I for one don't believe it will continue
much longer, but then again nobody knows. Bordo also
leaves out a critical part of the narrative, i.e.,
the U.S. secret deal with Saudi Arabia in 1974 to
officially tie the dollar to oil. See link below for
details. Without this secret arrangement the dollar
would have never survived as the international
reserve currency. The Saudis reportedly pushed for
greater use of the SDR, but the U.S. made them a
deal they couldn't refuse and the Saudi royal family
realized that if they didn't go along with U.S.
demands the CIA would find some other branch of the
family that would.
The system is a mess and it is retarded to allow
one country's currency to serve as the main reserve
asset for the system. That is the ultimate free
lunch and the equivalent to believing in a perpetual
motion machine. It is hard to believe in can
continue much longer despite of Bordo's view that it
will. It has reached a point where it has created
massive problems that can not continue.
So in a sense when China and Russia are
forced to hold dollars for global trade,
they're essentially paying for the Pentagon
to do what it's doing. You can see why
they'd be mad.
It is almost a gift from heaven when fixing a
single problem offers the chance to fix a whole
bunch of them. This IMHO is very possibly one of
those gifts. Without this "ultimate free lunch"
the globalization scam of allowing this
country's and the world's 1% to keep adding
zeros to their bank accounts ("to keep score" as
Pres. Trump puts it) would not have been
possible. Without countries like Saudi Arabia
willing to keep accepting more "debt that can't
be repaid (and) won't be", the US military
industrial complex would not be able to keep
increasing its threat to world peace and
threatening the survival of humanity. Without
the Saudi stranglehold over politics and US
Middle Eastern policy the US could stop killing
Muslims in its bogus 'war on terror'. It could
get busy replacing its fossil fuel energy
sources with renewable ones and its oil-powered
transportation system with an electrified one
(yes, maybe even a few EVs)
It is hard to believe in can continue
much longer despite of Bordo's view that it
will.
And yet where is the dollar's replacement?
If you'd told me ten years that the
petrodollar as an institution enforcing
compliance w. the dollar as global reserve
currency could end and yet the dollar would
continue with that status, I'd have laughed at
you. However, that increasingly looks like it
might happen.
Yes, yes, I know - we await the basket of
currencies solution pushed by China and Russia,
and others sick of the situation. We've been
waiting for a while now.
I'm thinking globalization has something
to do with the dollar's longevity. Strip a
country of the ability to support itself by
exporting its jobs and it's people become
dependent on a strong military to insure
it's money continues to be "accepted" even
when it's people no longer have anything to
trade for what they really need.
@Moneta, these numbers are
roughly correct. The U.S. defense
budget is about $600 billion, the
trade deficit is about $600 billion
and last year we issued $1.4
trillion in incremental debt.
Foreigners own about 40% of U.S.
debt. 40% of of $1.4 trillion is
$560 billion so yes there is a
pretty strong correlation. Massive
defense budget wouldn't be possible
without reserve currency scam.
I'm completely confused. Anything available in
plain English for laypeople?
"The adjustment problem in Bretton Woods
reflected downward rigidity in wages and prices
which prevented the normal price adjustment of the
gold standard price specie flow mechanism to
operate"
Canada which was one of the founding members of
Bretton Woods pulled out as early as 1949 in order
to move to a floating exchange rate and full capital
mobility. Bretton Woods was dead before it ever
began.
If the Federal Reserve can create trillions of dollars with a single keystroke, and the Fed
is the government's bank, then why does President Obama claim we've "run out" of money?
Why have Democrats and so-called progressives supported job-killing budget cuts in the name
of "shared sacrifice"? Why are we throwing away the equivalent of $9.8 billion in lost output
every single day? Why don't we do something about our $2.2 trillion infrastructure deficit, 25
million underemployed and unemployed Americans, 100 million Americans in or very near poverty,
and so on?
The answer is simple. Most of us don't understand the monetary system. Instead of deciding
how the government should wield its power over the dollar, we live in fear of the ratings agencies,
the Chinese, the bond market vigilantes and other imaginary evils. And this holds all of us back.
Unused resources abound, human needs go unmet, and the vast majority of Americans believe that
'There Is No Alternative' (TINA). Or, as Warren Mosler says, "Because we fear becoming the next
Greece, we're turning ourselves into the next Japan."
There is an alternative. And it begins with an understanding of the monetary system. The cat
is already out of the bag. Chairman Bernanke confirms it. Money is no object.
RGC,
the people here have been brainwashed and can not think for themselves. If it has not been approved
by their favorite academic, it is a crank theory. they'd rather believe in fairy tales like NGDP
level targeting - the fed will wish it into reality. Rather than pay attention to the MMT that
you and I subscribe to.
Moreover it is logical for them to stick to the "the Fed is omnipotent" as it bids up asset prices
and maintains the status quo. It vests more power in the institutions that benefit the people
you see here.
Blame the right, blame the deregulators, blame the tax cutters, blame the liberatarians, etc.
that is the how they maintain the status quo. And Mosler is right on - Bernanke turned us into
Japan trying to save us from that fate. And he is sliding down the rabbit hole - "I should have
doubled down on my failed strategy"
why? because he was able to bid up the stock market? I bet you everyone of the Fed worshippers
here benefit personally from the asset price binges that the stupid Fed has gotten us addicted
to.
Per Rubin and his cronies in the Wall Street banking cartel, the Fed is fine as it is...serving
the interests of the Wall Street banking cartel. The cartel has a good think going...why disrupt
it by taking into account the public good?
Has Rubin ever done anything in the interest of the public?
China and Currency Values: Fast Growing Countries Run
Trade Deficits
I don't generally comment on pieces that reference me, but
Jordan Weissman has given me such a beautiful teachable
moment that I can't resist. Weissman wrote * about Donald
Trump's reversal on his campaign pledge to declare China a
currency manipulator. Weissman assures us that Trump was
completely wrong in his campaign rhetoric and that China does
not in fact try to depress the value of its currency.
"It's pretty hard to argue with that. Far from devaluing
its currency, China has actually spent more than $1 trillion
of its vaunted foreign reserves over the past couple of years
trying to prop up the value of the yuan as investors have
funneled money overseas. There are some on the left, like
economist Dean Baker, who will argue that Beijing is still
effectively suppressing the redback's value by refusing to
unwind its dollar reserves more quickly. But if China were
really keeping its currency severely underpriced, you'd
expect it to still have a big current account surplus,
reminiscent of 10 years ago, which it doesn't anymore."
Okay, to start with, I hate the word "manipulation" in
this context. China isn't doing anything in the dark of the
night that we are trying to catch them at. The country pretty
explicitly manages the value of its currency against the
dollar, that is why it holds more than $3 trillion in
reserves. So let's just use the word "manage," in reference
to its currency. It is more neutral and more accurate.
It also allows us to get away from the idea that China is
somehow a villain and that we here in the good old US of A
are the victims. There are plenty of large U.S. corporations
that hugely benefit from having an under-valued Chinese
currency. For example Walmart has developed a low cost supply
chain that depends largely on goods manufactured in China. It
is not anxious for the price of the items it imports rise by
15-30 percent because of a rise in the value of the yuan
against the dollar.
The same applies to big manufacturers like GE that have
moved much of their production to China and other developing
countries. These companies do not "lose" because China is
running a large trade surplus with the United States, they
were in fact big winners.
Okay, but getting back to the issue at hand, I'm going to
throw the textbook at Weissman. It is not true that we should
expect China "to still have big current account surplus" if
it were deliberately keeping its currency below market
levels.
China is a developing country with an annual growth rate
of close to 7.0 percent. The U.S. is a rich country with
growth averaging less than 2.0 percent in last five years.
Europe is growing at just a 1.0 percent rate, and Japan even
more slowly. Contrary to what Weissman tells us, we should
expect that capital would flow from slow growing rich
countries to fast growing developing countries. This is
because capital will generally get a better return in an
economy growing at a 7.0 percent rate than the 1-2 percent
rate in the rich countries.
If capital flows from rich countries to poor countries,
this means they are running current account surpluses. The
capital flows are financing imports in developing countries.
These imports allow developing countries to sustain the
living standards of their populations even as they build up
their infrastructure and capital stock. In other words, if
China was not depressing the value of its currency we should
it expect it to be running a large trade deficit.
This is actually the way the world worked way back in the
1990s, a period apparently beyond the memory of most
economics reporters. The countries of East Asia enjoyed
extremely rapid growth, ** while running large trade
deficits. This all changed following the East Asian financial
crisis and the disastrous bailout arranged by Secretary of
Treasury Robert Rubin and friends. *** Developing countries
became huge exporters of capital as they held down the value
of their currencies in order to run large trade surpluses and
build up massive amounts of reserves.
But Weissman is right that China is no longer buying up
reserves, but the issue is its huge stock of reserves. As I
explained in a blogpost **** a couple of days ago:
"Porter is right that China is no longer buying reserves,
but it still holds over $3 trillion in reserves. This figure
goes to well over $4 trillion if we include its sovereign
wealth fund. Is there a planet where we don't think this
affects the value of the dollar relative to the yuan?
"To help people's thought process, the Federal Reserve
Board holds over $3 trillion in assets as a result of its
quantitative easing program. I don't know an economist
anywhere who doesn't think the Fed's holding of assets is
still keeping interest rates down, as compared to a scenario
in which it had a more typical $500 billion to $1 trillion in
assets.
"Currencies work the same way. If China offloaded $3
trillion in reserves and sovereign wealth holdings, it would
increase the supply of dollars in the world. And, as Karl
Marx says, when the supply of something increases, its price
falls. In other words, if China had a more normal amount of
reserve holdings, the value of the dollar would fall,
increasing the competitiveness of U.S. goods and services,
thereby reducing the trade deficit."
So, there really are no mysteries here. China is holding
down the value of its currency, which is making the U.S.
trade deficit worse. It is often claimed that they want their
currency to rise. That may well be true, which suggests an
obvious opportunity for cooperation. If the U.S. and China
announce a joint commitment to raise the value of the yuan
over the next 2-3 years then we can be fairly certain of
accomplishing this goal.
This should be a very simple win-win for both countries.
Walmart and GE might be unhappy, but almost everyone else
would be big winners, especially if we told them not to worry
about Pfizer's drug patent and Microsoft's copyright on
Windows.
It is unfortunate that Donald Trump seems closer to the
mark on China and trade than many economists and people who
write on economic issues for major news outlets. Today,
Eduardo Porter gets things partly right in his column *
telling readers "Trump isn't wrong on China currency
manipulation just late." The thrust of the piece is that
China did in fact deliberately prop up the dollar against its
currency, thereby causing the U.S. trade deficit to explode.
However, he argues this is all history now and that China's
currency is properly valued.
Let's start with the first part of the story. It's hardly
a secret that China bought trillions of dollars of foreign
exchange in the last decade. The predicted and actual effect
of this action was to raise the value of the dollar against
the yuan. The result is that the price of U.S. exports were
inflated for people living in China and the price of imports
from China were held down.
Porter then asks why the Bush administration didn't do
anything when this trade deficit was exploding in the years
2002–2007. We get the answer from Eswar Prasad, a former
I.M.F. official who headed their oversight of China:
"'There were other dimensions of China's economic policies
that were seen as more important to U.S. economic and
business interests,' Eswar Prasad, who headed the China desk
at the International Monetary Fund and is now a professor at
Cornell, told me. These included 'greater market access,
better intellectual property rights protection, easier access
to investment opportunities, etc.'"
Okay, step back and absorb this one. Mr. Prasad is saying
that millions of manufacturing workers in the Midwest lost
their jobs and saw their communities decimated because the
Bush administration wanted to press China to enforce Pfizer's
patents on drugs, Microsoft's copyrights on Windows, and to
secure better access to China's financial markets for Goldman
Sachs.
This is not a new story, in fact I say it all the time.
But it's nice to have the story confirmed by the person who
occupied the International Monetary Fund's China desk at the
time.
Porter then jumps in and gets his story completely 100
percent wrong:
"At the end of the day, economists argued at the time,
Chinese exchange rate policies didn't cost the United States
much. After all, in 2007 the United States was operating at
full employment. The trade deficit was because of Americans'
dismal savings rate and supercharged consumption, not a cheap
renminbi. After all, if Americans wanted to consume more than
they created, they had to get it somewhere."
Sorry, this was the time when even very calm sensible
people like Federal Reserve Board Chair Ben Bernanke were
talking about a "savings glut." The U.S. and the world had
too much savings, which lead to a serious problem of
unemployment. Oh, we did eventually find a way to deal with
excess savings.
Anyone remember the housing bubble? The demand generated
by the bubble eventually pushed the labor market close to
full employment. (The employment rate of prime age workers
was still down by 2.0 percentage points in 2007 compared to
2000 - and the drop was for both men and women, so skip the
problem with men story.)
Yeah, that bubble didn't end too well. So much for
Porter's no big deal story.
But what about the present, are we all good now?
Porter is right that China is no longer buying reserves,
but it still holds over $3 trillion in reserves. This figure
goes to well over $4 trillion if we include its sovereign
wealth fund. Is there a planet where we don't think this
affects the value of the dollar relative to the yuan?
To help people's thought process, the Federal Reserve
Board holds over $3 trillion in assets as a result of its
quantitative easing program. I don't know an economist
anywhere who doesn't think the Fed's holding of assets is
still keeping interest rates down, as compared to a scenario
in which it had a more typical $500 billion to $1 trillion in
assets.
Currencies work the same way. If China offloaded $3
trillion in reserves and sovereign wealth holdings, it would
increase the supply of dollars in the world. And, as Karl
Marx says, when the supply of something increases, its price
falls. In other words, if China had a more normal amount of
reserve holdings, the value of the dollar would fall,
increasing the competitiveness of U.S. goods and services,
thereby reducing the trade deficit.
At the beginning of the piece, Porter discusses the
question of China's currency "manipulation." (I would much
prefer the more neutral and accurate term "currency
management." There is nothing very secret here.) He tells
readers:
"It would be hard, these days, to find an economist who
feels China fits the bill."
Perhaps. Of course it would have been difficult to find an
economist who recognized the $8 trillion housing bubble, the
collapse of which wrecked the economy. As the saying goes,
"economists are not very good at economics."
Dr Krugman ignored another wrinkle in France leaving the euro; the euro
itself.
While GB joined the EU, it retained the british pound. So, Brexit won't
affect it monetarily. France, on the other hand, did convert to the euro
(in hindsight, another enormous mistake). Each euro has an identifier, similar
to how we designate the origin by Fed Reserve, which designates it's country
of origin.
So, should France leave the EU, would euros held by, say, someone in
Italy then become worthless? This isn't someone most people concern themselves
with. When was the last time someone on this blog check to see which dollars
in your wallet came from the Denver Fed? But, it may well be that the EU
would stop honoring French euros, should they leave.
Interesting conjecture, but a Euro printed in France belongs to the Euro
Area rather than to France in the same way that a dollar printed in Denver
belongs to the United States. There is by the way, to my understanding,
no treaty provision describing how any country in the Euro Area might leave.
"Start with the euro. The single currency was and is a flawed project, and
countries that never joined – Sweden, the UK, Iceland – have benefited from
the flexibility that comes from independent currencies. There is, however,
a huge difference between choosing not to join in the first place and leaving
once in."
Okay, but then the bank reserves
which are held at the Fed by law could be defined as part of "outside money", because they
aren't backed by anything in the private economy. Those reserves are established, or insisted
upon, by government fiat, in essence. We know those reserves are not really backed by a precious
metal or anything else but faith. So why are bank reserves held at the Fed not included in
the definition of "outside money"?
From the standpoint of the private
economy, reserves are 'outside money", because they circulate only within the Fed system. Currency
is inside money because it circulates within the private economy, although it also circulates
between government and private banks.
The monetary base is both currency and reserves.
So it takes a clear understanding of the purpose of the discussion and maybe even a Venn
diagram.
Outside money
is money that is either of a fiat nature (unbacked) or backed by some asset that is not in
zero net supply within the private sector of the economy.
Thus, outside money is a net asset for the private sector. The qualifier outside is short
for (coming from) outside the private sector.
Inside money is an asset representing, or backed by, any form of private credit that circulates
as a medium of exchange.
Since it is one private agent's liability and at the same time some other agent's asset,
inside money is in zero net supply within the private sector.
The qualifier inside is short for (backed by debt from) inside the private sector.
These are entries in accounts owned by the banks and put there by the banks and
are money. These can not be 'taken' by the govt without compensation per law.
JF, Sorry, I only meant that
the minimum reserves are established by the decree of the public-private partnership known
as the central bank. So I was using "fiat" in the sense of "law". I should not have written
that the bank reserves are established by gov't "fiat" in a discussion about money, because
that is confusing.
And the reason for this law is to make sure that banks can cover their
needs for cash, to prevent a run on the banking system.
But what this means, is that the ultimate foundation of part of the individual's trust in
the money that is used, is based upon the existence of the requirement for bank reserves. Otherwise,
people wouldn't trust the money supply. The trust is not based on any function more basic than
bank reserves.
What else do people trust? Well of course people already trust paper notes and coins in
daily transactions: they automatically suppose that the gov't backs it up. Backs it up, with
what?, they do not know; but it works. And for checks and debits, they suppose that the bank
is good for the cash -- which ultimately is based on the reserve requirement. So therefore,
"trust" of money by the common folk is presently based upon 2 things, the existence of currency
and the (vaguely understood yet reassuring) existence of bank reserves.
Well, the "money base" is defined as reserves + cash & coin. However, this seems to me to
be the same definition as "outside money". So I am still wondering if there is another difference
between the definitions.
Certainly people think of gold & silver as money, but if that is the only difference between
"monetary base" and "outside money", I think it would be easy to alter the definition of "currency"
to include them.
"... Probably the biggest single factor was public employment was savagely cut during the Obama presidency which would have kept economic activity higher at a fairly cheap cost. ..."
"... the owning/lending class tends to dislike inflation for some reason... ..."
"... I think this is highly dependent on one's understanding of "equitable". Monetary policy can be used in a way that ensures safe income streams to those who already own many financial assets. Some people think that is how it should be and therefore "equitable". ..."
"The central bank remains important for useful tasks - the clearing of checks, the replacement of
worn and dirty banknotes, as a loan source of last resort. These tasks it performs well.
With other public agencies in the United States, it also supervises the subordinate commercial
banks. This is a job which it can do well and needs to do better. In recent years the regulatory
agencies, including the Federal reserve, have relaxed somewhat their vigilance. At the same time
numerous of the banks have been involved in another of the age-old spasms of optimism and feckless
expansion. The result could be a new round of failures. It is to such matters that the Federal Reserve
needs to give its attention.
These tasks apart, the reputation of central bankers will be the greater, the less responsibility
they assume. Perhaps they can lean against the wind - resist a little and increase rates when the
demand for loans is persistently great, reverse themselves when the reverse situation holds.
But, in the main, control must be - as it was in the United States during the war years and the
good years following - over the forces which cause firms and persons to seek loans and not over whether
they are given or not given the loans."
-From "Money: Whence it came,Where it went" 1975 - pgs 305,6.
[Mariner Eccles explained it
way back in the 1930's:]
"Pushing on a String: An Origin Story
There's a long-standing metaphor in monetary policy that the central bank "can't push on
a string." It means that while a central bank can certainly slow down an economy or even drive
an economy into recession with an ill-timed or too-large increase interest rates, the power
of monetary policy is not symmetric.
When a central bank reduces interest rates in an attempt to stimulate the economy, it may
not make much difference if banks don't think it's a good time to lend or firms and consumers
don't think it's a good time to borrow. In other words, monetary policy is like a string with
which a central bank can "pull" back the economy, but pushing on a string just crumples the
string.
The "can't push on a string" metaphor appears in many intro-level economics texts.
It has also gotten a heavy work-out these last few years as people have sought to understand
why either economic output or inflation wasn't stimulated more greatly by having the Federal
Reserve's target interest rate (the "federal funds" rate) near zero percent for going on seven
years now, especially when combined with "forward guidance" promises that this policy would
continue into the future and a couple trillion dollars of direct Federal Reserve purchases
of Treasury debt and mortgage-backed securities.
The first use of "pushing on a string" in a monetary policy context may have occurred in
hearings before House Committee on Banking and Currency on March 18, 1935, concerning the proposed
Banking Act of 1935. Marriner Eccles, who was appointed Chairman of the Fed in 1934 and served
on the Board of Governors until 1951, was taking questions from Rep. Thomas Alan Goldsborough
(D-MD) and Prentiss M. Brown (D-MI). The hearings are here; the relevant exchange is on p.
377, during a discussion of what the Fed might be able to do to end deflation."
The Fed didn't try very hard
with its unconventional monetary policy. It was always worried about inflation. Plus it had
to overcome the unprecedented austerity which Congress pushed on the economy.
If you look
at the recovery and say monetary policy didn't work, you are either insane or highly ideological.
Now, the recovery could have been much quicker and better with the help of fiscal policy
and other policies.
Must be so, because the following certainly is not true =
"We are all Keynesians now"
OK, not all one way or the other but the Keynesians are under siege by monetarists including
ones that do not know what a monetarist is or that they are one.
It is not that monetary policy
is entirely ineffective at stimulating demand, but that its effects are very limited according
to the very narrow channels in which its effects are most pronounced, intermediation risks,
widening the term spread or yield curve, and making short term business loans and related prime
rate small short term loans. It does next to nothing towards reducing credit rationing by financial
institutions after a shock, which would be highly stimulative compared to just lowering the
FFR. Purchase of the riskiest assets by the Fed was probably most effective at reducing credit
rationing since it lowered the risk of bank loan portfolios. Just buying up safe assets had
mixed results on lowering long term interest rates, but was more successful on that than reducing
credit rationing.
All your jargon obscures the
point that the Fed didn't really try that hard with its unconventional policy b/c of politics.
It's like arguing that the ARRA didn't work very well. It did work and could have been bigger
and better but policymakers are too conservative when it comes to macro policy.
Tight money means credit rationing.
Cheap money does not necessarily get looser. Yes, widening the term spread helps loosen, but
narrowing the term spread does not. Other forms of monetary policy such as government loan
guarantees on small business loans loosen money more than QE.
Because you're wrong and misleading.
The Fed does the minimal amount of experimental unconventional policy - always paranoid over
inflation - while Congress forces unprecedented fiscal austerity on the economy. I'd say monetary
policy works. Doesn't mean fiscal policy doesn't work better.
"Now here we are, in 2017, after
the Obama Administration has brought the deficit down from $1.5 trillion in Fiscal Year 2009
to $621 billion in FY2016, "
Via Max Sawicky, below. $900 billion in austerity that monetary
policy had to fight against.
I don't think it is as simple
as you have outlined here. Debt as a percentage of GDP has doubled since 2009 so that has provided
some relief.
Probably the biggest single factor was public employment was savagely cut
during the Obama presidency which would have kept economic activity higher at a fairly cheap
cost.
"Debt as a percentage of GDP
has doubled since 2009 so that has provided some relief."
wut?
The largest difference was there was little to no Federal aid to the states which had to
run balanced budgets.
We can all agree after the ARRA ran its course, there was massive, unprecedented austerity
forced on the economy by Republicans, just as in the UK and we see the results when central
banks didn't do enough unconventional policy to fully offset it.
A crappy recovery and the election of Trump/Brexit.
I think this is highly dependent
on one's understanding of "equitable". Monetary policy can be used in a way that ensures safe
income streams to those who already own many financial assets. Some people think that is how
it should be and therefore "equitable".
I have no idea how monetary policy with its currently defined policy tools can be used effectively,
by itself, to redistribute wealth in the other direction, which is probably most people's understanding
of "equitable".
If it was, by itself, able to cause large jumps in inflation, that might feed back into
rapidly rising nominal wages and large losses to the current holders of financial assets like
bonds and loan books. That might be considered more "equitable" to some, but current limitations
on monetary policy prevent it from creating inflation all by itself.
"... When the Federal Reserve lowered interest rates to close to zero during the financial crisis, it was an extraordinary move. The central bank had hit the limits of conventional monetary policy, leaving the recovery to sputter along with less help than it needed ..."
"... A new study suggests that near-zero interest rates - accompanied by a lackluster recovery - may become a common occurrence. ..."
" When the Federal Reserve lowered interest rates to close to zero during the financial
crisis, it was an extraordinary move. The central bank had hit the limits of conventional monetary
policy, leaving the recovery to sputter along with less help than it needed ."
This is a huge lie. The Fed did not do what it could have done. It did the minimal amount possible,
always afraid of setting off inflation. The Fed said it delivered the recovery it wanted. It gave
the economy exactly the help the Fed thought it needed. Then why the dishonesty from Wulfers.
It's the kind we get from PGL the Facile.
Why did the Fed deliver a lame recovery is the question Wolfers should be asking, but it's
the kind of thing mainstream economists like him and PGL avoid. It's class war.
" A new study suggests that near-zero interest rates - accompanied by a lackluster recovery
- may become a common occurrence.
That's troubling for many reasons. If the Fed can't cut rates as much as required to fight
a slowing economy, then recessions will become more common and more painful. It suggests an urgent
need to reconsider how we will counter the next bout of bad economic news, preferably before it
arrives. If monetary policy won't be enough, perhaps fiscal policy will be. Certainly, this is
no time for complacency."
Yes fiscal policy would help deliver a better recovery as the Fed has repeatedly said, but
again Wolfers is misleading his readers. The Fed could do more. It's not out of bullets. It's
raising rates. Wolfers is really doing a disservice to his readers in an apparent attempt to talk
up fiscal policy in a dishonest way. WTF.
"But when normal interest rates are closer to 3 percent, the Fed can cut rates only a few times,
because rates can only go so low - perhaps as low as zero, maybe a tad lower. This means that
in even a typical downturn, the Fed may be unable to cut rates as much as it would like."
But then it turns to unconventional policy. Seriously. WTF.
"This dynamic can feed on itself. The less ammunition the Fed has to blast the economy out
of its malaise, the weaker and slower will be the recovery, making it more likely that the next
bad shock will require the Fed to cut rates more than is feasible."
It doesn't have less ammunition. Now Wolfers finally admits there's something called unconventional
policy.
"The Fed has already been experimenting with monetary policy, but it hasn't been enough. In
the wake of the financial crisis, for example, it bought bonds in a program known as quantitative
easing, cutting long-term interest rates once short-term rates were near zero. The resulting stimulus
was relatively small, reducing long-term rates by only a fraction of a percentage point, and the
program was politically unpopular.
The authors suggest an alternative approach in which the Fed makes up for "missing stimulus"
by promising to keep rates lower, for longer periods. In their view, the Fed needs to make up
for the interest rate cuts that it wishes it could have made, but couldn't. Promising this in
the depths of a downturn would offer businesses reason to be optimistic, they say, boosting the
recovery. The Fed would need to keep rates low, even as inflation overshot its target.
It's a promising approach, but would people really believe the Fed's promises? I know a lot
of central bankers, and I fear they are incapable of sitting still while inflation rises above
their stated target."
Wolfers admits that central bankers haven't pushed very hard on unconventional policy, shattering
his thesis. They're paranoid over inflation.
"Perhaps the answer lies outside the Fed. It may be time to revive a more active role for fiscal
policy - government spending and taxation - so that the government fills in for the missing stimulus
when the Fed can't cut rates any longer. Given political realities, this may be best achieved
by building in stronger automatic stabilizers, mechanisms to increase spending in bad times, without
requiring Congressional action."
That's a good idea no matter whether unconventional monetary policy works or not. But Republicans
are blocking it, so monetary policy is all we have. It doesn't help to say it doesn't work and
we must suffer long painful recoveries.
"The general distrust of fiscal policy may well have made sense; many economists are more likely
to trust the technocrats at the Fed to manage the business cycle than the election-driven politicians
on Capitol Hill. But in a world of low interest rates in which the Fed is frequently hamstrung,
we may not have that choice."
No the sidelining of fiscal policy never made any sense. But that doesn't mean we should sideline
monetary policy when fiscal policy isn't forthcoming.
Captain Renault: I'm shocked, shocked
to find that gambling is going on in here!
– From the classic scene in
Casablanca,
made in 1942
The latest scandal du jour seems to be about what is now called
LIBORgate. But is it a scandal or is it really just business as
usual?
And if we don't know which it is, what does that say about how
we organize the financial world, in which $300-800 trillion, give
or take, is based on LIBOR?
This is actually just the second verse of the old song about
derivatives, which is a much larger market. Which of course is a
problem that was not solved by Dodd-Frank and that has the
potential to once again create true havoc with the markets, whereas
LIBOR can only cost a few billion here and there. (Sarcasm
intended.)
The problem is the lack of transparency. Why would banks want to
reveal how much profit they are making? The last thing they want is
transparency. This week I offer a different take on LIBOR, one
which may annoy a few readers, but which I hope provokes some
thinking about how we should organize our financial world.
There Is Gambling in the House? I Am Shocked...
Let's quickly look at what LIBOR is. The initials stand for
London InterBank Offered Rate. It is the rate that is based on what
16 banks based in London (some are US banks) tell Thomson
Reuters
they expect to pay for overnight loans (and other
longer loans). Thomson Reuters throws out the highest four numbers
and the lowest four numbers and then gives us an average of the
rest. Then that averaged number becomes about 150 other "rates,"
from overnight to one year and in different currencies. The key is
that the number is not what the banks actually paid for loans, it's
what they
expect
to pay. Also, please note that the
British Banking Association, on its official website, calls this a
price "fixing."
Most of the time the number is probably pretty close to real, or
close enough for government work. But then, there are other times
when it is at best a guess and at worst manipulated.
Back in the banking and credit crisis panic of 2008 the
interbank market dried up. No bank was loaning other banks any
money at any price. Thus there was clearly no way for the LIBOR
number to be anything
but
fictitious. Anyone who was not
aware of this was simply not paying attention.
The regulators certainly knew on both sides of the Atlantic. All
along there were clear records, we now learn, that bankers were
telling the FSA (the Financial Services Authority) that they had
problems. Regulators were worried about what was happening but were
pointing out that there was a large hole in the ship that was
already admitting water, and they didn't want to make it any
bigger. Timothy Geithner, then President of the New York Federal
Reserve Bank (and now Secretary of the Treasury) wrote a rather
pointed letter to the FSA, suggesting the need for better
practices.
Some banks reported lower rates, to make it appear they were
better off than they were (since no one was actually lending to
them), and others might have given higher rates, for other reasons.
Remember, this was a British Banking Association number. Whether
you personally won or lost money on the probably wrong price
information depends on whether you were lending or borrowing and
whether you really wanted the entire market to appear worse than it
already was.
This was the equivalent of an open-book test where you got to
grade your own paper. And we are supposed to be shocked that there
might have been a few bad "expectations" here and there by bankers
acting in their own self-interest, with the knowledge of the
regulators? The more amazing proposition would be that in a time of
crisis the number had any close bearing on reality to begin with.
Call me skeptical, but I fail to see how we should be surprised.
The larger question that really needs to be asked is how in the
name of all that is holy did we get to a place where we base
hundreds of trillions of dollars of transactions worldwide on a
number whose provenance is not clearly transparent. Yes, I get that
the methodology of the creation of the number
after
the
banks call in their "expectations" is clear, but the process of
getting to that number was evidently not well understood and looks
to be even muddier than my rather cynical previous understanding of
it.
It now seems that there will be a feeding frenzy as politicians
and regulators hammer the various banks for improper practices. And
they are pretty easy targets: there is just no way you can explain
this that does not sound bad.
You're a big banker. The world is falling down before your eyes.
No one trusts anyone. If you put out a bad number (whatever "bad"
means in a time of sheer utter blind panic) the markets will kill
you even more than they already are and you could lose your job.
You have got to come up with a number in ten minutes.
"Hey, Nigel, what do you think we
should tell Tommie [Thomson Reuters]?"
"I don't know, Winthorpe, maybe
Mortimer has an idea; let's ask him."
Simply fining a few bankers is not going to fix the larger
problem: the lack of transparency for arguably the most important
number in financial markets. A very clear methodology needs to be
developed, along with guidelines for what to do in times of crisis
when the interbank market is frozen and there really is no number.
Having no number might be worse than having a number that is a
guess. But having a number that can be fudged by banks for their
benefit is also clearly not in the public's interest.
The point of the rule of law is that it is supposed to level the
playing field. But the rule of law means having a very transparent
process with very clear rules and guidelines and penalties for
breaking the rules.
I had dinner with Dr. Woody Brock this evening in Rockport. We
were discussing this issue and he mentioned that he had done a
study based on analysis by an institution that looks at all sorts
of "fuzzy" data, like how easy it is to start a business in a
country, corporate taxes and business structures, levels of free
trade and free markets, and the legal system. It turned out that
the trait that was most positively correlated with GDP growth was
strength of the rule of law. It is also one of the major factors
that
Niall Ferguson
cites in his book
Civilization
as a
reason for the ascendency of the West in the last 500 years, and a
factor that helps explain why China is rising again as it emerges
from chaos.
One of the very real problems we face is the growing feeling
that the system is rigged against regular people in favor of "the
bankers" or the 1%. And if we are honest with ourselves, we have to
admit there is reason for that feeling. Things like LIBOR are
structured with a very real potential for manipulation. When the
facts come out, there is just one more reason not to trust the
system. And if there is no trust, there is no system.
Opacity and Credit Default Swaps
Which brings me to my next point. We just went through a crisis
where derivatives were a major part of the problem, and
specifically the counterparty risk of over-the counter (OTC)
derivatives.
Taxpayers
had to back-stop derivatives sold by banks (and
specifically
AIG
) that were clearly undercapitalized. That cost tens of
billions. Yet the commissions and bonuses paid for selling those
bad derivatives went on being paid. Congress held hearings and
expressed outrage, but in the end Dodd-Frank sold out.
"Efforts to create an exchange-traded futures contract tied to
credit-default swaps haven't yet gained traction after 18 months of
talks, but banks dealing in the private multitrillion-dollar market
for credit derivatives believe such contracts will eventually
appear for a simple reason: They should attract new players.
"Credit-default swaps function like insurance for bonds and
loans. Investors use them to hedge or speculate against changes in
a borrower's creditworthiness. If a borrower defaults, sellers of
the protection compensate buyers.
"The swaps – traded over the phone or on-screen, with prices
known only to trading partners – are the domain of asset managers
and hedge funds with the sophistication and financial wherewithal
to take on complex risks.
"Futures, by contrast, are more routine instruments used by
institutions and individual or "retail" investors. Futures prices
are displayed publicly on exchanges, and customers can trade them
directly with other customers – unlike in the swaps market, where a
dealer is on one side of every trade.
"Dealers have long been fiercely protective of keeping the
status quo in credit-default swaps or 'CDS' because they have
booked fat profits from customers not being able to see where other
customers are trading." (Market Watch)
And that is the issue. Bankers do not want transparency, because
it will seriously cut into their profits. And while I like everyone
to make a profit, the implicit partner in every trade is the
taxpayer and, last time I looked, we do not get a piece of that
trade. Derivatives traded on an exchange were not part of the
problem during the last credit crisis; OTC derivatives were.
An exchange makes it very clear where the counterparty risk is
and what the price mechanism is. It creates a transparent rule of
law and places the risk on the backs of those buying and selling
derivatives and not on the taxpayer. Exchange-traded derivatives do
not pose a potential threat to the economies of the world, while we
don't know the extent of the threat posed by OTC trades. JPMorgan
has lost around $6 billion on the trading of their "London Whale."
If
Jamie Dimon
and the JPM board couldn't guarantee reasonable
corporate governance, then why should we assume that in another
crisis we won't find another AIG?
Dodd-Frank needs to be repealed and replaced. The last time, the
process was too clearly in the hands of those being regulated and
has contributed to their profits. Enough already.
Credit default swaps and any other derivative large enough to
put the system at risk must be moved to an exchange, to make clear
the counterparty risks.
This FT -- the most deep neoliberal swamp among mainstream newspaper. So they do not like any
critique of thier beloved neloneral world order with the dominance of reckless financial oligarchy
as one of the key components.
Notable quotes:
"... She argues that under our deregulated financial system "commercial bankers can create credit . . . effectively without limit, and with few regulatory constraints." She says that because the government and central banks impose no restrictions on what credit is used for, banks increasingly lend for speculative activities, rather than "sound, productive investment". ..."
"... The collateral for this borrowing is in the form of "promises to pay", which can "evaporate" and be defaulted upon - which risks dragging down the rest of the system. ..."
"... many of the remedies Pettifor recommends are, as she acknowledges, fairly mainstream: monitoring the evolution of credit relative to national income, limiting loan-to-value mortgage ratios more strictly, imposing stronger regulation on banks and issuing government debt at low interest rates across the maturity spectrum. ..."
"... Less mainstream are her calls for controls on international capital flows through a Tobin tax on financial transactions, and for central banks to "manage exchange rates over a specified range by buying and selling currency". ..."
"... its confrontational style - criticising financial market players, most economists, politicians and ideas from other left-leaning economists ..."
'The Production of Money', by Ann Pettifor - a financial education
16 HOURS AGO by: Review by Gemma Tetlow
Ann Pettifor's The Production of Money, is a work in three parts. It provides an explanation
of how money and credit are created in modern economies and of some of the problems that helped
foment the financial crisis. The author, an economist, then sets out her views on how these problems
should be fixed, including introducing controls on international capital flows. Finally, and less
obviously from the title, the book strays into a critique of fiscal austerity.
"Citizens," Pettifor argues, "were unprepared for the [financial] crisis, and remain on the
whole ignorant of the workings of the financial system." This is one reason why policymakers have
failed to address its failings. One of her objectives is to "simplify key concepts in relation
to money, finance and economics, and to make them accessible to a much wider audience".
Chapter two provides a clear, intuitive explanation of how money is created and how this can
facilitate economic growth. Money creation is a complex and intangible concept in a world where
it is no longer backed by gold bars held by the central bank, and Pettifor provides the most accessible
and thorough explanation I have seen.
In the rest of the book, the author sets out her diagnosis of the problems afflicting the world's
monetary system and her prescription for how they should be fixed. She argues that under our deregulated
financial system "commercial bankers can create credit . . . effectively without limit, and with
few regulatory constraints." She says that because the government and central banks impose no
restrictions on what credit is used for, banks increasingly lend for speculative activities, rather
than "sound, productive investment".
The collateral for this borrowing is in the form of "promises to pay", which can "evaporate"
and be defaulted upon - which risks dragging down the rest of the system.
The description is informative as far as it goes. However, it does not provide the sort of
compelling, insightful account of the problems before the crisis that is provided by, for example,
Michael Lewis in The Big Short.
She strikes a revolutionary tone when setting out the problem. But many of the remedies Pettifor
recommends are, as she acknowledges, fairly mainstream: monitoring the evolution of credit relative
to national income, limiting loan-to-value mortgage ratios more strictly, imposing stronger regulation
on banks and issuing government debt at low interest rates across the maturity spectrum.
Less mainstream are her calls for controls on international capital flows through a Tobin tax
on financial transactions, and for central banks to "manage exchange rates over a specified range
by buying and selling currency".
Her support for these measures is consistent with her belief - expressed throughout the book
- that everything was well until the global financial system began to liberalise following the
breakdown of the Bretton Woods system in 1971.
The evidence she provides to support her belief that policies in place during the Bretton Woods
era were superior to those operating now appears rather selective. She cites data presented in
Carmen Reinhart and Kenneth Rogoff's book, This Time is Different, as evidence that "financial
crises proliferated" after the 1970s. However, Reinhart and Rogoff's thesis was that we have been
here before in centuries past - and will be again.
The Production of Money presents one view of issues afflicting the world's financial systems
and how they should be dealt with, and will be useful to readers unfamiliar with these issues.
But in other places it provides a partial or rather confusing descriptions of aspects of the monetary
system. Saying the global economy "is once again at risk of slipping into recession" and faces
"deflation" are statements that have aged badly.
This book will help the public "develop a much greater understanding" of how banking and financial
systems work. However, its confrontational style - criticising financial market players, most
economists, politicians and ideas from other left-leaning economists - may put some readers off
before they get to the meat of the argument. The characterisations of these groups' views are
selective and her criticisms are at times not well supported by the evidence she presents.
How Money Made Us Modern
: About 9,500 years ago in the
Mesopotamian region of Sumer, ancient accountants kept track of
farmers' crops and livestock by stacking small pieces of baked
clay, almost like the tokens used in board games today. One piece
might signify a bushel of grain, while another with a different
shape might represent a farm animal or a jar of olive oil.
Those humble little
ceramic
shapes might not seem have much in common with today's
$100 bill, whose high-tech anti-counterfeiting features include a
special security thread designed to turn pink when illuminated by
ultraviolet light, let alone with credit-card swipes and online
transactions that for many Americans are rapidly taking the place
of cash.
But the roots of those modern modes of payment may lie in the
Sumerians' tokens. ...
The article is poorly researched. The author needs to read
Innes, Graeber, Ingham, Wray and Hudson on the history of
money from the perspective of credit instead of relying on
Davies, who emphasizes commodity money and doesn't
distinguish between bullion and chartal.
I was speaking specifically of the early history in my
comment, but the entire article was rather one-sided. The
debated on the history and nature of money is nuanced and
the author made it seem as through the article presents a
definitive version. The audience to which it is addressed
would not glean that from the article and would likely
come away with a one-sided and simplistic perspective on
the history and nature of money.
Michael Hudson offers a wonderful piece on the ancient
middle east, how they handled oppressive debt, and how, in
the Anglo-Saxon word, the biblical word for debt got
translated into 'sin.'
"From the actual people who study
cuneiform records, 90% of which are economic, what we have
surviving from Sumer and Babylonia, from about 2500 BC to
the time of Jesus, are mainly marriage contracts, dowries,
legal contracts, economic contracts, and loan contracts.
Above all, loans....
The rulers had what we would call an economic model.
They realized that every economy tended to become unstable
as a result of compound interest. We have the training
tablets that they trained scribal students with, around
1800 or 1900 BC. They had to calculate: How long does it
take debt to double its size, at what we'd call 20%
interest? The answer is 5 years. How does long it take to
multiply four-fold? The answer is 10 years. How much to
multiply 64 times? The answer is 30 years. Well you can
imagine how fast the debts grew.
So they knew how the tendency of every society was that
people would run up debts. Now when they ran up debts in
Sumer and Babylonia, and even in in Judea in Jesus' time,
they didn't borrow money from money lenders. People owed
debts because they were in arrears: They couldn't pay the
fees owed to the palace. We might call them taxes, but
they actually were fees for public services. And for beer,
for instance. The palace would supply beer and you would
run up a tab over the year, to be paid at harvest time on
the threshing floor. You also would pay for the boatmen,
if you needed to get your harvest delivered by boat. You
would pay for draught cattle if you needed them. You'd pay
for water. Cornelia Wunsch did one study and found that
75% of the debts, even in neo-Babylonian times around the
5th or 4th century BC, were arrears.
Sometimes the harvest failed. And when the harvest
failed, obviously they couldn't pay their fees and other
debts. Hammurabi canceled debts four or five times during
his reign. He did this because either the harvest failed
or there was a war and people couldn't pay.
What do you do if you're a ruler and people can't pay?
One reason they would cancel debts is that most debts were
owed to the palace or to the temples, which were under the
control of the palace. So you're canceling debts that are
owed to yourself.
Rulers had a good reason for doing this. If they didn't
cancel the debts, then people who owed money would become
bondservants to the tax collector or the wealthy
creditors, or whoever they owed money to. If they were
bondservants, they couldn't serve in the army. They
couldn't provide the corvée labor duties – the kind of tax
that people had to pay in the form of labor. Or they would
defect. If you wanted to win a war you had to have a
citizenry that had its own land, its own means of
support."
http://michael-hudson.com/2017/01/the-land-belongs-to-god/
"The focus of my talk today will be Jesus' first sermon
and the long background behind it that helps explain what
he was talking about and what he sought to bring about."
Glad you are researching the ancient history of monetary
regimes. Especially since your research into monetary
history over the past 150 years is so incredibly wrong.
"... Privilege: still exorbitant. Here's a nice analysis of the international role of the dollar. This is the same argument I tried to make in my Roosevelt Institute piece on trade policy last summer. The Economist* says it better: ..."
"... "Unlike other aspects of American hegemony, the dollar has grown more important as the world has globalised, not less. As economies opened their capital markets in the 1980s and 1990s, global capital flows surged. Yet most governments sought exchange-rate stability amid the sloshing tides of money. They managed their exchange rates using massive piles of foreign-exchange reserves Global reserves have grown from under $1trn in the 1980s to more than $10trn today. ..."
"... Dollar-denominated assets account for much of those reserves. Governments worry more about big swings in the dollar than in other currencies; trade is often conducted in dollar terms; and firms and governments owe roughly $10trn in dollar-denominated debt. the dollar is, on some measures, more central to the global system now than it was immediately after the second world war. ..."
"... America wields enormous financial power as a result. It can wreak havoc by withholding supplies of dollars in a crisis. When the Federal Reserve tweaks monetary policy, the effects ripple across the global economy. Hélène Rey of the London Business School argues that, despite their reserve holdings, many economies have lost full control over their domestic monetary policy, because of the effect of Fed policy on global appetite for risk. ..."
"... America's return on its foreign assets is markedly higher than the return foreign investors earn on their American assets That flow of investment income allows America to run persistent current-account deficits -- to buy more than it produces year after year, decade after decade." ..."
Privilege: still exorbitant. Here's a nice analysis of the international role of the dollar.
This is the same argument I tried to make in my Roosevelt Institute piece on trade policy last
summer. The Economist* says it better:
"Unlike other aspects of American hegemony, the dollar has grown more important as the
world has globalised, not less. As economies opened their capital markets in the 1980s and 1990s,
global capital flows surged. Yet most governments sought exchange-rate stability amid the sloshing
tides of money. They managed their exchange rates using massive piles of foreign-exchange reserves
Global reserves have grown from under $1trn in the 1980s to more than $10trn today.
Dollar-denominated assets account for much of those reserves. Governments worry more about
big swings in the dollar than in other currencies; trade is often conducted in dollar terms; and
firms and governments owe roughly $10trn in dollar-denominated debt. the dollar is, on some
measures, more central to the global system now than it was immediately after the second world
war.
America wields enormous financial power as a result. It can wreak havoc by withholding
supplies of dollars in a crisis. When the Federal Reserve tweaks monetary policy, the effects
ripple across the global economy. Hélène Rey of the London Business School argues that, despite
their reserve holdings, many economies have lost full control over their domestic monetary policy,
because of the effect of Fed policy on global appetite for risk.
During the heyday of Bretton Woods, Valéry Giscard d'Estaing, a French finance minister (later
president), complained about the "exorbitant privilege" enjoyed by the issuer of the world's reserve
currency. America's return on its foreign assets is markedly higher than the return foreign
investors earn on their American assets That flow of investment income allows America to run
persistent current-account deficits -- to buy more than it produces year after year, decade after
decade."
Exactly right. You can have free capital mobility, or you can have a balanced trade for the
US. But you can't have both, as long as the world depends on dollar reserves."
By Scott Ferguson, Assistant Professor, University of South
Florida. He is also a Research Scholar at the Binzagr Institute for
Sustainable Prosperity. His current research and pedagogy focus on Modern
Monetary Theory and critiques of neoliberalism, aesthetic theory; the
history of digital animation and visual effects; and essayistic writing
across media platforms. Originally published at
Arcade
James Livingston has responded to
my
critique
of his Aeon essay, "
Fuck
Work
." His response was published in the Spanish magazine
Contexto
y Accion
. One can find an English translation
here
.
What follows is my reply:
... ... ...
This brings me to Modern Monetary Theory (MMT). Far from an "obscure
intellectual trend," MMT is a prominent heterodox school of political
economy that emerged from
post-Keynesian
economics
and has lately influenced the economic platforms of
Bernie
Sanders
,
Jeremy
Corbyn
, and Spain's
United
Left
. For MMT, money is not a private token that states amass and
hemorrhage. Rather, it is a boundless government instrument that can easily
serve the needs of the entire community. International monetary agreements
such the Eurozone's
Maastricht
Treaty
may impose artificial limits on fiscal spending, but these are,
MMT argues, political constraints. They are not economically inevitable and
can immediately be dissolved. In truth, every sovereign polity can afford to
take care of its people; most governments simply choose not to provide for
everyone and feign that their hands are tied.
To be sure, Liberalism has debated the "designation and distribution of
rival goods," as Livingston explains. In doing so, however, it has
overlooked how macroeconomic governance conditions the production of these
goods in the first place. MMT, by contrast, stresses money's creative role
in enabling productive activity and places government's limitless spending
powers at the heart of this process.
In lieu of Liberal "redistribution" via taxation, MMT calls for a
politics of "
predistribution
."
Redistributive politics mitigate wealth disparity by purportedly
transferring money from rich to poor. This is a false and deeply
metaphysical gesture, however, since it mistakes the monetary relation for a
finite resource instead of embracing government's actual spending
capacities. MMT's predistributive politics, meanwhile, insist that
government can never run out of money and that meaningful transformation
requires intervening directly in the institutions and laws that structure
economic activity. MMT does not imply a crude determinism in which
government immediately commands production and distribution. Rather, it
politicizes fiscal spending and the banking system, which together
underwrite the supposedly autonomous civil society that Livingston
celebrates.
MMT maintains, moreover, that because UBI is not sufficiently productive,
it is a passive and ultimately
inflationary
means
to remedy our social and environmental problems. It thus recommends a
proactive and politicized commitment to public employment through a
voluntary
Job
Guarantee
. Federally funded yet operated by
local
governments
and
nonprofits
,
such a system would fund communal and ecological projects that the private
sector refuses to pursue. It would stabilize prices by maintaining aggregate
purchasing power
and
productive activity during market downturns.
What is more, by eliminating forced unemployment, it would eradicate
systemic poverty, increase labor's bargaining power, and improve everyone's
working conditions. In this way, a Job Guarantee would function as a form
of
targeted
universalism
: In improving the lives of particular groups, such a
program would transform the whole of economic life from the bottom up.
Unlike the Job Guarantee, UBI carries no obligation to create or maintain
public infrastructures. It relinquishes capital-intensive projects to the
private sector. It banks on the hope that meager increases in purchasing
power will solve the
systemic
crises
associated with un- and underemployment.
Let us, then, abandon UBI's "end of work" hysteria and confront the
problem of social provisioning head on. There is no escape from our broken
reality. We do better to seize present power structures and transform
collective participation, rather than to reduce politics to cartoonish
oppositions between liberty and tyranny, leisure and toil. Technology is
marvelous. It is no substitute, however, for governance. And while civil
society may be a site of creativity and struggle, it has limited spending
abilities and will always require external support.
It is essential, therefore, to construct an adequate welfare system. On
this matter, Livingston and I agree. But Livingston's retreat from
governance strikes me as both juvenile and self-sabotaging. Such thinking
distracts the left from advancing an effective political program and
building the robust public sector we need.
I really need to be kicked out of the house, to go someplace and do
something I don't really want to do for 8 hours a day.
I've already got too much time to fritter away. I'm fairly certain,
giving me more time and money to make my own choices would not make the
world a better place.
Hmm. No "sarc" tag Really?? More free time and money wouldn't be a
benefit to you and your surroundings? That's hard to believe. To each
their own I guess.
I can see it both ways. Most people see that as sarcasm but I have
more than a few friends whose jobs are probably the only thing keeping
them out of jail. Idle hands being the devil's plaything and all. For
instance, the last thing you want to give a recovering addict is a lot
of free time and money.
As a recovering addict, I must vehemently disagree with ur
statement.
I would love to have as much money and free time on my hands to
work on the fun hobbies that keep me sober like Political Activism,
Blogging, Film, etc.
At no point in the "Job Guarantee" discussion did anyone advocate
forcing you to go to work. However, if you decide to get ambitious and
want a paid activity to do that helps make society a better place to
live, wouldn't it be nice to know that there'd be work available for you
to do?
Right now, that's not so easy to do without lots of effort searching
for available jobs and going through a cumbersome and dispiriting
application process that's designed to make you prove how much you
REALLY, REALLY want the job.
For me, the real silver bullet is the moral/political argument of a
Job Guarantee vs. Basic Income. Job Guarantee gives people a sense of
pride and accomplishment and those employed and their loved ones will
vigorously defend it against those who would attack them as 'moochers'.
Also, defenders can point to the completed projects as added ammunition.
Basic income recipients have no such moral/political defense.
The guaranteed jobs could be for a 20 or 30 hour week. I fear they
won't be as most job guarantee advocates seem to be Calvinists who
believe only work gets you into heaven though.
"MMT, by contrast, stresses money's creative role in enabling productive
activity and places government's limitless spending powers at the heart of
this process."
" [money] is a boundless government instrument "
Limitless spending power is identical to infinite spending powers. If
this is a central tenet of MMT, the whole conceptual construct can easily be
disproved by reductio ad absurdum.
"And while civil society may be a site of creativity and struggle, it has
limited spending abilities and will always require external support."
Sure, the support of Nature, but I guess the author is referring to Big
Brother, the all-knowing and benevolent government, source and creator of
all money, indispensable provider of jobs, jobs, jobs.
Before there was nothing, then came the Government and the Government
said: let there be money.
I would like to see you do that via "reductio ad absurdum" because I
find you absolutely clueless regarding MMT's propositions. Maybe you just
like to spout off?
It's a common 'argument' by people defending status quo. They claim
something is ridiculous and easily disproven and then leave it at
that. They avoid making argument that are specific enought to be
countered, because thay know they don't actually have a leg to stand
on.
Limitless may not have been the best word. Of course the government
can print money till the cows come home; but MMT recommends stopping when
you approach the real resource constraint.
Sloppy language does not help so thank you. So the next question is
how do constraints (natural or other) affect spending power under MMT,
is it asymptotic, is there an optimum, discontinuities?
The other major issue is that although spending power is controlled
by legislatures it must be recognized that wealth creation starts with
the work of people and physical capital, not by the good graces of
gov't. MMT makes it sound as if money exists just because gov't wills
it to exist, which is true in the sense of printing pieces of paper
but not in the sense of actual economic production and wealth
creation. Taxes are not the manner in which gov't removes money but it
really is the cost of gov't sitting on top of the economic production
by people together with physical capital.
Help me understand your last sentence. So, if I'm a farmer, the
time I spend digging the field is economic production, but the time
I spend sitting at my desk planing what to plant and deciding which
stump to remove next and how best to do it, and the time I spend
making deals with the bank etc, these are all unproductive hours
that make no contribution to my economic production?
Yes, Jamie. And as you point out, Ferguson is giving us a
better definition of "productive". He is not saying productivity
produces profits – he is saying productive work fixes things and
makes them better. But some people never get past that road bump
called "productivity."
"MMT makes it sound as if money exists just because gov't wills
it to exist "
No, this is inaccurate, MMT says that the government must SPEND
money into existence, not just issue a legal fiat. Collecting taxes
in the currency creates a need for the currency. This is
historically accurate and can be traced from British colonial
history. They imposed taxes on the colonies in pound sterling, that
compelled the colonies to find something to export to Britain in
order to generate the foreign exchange to pay the taxes.
The debate is over how to get the currency in people's hands.
Should the govt just cut checks and let citizens spend as they see
fit? Or should the government directly employ resources to improve
society where the private sector isn't interested?
Regarding user Jamie's point, I hope I can add to it by saying
that someone is going to do the planning, whether it's the public
sector or the private sector, planning must be done. When
government does the planning, then it's decided democratically (at
least in theory). If the government doesn't do the planning, then
the private sector is left to do it on its own. This gets chaotic
if the private sector doesn't coordinate, or can get parasitic if
the private sector colludes against public interest.
I don't think there's anything wrong with calling money a
"boundless government instrument". The problem here comes from
confounding a potentially infinite resource (money) with the
inherently limited application of that resource. Sovereign money
really is limitless, what one can do with it is not. The distinction
needs to be clarified and emphasized, not glossed over.
"Limitless" is a pretty good word for some arguments. Look what you
get with "limited": every year congress up and says, "Hey dudes,
dudettes, we know you expected some governing from us, but we've
decided not to do that, because we've decided that the money we've
spent has taken us past the Debt Limit. So we're gonna stop now."
They're jerking you around. The rules of fiat money that they're using
don't work that way. In fact, Richard Nixon took the U.S. into a full
fiat money system so he could keep governing without having to worry
about running out of money to do it with.
International monetary agreements such the Eurozone's Maastricht
Treaty may impose artificial limits on fiscal spending, but these are,
MMT argues, political constraints. They are not economically
inevitable and can immediately be dissolved.
So no, not limitless. Rather, the limitations are political ones, not
economic. As long as the sovereignty of the currency is not in threat,
the money supply can be increased.
The author is making some assumptions, and then goes and takes them
apart. It's possilble (I didn't read the article he refers to), that the
assumptions he responds to directly are made by the article, but that
doesn't make them universal assumptions about UBI.
UBI is not a single exact prescription – and in the same way, JG is not a
single exact prescription. The devil, in both cases, is in details. In fact,
there is not reason why JG and UBI should be mutually exclusive as a number
of people are trying to tell us.
and if we talk about governance – well, the super-strong governance that
JG requires to function properly is my reason why I'd prefer a strong UBI to
most JG.
Now and then we get a failed UBI example study – I'm not going to look at
that. But the socialist regimes of late 20th century are a prime example of
failed JG. Unlike most visitor or writers here, I had the "privilege" to
experience them first hand, and thanks but no thanks. Under the socialist
regimes you had to have a job (IIRC, the consitutions stated you had "duty"
to work). But that become an instrument of control. What job you could have
was pretty tightly controlled. Or, even worse, you could be refused any job,
which pretty much automatically sent you to prison as "not working
parasite".
I don't expect that most people who support JG have anything even
remotely similar in mind, but the governance problems still stay. That is,
who decides what jobs should be created? Who decides who should get what
job, especially if not all jobs are equal (and I don't mean just equal pay)?
Can you be firedt from your JG job if you go there just to collect your
salary? (The joke in the socialist block was "the government pretends to pay
us, we pretend to work"). Etc. etc.
All of the above would have to be decided by people, and if we should
know something, then we should know that any system run by people will be,
sooner or later, corrupted. The more complex it is, the easier it is to
corrupt it.
Which is why I support (meaningfull, meaning you can actually live on it,
not just barely survive) Basic Income over JG. The question for me is more
whether we can actually afford a meaningful one, because getting a "bare
survival one" does more damage than good.
That's why any JG would have to be filtered through local governments
or, more ideally, non-profit community organizations, and not a
centralized government. New York City's
Summer Youth Employment Program
offers a good model for this. Block
grants of money are delivered to a wide range of community organizations,
thus ensuring no one group has a monopoly, and then individual
businesses, other community groups, schools, non-profits, etc., apply to
the community organizations for an "employee" who works for them, but the
payment actually comes from the block grant. The government serves as the
deliverer of funds, and provides regulatory oversight to make sure no
abuses are taking place, but does not pick and choose the jobs/employers
themselves.
I don't see it as either/or. Provide a UBI and a job guarantee. The job
would pay over and above the UBI bit, if for some reason, you don't want to
work or cannot, you still have your Universal BASIC Income as the floor
through which you cannot fall.
Private employers will have to offer better conditions and pay to
convince people getting UBI to work for them. They wouldn't be able to
mistreat workers because they could simply bolt because they will not fall
into poverty if they quit. The dirtbags needing workers won't be able to
overpay themselves at the expense of workers because they feel completely
free to leave if you are a self worshipping douche.
It seems that over time the "floor through which you cannot fall"
becomes just that, the floor, as the effect of a UBI becomes the
universal value, well floor.
Was going to be my response as well, why such absolute yes or no
thinking? The benefit of the UBI is that is recognizes that we have been
increasing productivity for oh the last couple millenia for a REASON! To
have more leisure time! Giving everyone the opportunity to work more and
slave away isn't much of a consolation. We basically have a jobs
guarantee/floor right now, its called McDonalds, and no one wants it.
Labor needs a TON of leverage, to get us back to a reasonable
Scandinavian/Aussie standard of living. Much more time off, much better
benefits, higher wages in general. UBI provides this, it says screw you
employers unless you are willing to offer reasonable conditions we are
going to stay home.
Why the Job Guarantee versus Universal Basic Income is not about work,
BUT ABOUT GOVERNANCE!
Yep, agree 100%.
We live in a capitalist society which is dependent on a (wage) slave
population.
UBI? Are you mad?
I for one am mad, give me UBI!
Time to end the insanity of U.S. capitalism
I'm curious to know if either of these systems work if there is no
guarantee of "free" access to healthcare through single-payer or a national
insurance? I'm only marginally informed about UBI or MMT, and haven't found
adequate information regarding either as to how healthcare is addressed. It
seems clear that neither could work in the US, specifically for the reason
that any UBI would have to be high enough to pay insane insurance premiums,
and cover catastrophic illnesses without pushing someone into bankruptcy.
Can anyone clarify, or point me in the direction of useful information on
this?
I think they're basically separate issues although MMT provides a way
of thinking that federal single payer is possible.
MMT is basically anti-austerity and in favor of 'smart' deficits ie
not deficits for no reason but deficits that can improve the economy and
the overall social structure such as single payer, affordable education,
job guarantee program.
Stephanie Kelton has commented that MMT has no real problem with a UBI
if it is done in conjunction with a good job guarantee program. She is
well aware of the dangers of a UBI if it eliminates most other social
programs.
I think that a job guarantee at a living wage would provide a much
better standard for private employment than a UBI which could just work
as a supplement allowing private industry to pay lower wages. As a
supplement to a job guarantee a UBI could help address issues such as
payment for reproductive type work.
There are different flavors of UBI, most don't mention healthcare at
all. Milton Friedman's UBI flavor prefers that it replace all government
spending on social welfare to reduce the government's overall burden. MMT
says there is no sense in not having single payer.
My thought on the last thread of this nature is that if UBI were ever
enacted in the U.S., healthcare access would become restricted to those
with jobs (and the self-employeed with enough spare income to pay for
it). You don't have to be healthy to collect a subsistence payment from
to the government.
Here in Canada we have universal healthcare, as well as a basic income
guarantee for low income families with children and seniors. There is a
movement to extend that as well,
details of one plan here
.
In theory, I think it could be possible for the JG to build and staff
hospitals and clinics on a non-profit basis or at least price-controlled
basis, if so directed (*huge* question, of course - by what agency? govt?
local councils?). Ditto housing, schools, infrastructure, all kinds of
socially useful and pleasant stuff. However, the way the US tends to do
things, I would expect instead that a BIG or a JG would, as others have
pointed out, simply enable employers to pay less, and furthermore,
subsidize the consumption of overpriced goods and services. IOW, a repeat
of the ACA, just a pump to get more $$ to the top.
The problem is not the money, but that the Americans govern themselves
so poorly. No idea what the cure could be for that.
Fixing worker pay is actually VERY easy. It's purely a political
issue. You tie corporate taxes to worker compensation. More
specifically, you set the maximum compensation for CEOs at NO MORE
than (say) 50x average worker pay in their corporation (INCLUDING
temps AND off-shored workers IN US DOLLARS no passing the buck to Temp
Agencies or claiming that $10/day in hellhole country x is equivalent
to $50k in the US. NO, it is $10/day or $3650/yr, period). At 50x,
corporate taxation is at the minimum (say something like 17%). The
corporation is free to pay their top exec more than 50x but doing so
will increase the corporate tax to 25%. You could make it step-wise:
51-60x average worker pay = 25% corporate tax, 61-80x = 33% corporate
tax, etc.
It is time to recognize that CEO pay is NOT natural or earned at
stratospheric levels. THE best economic times in the US were between
the 50s to early 70s when top tax rates were much higher AND the
average CEO took home maybe 30x their average worker pay. We CAN go
back to something like that with policy. Also, REQUIRE that labor have
reps on the Board of Directors, change the rules of incorporation so
it is NOT mainly focused on "maximizing profit or shareholder value".
It must include returning a social good to the local communities
within which corporations reside. Profits and maximizing shareholder
value must be last (after also minimizing social/environmental harm).
Violate the rules and you lose your corporate charter.
There is no right to be a corporation. Incorporation is a privilege
that is extended by government. The Founders barred any corporate
interference in politics, and if a corporation broke the law, it lost
its charter and the corporate officers were directly held responsible
for THEIR actions. Corporations don't do anything, people in charge of
corporations make the decisions and carry out the actions so NO MORE
LLCs. If you kill people due to lax environmental protections or
worker safety, etc, then the corporate officers are DIRECTLY and
personally responsible for it. THEY made it happen, not some ethereal
"corporation".
Durned hippys imagine an IRON boot stamping on a once human face –
forever. OK, now everybody back to the BIG house. Massa wanna reed yew sum
Bible verses. We're going to be slaves to the machines, ya big silly!
I'm sceptical whether a guaranteed job policy would actually work in
reality. There are plenty of historical precedents – for example, during the
Irish potato famine because of an ideological resistence to providing direct
aid, there were many 'make work' schemes. You can still see the results all
along the west coast of Ireland – little harbours that nobody has ever used,
massive drainage schemes for tiny amounts of land, roads to nowhere. It
certainly helped many families survive, but it also meant that those
incapacitated by starvation died as they couldn't work. It was no panacea.
There are numerous practical issues with make work schemes. Do you create
a sort of 2-layer public service – with one level permanent jobs, the other
a variety of 'temporary' jobs according to need? And if so, how do you deal
with issues like:
1. The person on a make work scheme who doesn't bother turning up till 11
am and goes home at 2.
2. Regional imbalances where propering region 1 is desperately short of
workers while neighbouring region 2 has thousands of surplus people sweeping
streets and planting trees.
3. What effect will this have on business and artistic innovation?
Countries with strong welfare systems such as Sweden also tend to have a
very high number of start ups because people can quit their jobs and devote
themselves to a couple of years to develop that business idea they always
had, or to start a band, or try to make a name as a painter.
4. How do you manage the transition from 'make-work' to permanent jobs
when the economy is on the up, but people decide they prefer working in
their local area sweeping the street?
I can see just as many practical problems with a job guarantee as with
universal income. Neither solution is perfect – in reality, some sort of mix
would be the only way I think it could be done effectively.
To provide some context for passers-by, this seemingly too-heated
debate is occurring in the context of the upcoming Podemos policy meeting
in Spain, Feb 10-12.. Podemos seems to have been unaware of MMT, and has
subscribed to sovereign-economy-as-household policies. Ferguson, along
with elements of the modern left, has been trying to win Podemos over to
MMT-based policies like a Jobs Guarantee rather than the Basic Income
scheme they have heretofore adopted rather uncritically.
(Of course Spain is far from "sovereign", but that's another matter
:-(
1) Fire them
2) Prospering region 1 isn't "short on workers" they just all have
private jobs.
3) What a good argument to also have single payer healthcare and some
sort of BIG as well as the JG
4) private companies must offer a better compensation package. One of the
benefits of the JG is that it essentially sets the minimum wage.
Yeah, those are pretty good answers right off the bat. (Obviously I
guess for #1 they can reapply in six months or something.)
Plutonium- I feel like true progress is trading shitty problems for
less shitty ones. I can't see any of the major proponents like Kelton,
Wray or Mitchell ever suggesting that the JG won't come with it's own
new sets of challenges. On the overly optimistic side though: you
could look at that as just necessitating more meaningful JG jobs
addressing those issues.
I was writing that on my phone this morning. Didn't have time to
go into great detail. Still, I wanted to point out that just
because there will be additional complexities with a JG, doesn't
mean there aren't reasonable answers.
1. If you fire them its not a jobs guarantee. Many people have
psychological/social issues which make them unsuitable for regular
hours jobs. If you don't have a universal basic income, and you don't
have an absolute jobs guarantee, then you condemn them and their
families to poverty.
2. The area is 'short on workers' if it is relying on a surplus
public employee base for doing things like keeping the streets clean
and helping out in old folks homes. It is implicit in the use of
government as a source of jobs of last resort that if there is no
spare labour, then you will have nobody to do all the non-basic works
and you will have no justification for additional infrastructure
spend.
3. You miss the point. A basic income allows people time and
freedom to be creative if they choose. When the Conservatives in the
early 1990's in the UK restricted social welfare to under 25's, Noel
Gallagher of Oasis predicted that it would destroy working class rock
n roll, and leave the future only to music made by rich kids. He was
proven right, which is why we have to listen to Coldplay every time we
switch on the radio.
4. This ignores the reality that jobs are never spread evenly
across regions. One of the biggest problems in the US labour market is
that the unemployed often just can't afford to move to where the jobs
are available. A guaranteed job scheme organised on local govenment
basis doesn't address this, if anything it can exacerbate the problem.
And the simplest and easiest way to have a minimum wage is to have a
minimum wage.
1) Kelton always talks about a JG being for people "willing and
able to work." If you are not willing I don't really have much
sympathy for you. If you are not able due to psychological factors
or disability, then we can talk about how you get on welfare or the
BIG/UBI. The JG can't work in a vacuum. It can't be the only social
program.
2) Seems unrealistic. You are just searching to find something
wrong. If there is zero public employment, that means private
employment is meeting all labor demands.
3) I have no idea what you are going on about. I'm in a band. I
also have a full-time job. I go see local music acts all the time.
There are a few that play music and don't work because they have
rich parents, but that's the minority. Most artists I know manage
to make art despite working full time. I give zero shits what
corporate rock is these days. If you don't like what's on the radio
turn it off. There are thousands of bands you've never heard of. Go
find them.
4) Again, you are just searching for What-If reasons to crap on
the JG. You try to keep the jobs local. Or you figure out free
transportation. There are these large vehicles called busses which
can transport many people at once.
Yes these are all valid logistical problems to solve, but you
present them like there are no possible solutions. I can come up
with several in less than 5 minutes.
For a more practical first step--how about getting rid of/slashing
regressive and non-federal income tax deductible sales taxes? shifting that
tax burden to where income growth has been.
Democratic Party-run states/cities are the biggest offenders when it
comes to high sales taxes.
universal basic income in the West + de facto open borders won't work.
just making a reasonable hypothesis.
There might be a psychological benefit to a jobs guarantee vs. UBI. There
are a lot of people that would much rather "earn" their income rather than
directly receiving it.
Which of these tools do you posess:
( ) Machete, pick-axe, big old hemp bag
( ) Scattergun, hound, mirrored shades
( ) Short-shorts, bandeau top, knee pads
( ) RealTree camo ACUs, FLIR scope
( ) ephedrine, pseudoephedrine, fast car
A JG would begin to rebuild the trust and cooperation needed to have a
society based on justice instead of might makes right. Human life is based
on obligations- we are all responsible to one another for the social system
to work. The problem is always about how to deal with cheaters and shirkers.
This problem is best solved by peer pressure and shaming- along with a
properly functioning legal system.
I get a kick out of the "make work" argument against a JG. With planned
obsolescence as the foundation of our economic system, it's just a more
sophisticated way of digging holes and filling them in again. Bring on
robotic automation, and the capitalist utopia is reached. Soul crushing,
pointless labor can be sidelined and replaced with an unthinking and
unfeeling machine in order to generate profits. The one problem is people
have no money to buy the cheep products. To solve that dilemma, use the
sovereign governments power to provide spending credits in the form of a
UBI. Capitalism is saved from is own contradictions- the can is kicked
farther down the road.
The obligations we have to one another must be defined before any system
organization can take place. Right now, the elite are trying to have their
cake and eat it too.
I agree with those who see a need for both programs. I think the critique
of UBI here is a good one, that raises many valid points. But I have trouble
with a portion of it. For instance:
by eliminating forced unemployment, it would eradicate systemic
poverty
treats 'poverty' as an absolute when it is a relative. No matter what
programs are in place, there will always be a bottom tier in our
hierarchical society and those who constitute it will always be
'impoverished' compared to those in higher tiers. This is the nature of the
beast. Which is why I prefer to talk about subsistence level income and
degrees above subsistence. The cost of living may not be absolutely fixed
over time, but it seems to me to be more meaningful and stable than the term
'poverty'. On the other hand, in a rent seeking economy, giving people an
income will not lift them out of poverty because rents will simply be
adjusted to meet the rise in resources. So UBI without rent control is
meaningless.
Another point is that swapping forced unemployment for forced employment
seems to me to avoid some core issues surrounding how society provides for
all its members. Proponents of the JG are always careful to stress that no
one is forced to work under the JG. They say things like, "jobs for everyone
who wants one". But this fails to address the element of coercion that
underlies the system. If one has no means to provide for oneself (i.e. we
are no longer a frontier with boundless land that anyone can have for cheap
upon which they may strike out and choose the amount of labor they
contribute to procure the quality of life they prefer-if ever was such the
case), then jobs for "everyone who wants one" is simply disingenuous. There
is a critical "needs" versus "wants" discussion that doesn't generally come
up when discussing JG. It's in there, of course, but it is postponed until
the idea is accepted to the point where setting an actual wage becomes an
issue. But even then, the wage set will bear on the needs versus wants of
the employed, but leaves out those foolish enough to not "want" a job.
Whereas, in discussing UBI, that discussion is front and center (since even
before accepting the proposal people will ask, how much?, and proper reasons
must be given to support a particular amount-which again brings us to
discussing subsistence and degrees above it-the discussion of subsistence or
better is "baked in" to the discussion about UBI in a way that it is not
when discussing the JG).
While UBI interests me as a possible route to a non-"means of
production"-based economy, the problem I see with it is that it could easily
reduce the populace to living to consume. Given enough funds to provide for
the basics of living, but not enough to make any gains within society, or
affect change. It's growth for growth's sake, not as to serve society.
Something is needed to make sure people aren't just provided for, but have
the ability to shape the direction of their society and communities.
Where I work @3/4 of the staff already receives social security and yet
it is not enough seems to me human satisfaction is boundless and providing
a relative minimum paper floor for everyone is just. Yet the way our market
is set up, this paper floor would be gobbled back up by the rentier class
anyway. So unless there is a miraculous change in our economic rent capture
policies, we are screwed
So yes, just describe to people precisely what it is – a 'paper' floor
not something that has firm footing yet acknowledges inequities inherent in
our current currency distribution methods. And of course couple this with a
jobs guarantee. I have met way too many people in my life that 'fall through
the cracks' .
why is no one bemoaning the rabid over-consumption of the complainers who
suck up much more than they will ever need, hoarding and complaining about
people who do not have enough? the real problem is rampant out of control
parasites
But Ferguson should also adknowledge that Livingston has some points.
Why on earth we politically put limits to, for instance, public
earning-spending while do not put any limit to the net amount that one
person can earn, spend and own?
Upward redistribution is what occurs in the neoliberal framework. UBI is
distribution. Bear in mind that even in the best employment conditions, not
everybody can earn a salary. 100% employment is unrealistic.
The people marketing UBI and MMT have hundreds of years of attempted
social engineereing to overcome. I referring to the " why people want what
they want and why do they believe what they believe." Why?
The only suggestion I have is that, since everybody has a different
relationship to the concept of work, the populations involved need to be
smaller. Not necessarily fewer people, but more regions or nation states
that are actually allowed to try their ideas without being attacked by any
existing "empire" or "wanna be empire" via sanctions or militarily.
It is going to take many differerent regions, operating a variety of
economic systems (not the globalized private banking extraction method
pushed down every one's throat whether they like it or not) that people can
gravitate in and out of freely.
People would have the choice to settle in the region that has rules and
regulations that work most for their lives and belief systems (which can
change over time).
Looking at it from the perspective that there can be only one system that
300 million plus people (like the USA) or the world must be under is the
MAIN problem of social engineering. There needs to be space carved out for
these many experiments.
First, congratulations to everyone who managed to read this all the way
through. IMO both this (and the guy he's responding to), seem like someone
making fun of academic writing. Perhaps with the aid of a program that spits
out random long words.
FWIW, when I lived in Japan, they had a HUGE, construction-based
make-work program there, and it was the worst of both worlds: hard physical
labor which even the laborers knew served no purpose, PLUS constant street
obstruction/noise for the people in the neighborhoods of these make-work
projects. Not to mention entire beautiful mountains literally concreted over
in the name of 'jawbs'.
Different thought: I'm not sold on UBI either, but wouldn't it mess up
the prostitution/sex trafficking game, almost as a side effect? Has anyone
heard UBI fans promote it on that basis?
The sound and fury of disagreement is drowning out what both authors
agree on: guaranteed material standards of living and reduced working time.
If that's the true goal, we should say so explicitly and hammer out the
details of the best way to attain it.
Interesting read society has become so corrupt at every level from
personal up through municipal, regional and federal governments that it cant
even identify the problem, let alone a solution
all forms of government and their corresponding programs will fail until
that government is free from the monetary influences of individuals /
corporations and military establishments, whether it be from donations to a
political establishment or kick backs to politicians and legislators or
government spending directed to buddies and cohorts
I don't pretend to understand the arguments at the level to which they
are written, but at the basic level of true governance it must but open and
honest, this would allow the economy to function and be evaluated, and then
at that point we could offer up some ideas on how to enhance areas as needed
or scale back areas that were out of control or not adding value to society
as a whole
We stand at a place that has hundreds of years of built in corruption
into the model, capable so far of funneling money to the top regardless of
the program implemented by the left or the right sides of society
first step is to remove all corruption and influence from governance at
every level until then all the toils toward improvement are pointless as no
person has witnessed a "free market " in a couple hundred years, all
economic policy has been slanted by influence and corruption
we can not fix it until we actually observe it working, and it will never
work until it is free of bias / influence
no idea how we get there . our justice system is the first step in
repairing any society
"... "instead they've had difficulty even getting inflation high enough to hit their inflation target. Maybe the problem is the way the FED is counting dollars." ..."
"... Debt the First 5000 Years ..."
"... looks like ..."
"... "but at some point this must and will end" ..."
"... personal, anecdotal, small-sample, and otherwise qualified observations ..."
"instead they've had difficulty even getting inflation high enough to
hit their inflation target. Maybe the problem is the way the FED is counting
dollars."
Ah, but they did stop deflation. Which was all they really cared about.
Everything else was theater. Bottom line, Federal Reserve is the
counterparty to all the private interests naked shorting the US dollar.
Which always works unless that counterfeiting process starts to go into
reverse. Just like naked shorting in the stock market can go into reverse
and put a big deal of hurt on the naked shorters. But with naked shorting in
the stock market, the party that is doing the counterfeiting of stock
doesn't have a way to prevent the play from going into reverse. In contrast,
the Federal Reserve does, through QE and whatever else they can do. Believe
you me, if things got bad enough, they would have done a true helicopter
drop. Whatever it takes to get their "liquidity pump" working again.
And they got their liquidity pump working again and stopped deflation.
(So hey they were heros, yay! /sarc) And along the way, dollars (either
newly borrowed or already in the economy) ended up in assets. And those
assets keep going up through more inflation. So while they may not have
"levitated the economy", they did levitate the demand for their liquidity
pump. (What's not to love? /sarc)
It just hasn't reached high inflation because main street isn't a player.
Otherwise, if main street was a player too, like they were for the dot com
bubble and housing bubble, well then look out. But everybody on main street
is just trying to survive. As far as the Federal Reserve is concerned that's
a perfect "wall of worry" to provide them all the cover they need to make
sure inflation doesn't get out of hand. To use the words of Adam Smith,
"it's a virtuous cycle". Assets go up, the plebs aren't at the party yet, so
no need to take away the punch bowl.
(And hey look at all the temp jobs that main street has now. Who says the
magic of the Federal Reserve isn't doing good things? /sarc)
Ah yes, "stopping deflation", what a disaster it would be if rent,
food, health care cost less. The horror: people might be able to put a
little away as "savings" and maybe even "invest". Can't have that now can
we.
So we have a system where the Fed controls interest rates (domestic
policy) and Treasury worries about exchange rates (trade and
international). Their objectives align probably 20% of the time.
Meantime "bank underwriting" is a distant memory, just sign the deal, get
your bonus, if/when it goes south Papa (Momma) CB will just smash the
value of the scrip some more
yes djrichard that is a nice synopsis of how this all works but where
does it end? How long can it go on? It is the world's biggest Ponzi
scheme and it almost ended in 2008 when the plebes could no longer take
on the increasing amounts of debt to keep it going. A normal Ponzi scheme
ends when it runs out of fools to fleece but this one is different
because it involves central banks which can step in to keep it all going
once mainstream is tapped out. That's where we are now; they ginned up
massive amounts of base money that was used to prop up asset prices on
behalf of the elites. This whole thing has to be the biggest fraud and
crime in human history but it is so esoteric that most people can't see
it. The masses get buried under inflated costs associated with the asset
bubble, inflation and interest payments while a small sliver at the top
lives in a rentiers paradise.
They have added massive debt to the system since the 2008 debt crisis
and things are now fine? Low interest rates mask the burden but at some
point this must and will end. Once they stripped the gold out of the
system in 1971 they set the groundwork for an explosion of debt. It's a
very scary situation.
However, there has been a lot of unproductive private debt issuance
even so, such as companies issuing debt to buy back stock and student
debt financing overpriced college costs.
This is a good explanation of why private debt, particularly
unproductive household debt, is the danger:
QE is widely misunderstood as printing money when it isn't. It's a
way to lower long term interest rates and spreads (as in lower the
spread of prime mortgages relative to Treasuries).
2. China continues to have a massive debt bubble. And no major
economy has made the transition from being investment and export led
to consumption led without having a major financial crisis.
Are you suggesting that the U.S. monetary system is healthy and
sound?
Completely agree that the creation of unproductive debt is the
real problem in any economy. Michael Hudson has written brilliantly
on that issue. Most debt/money creation should be closely tied to
productive investment.
As for private debt to GDP, I have no basis to comment on
whether it higher or lower than pre-crisis levels without doing a
lot of work. Those types of figures are fraught with complexity
based on source data, assumptions and methodology. Would love to
see those figures by sector, student loan, credit card, auto loan,
mortgage, corporate, municipal, etc. In any case it is unambiguous
that government debt has increased by nearly $10,000,000,000,000.00
since 2008. Does anyone think that is a good thing? And that
excludes retirement and medical costs which dwarf the funded debt.
Federal deficit went up by $1.4 last year, 9/30/16 year-end, after
a 7 year supposed recovery when tax revenues should be peaking.
What's up with that?
The U.S. may be able to borrow in its own currency but because
of its current account deficit it is dependent on foreigners to
play along. How long is that going to last?
Any thoughts on the 1974 deal whereby the Saudis agreed to
secretly support the dollar. What happens to dollar hegemony
without those kinds of deals.
What is going on with Russia right now, why the new cold war?
Russia runs a pipeline through Ukraine and is the leading supplier
of natural gas to western Europe. It's not dollar based. Qatar sits
on the world's largest supplies of natural gas and wants to run
pipeline North through Syria. Asssad said no. U.S. then unleashed a
proxy war to unseat Assad. Qatar is a U.S. client state, like Saudi
Arabia, and they allowed U.S. to build massive air base outside of
Doha. Qatar plays along with U.S. and in return the Al Thani family
remains in power.
I am afraid this is all a bit more complicated and fragile than
meets the eye.
What is your definition of printing money? Is there no such
thing in your mind? Does a central bank ever print money in your
view of the system other than when they ask the U.S. Treasury's
Bureau of Engraving and Printing to create some federal reserve
notes?
I have read two of Randall Wray's books on MMT and Warren
Mossler's Seven Deadly Innocent Frauds. I am fairly well
acquainted with MMT. As for Mossler I wish he had a good
editor because his stuff could read much better. As for
Wray's TWINTOPT ("that which is needed to pay taxes")
definition of money, you can also argue for TWINTOPP ("that
which is needed to purchase petroleum") as a definition of
money. Pricing the world's most important commodity in
"something" is an even more effective of way of causing that
something to be used as money.
As for MMT I like some of the ideas but it seems to suffer
from the same fundamental problems that the current system
does. If the government has a monopoly on producing money, it
is a given that they will overdo it at some point just like
what happens with the current private system where the banks
over did it. You end up with the same rudimentary
questions/problems under MMT or the current type system:
1) what are the rules governing its creation?
2) and who is in charge and gets to decide?
Either system can work if it is intelligently and honesty
run but of course that is asking a lot. Unfortunately men can
not be trusted to run an honest system for any length of time
because creating money is the world's greatest privilege and
it will always be abused at some point; war, greed,
stupidity, it doesn't matter, at some point discipline is
lost. That in summary is the entire history of money.
There's a lot of history behind the MMT conception.
David Graeber, in
Debt the First 5000 Years
describes kings creating money in order to pay the army,
and creating impersonal markets (pp. 226-227) where money
was good in order to feed the army without
a) trundling huge convoys of grain all over the country
all day, every day, or
b) letting the army feed itself, and stripping the country
bare.
The way this had to be done without impersonal markets
is described by
Pierre Loti in Au Maroc
(not sure where to find a
version in English.) Loti was part of a French diplomatic
mission to the depths of Morocco. To feed the mission, the
Sultan sent word in advance to the people near each
nightly stop, ordering them to provide a sufficiently larg
feast. Without the modern features of civilisation, that
was the only way.
One of Gandhi's early campaigns was against a move by
the British governmennt in India to licence all mango
trees. The situation had been that there were feral mango
trees growing all over India, and anyone who was going by
such a tree, and felt like a snack, could pick a mango and
eat it. This scheme provided no role for the government.
The plan was for each tree to be licenced, for a fee, and
to destroy any un-owned, unlicenced tree. Then everybody
would be obliged to pay rupees for their snacks. The
government's control of society through the impersonal
market would be strengthened. Pity that people would get
less to eat. ISTR Gandhi won that one.
I could entertain the doubt that without pre-existing
money and a global impersonal market there would even be
petroleum to buy. Who would drill down to the petroleum,
pump it out of the ground, and ship it halfway around the
world to where you happen to be in the hope that you even
exist, and, if you exist, that you even want petroleum and
have something worthwhile to give in exchange? It takes a
global impersonal market to aggregate personal whims and
accidents into something that we call demand, and find we
can count on in making far-reaching decisions on what to
do. I wonder, could we even have industry without it?
Hmmm
Check out
http://www.monetary.org/lostscienceofmoney.html
History shows abuse of the money supply primarily comes
from two places: 1) true illegal counterfeiting by outside
parties, 2) true legal counterfeiting (ahem borrowing) by
inside parties who are simply shorting the currency when
the economy is publicly biased towards increased private
debt (think Wiemar Republic or Venezuela).
In contrast, Fed Gov fiat (MMT) is not based on a
fractional reserve system. At least not the ones I hear
people talk about. So the magnitude of
debasement/debauchery is a lot less compared to
fractional-based currencies. Plus the monetary base can
always be shrunk by issuing bonds if the will power to tax
is weak.
Thanks for stepping in, Yves. But I have a minor quibble with
that Private Debt to GDP graphic you linked. Because the graph's
Y-origin begins at 195%, the 7.5% reduction since 2008
looks
like
a 500% decrease. Bottom line – private debt to GDP
remains very high and the economy is much weaker than it was in 08.
Unless GDP picks up quickly (less the Ponzi-esque growth in
equities), our financial future does not appear strong.
Is it OK if I hope (against my better judgement) that Trump is
serious about improving U.S. infrastructure through deficit
spending and the loony conservatives in Congress go along?
If this ends, the only way it does so is through deflation. But the
Fed Reserve is always on hand to do "whatever it takes" to prevent
deflation.
If the Federal Reserve loses that fight (and it's hard to think of
a scenario where they could ostensibly lose), then deflation would
take out everybody who is in debt. Which is pretty much everybody,
except people who have no debt and are holding cash. The Fed Gov would
certainly have to step in to provide 3 hots and a cot.
Instead, we have an outcome where the deflation monster is kept at
bay, but everybody is up to their eyeballs in debt (I'm speaking
private debt here. By the way, notice how private debt forgiveness
never enters into the conversation). Except for the elite, they're not
in debt to their eyeballs because the height of their eyeballs can
keep getting higher and higher. The elite know if the wall-of-worry
disappears, forcing the Fed Reserve to raise rates, they'll be caught
with their pants down. But they also know they'll be rescued again
(the ol deflation monster must be defeated once again. We do this for
you little people don't you know). So that's where the economy is
thriving – for the elite.
In aggregate terms the elites hold the other side of all the
debt that was created, that is why they won't tolerate deflation,
everything implodes under such a scenario. The masses are buried
under the debt, while a small minority holds the asset side of it.
Therefore everything will be done to stave off deflation. System is
very fragile, teetering between deflation and potential hyper
inflation. They have threaded a needle so far to keep it stable but
things are not normal. It will be some time before we know how this
resolves itself.
The issue isn't monetary policy, i.e increasing or decreasing the supply
of money, the issue is that the way we've decided to do it is by increasing
and decreasing interests rates. So we end up in this bazzarro world where,
.
------
Stop! I know the answer!
Fed Chief Mariner Eccles explained that long ago – "pushing on a string
won't work"
Keynes explains it in English – This doesn't work when in a "liquidity
trap"
Our current Fed are Monetary_keynesians working in the Mariner Eccles
building.
"If we accept that only the Federal Government, through spending and
taxing, can increase or decrease the supply of dollars"
the vast majority of dollars in the economy are actually created by banks
in the form of deposits generated by making loans. The central bank (Federal
Govt.) seeks to control the level of reserves in the interbank market and
has very limited control over the the supply of money in the economy as a
whole. banks do not lend reserves, which is why there can be reserves
sloshing all around the system without causing inflation. As long as there
are idle resources in the economy the danger of inflation is overblown.
Just follow the money. How does monetary policy influence influence the
average person's finances? They don't have access to the discount window.
Business investment is at an all-time low. Just witness the famously large cash
hoards currently collecting dust in the Fortune 500 and companies like Uber
setting billions of dollars on fire trying to get into new markets instead of
developing new products. Instead they're using cheap debt to buy competitors
and fire all their employees. Small businesses are disappearing and there are
fewer new ones to replace them - nobody has collateral.
Until financial policy starts seriously considering "helicopter money" the
economy is just going to sit there spinning its wheels, going nowhere on the
backs of a vast underclass with no money to spend. Government contracts are and
remain the only way the average person might even catch a glimpse of the world
of finance, a fact that must seem appalling to any financial conservative.
Inflation is hidden in plain sight for many consumers. Just take a trip to
the grocery store, or a home improvement big box, or any number of other
retailers. From
personal, anecdotal, small-sample, and otherwise qualified
observations
, retailers held prices low until the election and then
started to raise them. That will add some pop to their fourth quarter earnings,
while people adjust budgets accordingly.
This is not correct and I hate to tell you but your comments on
this topic are very confused, and worse, you are terribly self
confident about your erroneous beliefs.
A fiat currency issuer can deficit spend without creating debt
instruments. You do not take your dollar bills in a fiat regime to the
Treasury and get them redeemed for something material. The only use
you can make of currency with the Treasury is to extinguish your tax
liabilities.
The Fed can only 'lend' fiat. They don't 'spend' fiat, unless
Congress authorizes the purchase (e.g. Tarp). But note that even
foreign currency purchases of the Fed have to be cleared by Treasury
(which happens behind closed doors and no one notices). So no, the Fed
does not bypass Congress.
And if you mean that Fed offers deposit insurance on deposits
(created via private lending) but that's still an authority given to
it by Congress when FDIC was created. And the FDIC has a 'line of
credit' with the Treasury, not the Fed, so again Congress is not
bypassed. In fact, the credibility of the FDIC only exists because of
that line of credit from the Treasury, since it means they are de
facto linked to the currency issuing entity directly.
The Fed NEVER creates fiat for the private sector. It exchanges
green paper money for bank reserve balances–$ for $ exchange. There is
no cost to the Fed or the govt. Not to mention that the Fed's overall
operations are a cash cow for the federal govt (due to its profits via
interest income on securities owned vs. costs of its liabilities and
salaries, etc.), so it never needs Congressional appropriations. As an
MMT expert said of your BTW "This question in the first place shows
that this guy has no idea how any of this works."
This chart from Citibank shows the eye-popping expansion of central bank
balance sheets, from roughly $3 trillion in the year 2000 to $20 trillion
today.
Evidently the "EM" band in green is dominated by China, which accumulated
over $4 trillion in forex (primarily US Treasuries) through 2013. Now it's
having to sell Treasuries to prop up the yuan exchange rate.
But Haruhiko "Mad Dog" Kuroda at the Bank of Japan is picking up the slack
from China with a ferocious buying binge, as Mario "Whatever It Takes" Draghi
closely pursues him.
Common sense would tell you that expanding central bank assets at many
multiples of economic growth is neither sustainable nor even sensible. Central
banksters are giving ol' John Law a run for the money. With any luck they
should be able to produce an epic calamity, since their bubble blowing is
global rather than confined to one country.
Actually, the Fed is just laundering crap from our TBTFs and supporting
the purchasing power of the dollar:
http://econbrowser.com/wp-content/uploads/2015/12/fed_assets_dec_15.png
The grey is crap being invisibly written down at taxpayers expense (actually
holding a very small percentage of its face value, but embarrassing for
Jamie and Lloyd if admitted in public), the baby blue is keeping the imports
made abroad by our multinationals "affordable" without them having to re-patriate
the cash.
I'm pretty sure "grey" is the "good" MBS. They swore up and down it
was Fannie&Freddie MBS they were buying as part of QE – these are
supposed to be the high quality end of mortgage instruments and I think
it really did turn out that way.
The drek mopped up from Bears and others is called "Maiden", and is
the nearly imperceptible dark blue on this chart. If they properly wrote
them down immediately, then they wouldn't show up on a current chart!
This is why "audit" sounds cool. Then we could have a completely
different chart showing how much they did give away to their buddies.
No doubt they did say that, I guess I've just grown less trusting.
Given the proTBTF tilt of all else that transpired I just can't
believe Timmy and The Fed really took possession of anything it would
have pained Jamie and Lloyd to give up.
"Common sense would tell you that expanding central bank assets at many
multiples of economic growth is neither sustainable nor even sensible.
Central banksters are giving ol' John Law a run for the money. With any luck
they should be able to produce an epic calamity, since their bubble blowing
is global rather than confined to one country."
It's inevitable and will make John Law look like a rank amateur when this
thing comes apart.
Personally, I'm looking forward to what happened next: the Regent
toured France with a detachment Dragoons collecting gold from hoarders at
bayonete point!
Yay! This article and its comments exemplifies why I spend far longer on NC
than on any other site on the Web. Not only had it never before occured to me
that The Wizard of Oz was an allegory of anything – tho' it's obvious even to
the dim-witted like me once pointed out – it helped me understand the concepts
and relationships that underlie 'money'. In short, how a pound note can be, as
it says, "worth one pound".
The author's critique of modern central banking seems dead on, the fallacy of pushing on a string
etc, but he seems to think their response was a mistake because what we really lack is fiscal
stimulus. Pardon me if I am confused but didn't the government just engage in the biggest fiscal
stimulus in the history of the world as evidenced by its massive deficit spending to the tune of ten
trillion dollars. Was that not a fiscal stimulus? What is the author's point? That we need even more
of this! If Mr. Ferguson would clarify that would be great.
I happen to think everything they have done is mistake and that what we need is a debt jubilee
which is what William White, one of the world's foremost monetary theorists and former chief
economist of the BIS also thinks.
No, the bailouts were not fiscal spending. They were done mainly by
special facilities and those loans were paid back. QE is also not fiscal
spending.
The US engaged in only about $800 billion of fiscal spending. China did
the most, IIRC about $2 trillion.
William White was very good in the runup to the crisis in identifying the
housing bubbles but is really clueless about the debt of fiat currency
issuers v. that of non-fiat issuers, like US states and countries in the
Eurozone.
There is a slight upside to the frightful monetary policy we have been
obliged to pursue – by creating military mayhem all over the world we have
attracted savings to the US economy for fear it might be lost any where else.
Even UK has proved unsafe and western media is making the EU look dodgy too.
So regardless of the reality of a dormant national economy the money keeps
coming in.
Don't forget the tax havens either – they invest in New York.
But look at the poem that's repeated in there. It's fairly clear that
Frank Baum had opinions on currency. Now that particular poem is a peon to
Mckinley and "honest money". Which would make one think that Baum was a hard
money advocate, as McKinley and "honest money" was the counter William
Jennings Bryan (WJB) arguing against the "cross of gold". But WJB's campaign
for silver had the same failings as gold, they were both banker's money.
Perhaps Baum saw the disadvantages either way.
In any case, Bill Still provides what I think is the better currency
allegory from Frank Baum's story, in that it's an advocation against both
silver (the silver shoes) and gold (the yellow brick road) and was for
"paper money" issued by the Fed Gov (the emerald city). See
https://www.youtube.com/watch?v=Sboh-_w43W8
. Now this is purely Bill's
interpretation, just like the refutation you're linking to was admitted to
be an interpretation too. I happen to think Bill's allegory works better and
there's strong reason to think that this is where Baum's head was at (given
he was opinionated on currency and an advocate of the farmer's
vulnerabilities to issues related to currencies).
Littlefield himself wrote to The New York Times letters to the editor
section spelling out that his theory had no basis in fact, but that his
original point was "not to label Baum, or to lessen any of his magic, but
rather, as a history teacher at Mount Vernon High School, to invest
turn-of-the-century America with the imagery and wonder I have always found
in his stories."
Biographers report that Baum had been a political activist in the
1890s with a special interest in the money question of gold and silver,
and the illustrator Denslow was a full-time editorial cartoonist for a
major daily newspaper. For the 1901 Broadway production Baum inserted
explicit references to prominent political characters such as President
Theodore Roosevelt .
Littlefield's knowledge of the 1890s was thin, and he made numerous
errors, but since his article was published, scholars in history,[7]
political science[1] and economics[11] have asserted that the images and
characters used by Baum closely resemble political images that were well
known in the 1890s. Quentin Taylor, for example, claimed that many of the
events and characters of the book resemble the actual political
personalities, events and ideas of the 1890s.[10] Dorothy-naïve, young
and simple-represents the American people. She is Everyman, led astray
and seeking the way back home.[10] Moreover, following the road of gold
leads eventually only to the Emerald City, which may symbolize the
fraudulent world of greenback paper money that only pretends to have
value.[10] It is ruled by a scheming politician (the Wizard) who uses
publicity devices and tricks to fool the people (and even the Good
Witches) into believing he is benevolent, wise, and powerful when really
he is a selfish, evil humbug. He sends Dorothy into severe danger hoping
she will rid him of his enemy the Wicked Witch of the West. He is
powerless and, as he admits to Dorothy, "I'm a very bad Wizard."[12]
Historian Quentin Taylor sees additional metaphors, including:
The Scarecrow as a representation of American farmers and their
troubles in the late 19th century
The Tin Man representing the industrial workers, especially those of
American steel industries
The Cowardly Lion as a metaphor for William Jennings Bryan
In it, there is some discussion of who Frank Baum really was. And other
stuff, like how Yip's song, "Brother Can You Spare a Dime," was regarded:
"Roosevelt and the Democratic Party really wanted to tone it down and keep
it off the radio,"
And why the songs stop in the film:
"on their way to the wicked witch, when all the songs stopped, because they
wouldn't let them do anymore. OK? You'll notice then the chase begins, you
see, in the movie.
AMY GOODMAN:
Why wouldn't they let them do anymore?
ERNIE HARBURG:
Because they didn't understand what he was doing, and they wanted a chase
in there."
Barron's investment weekly has published a "Get Ready for Dow 20,000" cover today. Is
that a problem for stocks, from a contrarian point of view?
Not necessarily. Paul Macrae Montgomery, who first articulated the concept of fading the always-wrong
MSM, stipulated that it's widely-circulated, general-interest publications that are the best mirrors
of popular sentiment.
So far, they are largely silent on the twin asset bubbles - stocks and house prices - rising
ominously beneath our feet. Looks like it's gonna be awhile before we reach the supreme silliness
of Time magazine's fatuous June 2005 cover "Home $weet Home: Why We're Going Gaga Over
Real Estate."
That one actually scored double points, for the MSM's presumptuous habit of invoking the cozy
"we" formulation to tell readers what they think. (That's why "we" hate the MSM.)
With Time reportedly on the block, maybe a sensational "Dow 36,000" cover could goose
the sale price up to five dollars instead of one. It's worth a try, lads!
Jim, odd snippet from something I heard last night struck me as being right up your alley.
The guy who founded Princeton Review is now some kind of investment guru. He was talking about
last years announced rate hikes, and that he told his clients they weren't going up but might
reach record lows. He based that on metals traders (gold, silver etc). He says they have never
been wrong about the direction of rates. (I got interrupted so if he explained the signals he
was seeing from them I missed it). It should be part of a pod cast from Tim Ferriss if you want
to check it out, but I really did think it was one of those things you would have in your arsenal
for market prediction.
His other big advice was treat investing like a poker game, don't bet on the cards bet on the
players – look for their tells. And he hasn't figured out that Uber has some real issues to deal
with before its 'profits' are real, so take everything with a grain of salt.
TIPS didn't exist before 1997. But real Treasury yields (proxied by subtracting the trailing
12-month CPI change from nominal Treasury yields) went negative in 1974 and 1979 too, during the
epic gold spikes of that era.
So this seems to be an enduring anticorrelation. However, I use the yield curve in my bond
model rather than gold. The pronounced serial correlation in Fed-controlled short rates is highly
non-random, signaling what the cockeyed commissars are up to.
"... "And even though neoliberals and international banks would have you believe otherwise, a fall in these money movements is entirely a good thing. As Ken Rogoff and Carmen Reinhart found in their study of 800 years of financial crises, high levels of international capital flows are correlated with more frequent and severe financial crises. Similarly, a 2010 Bank of International Settlements study by Claudio Borio and Petit Disyatat ascertained that cross border capital flows were over 60 times trade flows, meaning they had almost nothing to do with them. " ..."
"... I think it is apparent that the entire edifice of finance has been jiggered to benefit, Davos man and NO ONE ELSE. ..."
"... hy shouldn't Davos man want it to continue – the aftermath was set right for the 0.1% remarkably fast in the aftermath of the Great Recession – by HUGE infusions of government money, guarantees, credit, forbearance, etcetera – which for some reason can NEVER be made available to the 90% ..."
"... This is probably the most salient reason Hillary lost, but it can never, ever be proffered as a reason for it would reveal that ALL our problems are due to the rich . ..."
"... I've often wondered how "The Multiplier Effect" of money, [not] circulating and recirculating in our local economies, at the consumer level, is affected by money sent out of the country by "immigrants"? ..."
"... Is this such a small amount as not to be considered part of "cross border capital flows"? How does it affect local economies that are more important to us than what happens on Wall Street? ..."
m'kay so kind of like robbing peter (emerging markets with growth potential) to pay paul (goldman
et.al.) until peter goes broke (asset bubble collapse) so paul can't be paid until he "natural"
growth potential of emerging markets recovers (peters growth potential recovers from the asset
bubble/debt overhang with best performance to those with more flexible currency) so that paying
paul (new grifts, oops financial innovations) can be foisted on them again leading to, in hindsight
only of course, and notably after paul has been paid, another collapse? rinse and repeat .is there
any sense to this postulation?
Why do you use the term 'capital' when referring to credit/lending that is not related to economically
real outputs. The rest of the article tells this story but the lead groups it all as 'capital'
flows.
This is an editorial suggestion really one that does not conflate or mislead when treating
credit creation used for financial asset trading as if it were the same general thing as FDI,
that is, direct investment.
We have seen the financial system react to the crisis by recognizing their own unhinged behavior,
and doing much less of it for good reasons. They know their credit creating behavior was nit coverting
Savings into Investment, they know it was not 'capital' – so editors, let us help our writers
to bring more clarity.
I agree. We need a separate word for 'financial capital'. I am thinking 'ante' or 'stake' or
some similar word from the world of gambling and confidence tricks.
"And even though neoliberals and international banks would have you believe otherwise, a fall
in these money movements is entirely a good thing. As Ken Rogoff and Carmen Reinhart found in
their study of 800 years of financial crises, high levels of international capital flows are correlated
with more frequent and severe financial crises. Similarly, a 2010 Bank of International Settlements
study by Claudio Borio and Petit Disyatat ascertained that cross border capital flows were over
60 times trade flows, meaning they had almost nothing to do with them. "
This is probably something that not one in 10,000 people understand (I don't really either) –
but I think it is apparent that the entire edifice of finance has been jiggered to benefit, Davos
man and NO ONE ELSE. And why shouldn't Davos man want it to continue – the aftermath was set right
for the 0.1% remarkably fast in the aftermath of the Great Recession – by HUGE infusions of government
money, guarantees, credit, forbearance, etcetera – which for some reason can NEVER be made available
to the 90%
This is probably the most salient reason Hillary lost, but it can never, ever be proffered
as a reason for it would reveal that ALL our problems are due to the rich .
I've often wondered how "The Multiplier Effect" of money, [not] circulating and recirculating
in our local economies, at the consumer level, is affected by money sent out of the country by
"immigrants"?
Is this such a small amount as not to be considered part of "cross border capital flows"?
How does it affect local economies that are more important to us than what happens on Wall Street?
Years of low interest rates and quantitative easing have not restored
growth to developed countries, and many observers lately have been calling on central banks to
inject stimulus into economies directly. But do the rewards of "helicopter money" outweigh the
risks?
ZURICH – The world has been on pins and needles since Donald Trump's upset victory over
Hillary Clinton in the United States' presidential election last week. No one – including,
perhaps, the president-elect himself – quite knows what shape the next US administration will
take, or what its policy priorities will be.
Compounding this uncertainty is the fact that, around the world, geopolitical tensions are
rising, with developed economies continuing to experience tepid growth, even after years of
record-low interest rates. For Trump to stimulate enough activity in the US economy to satisfy
his zealous base, he will have to find the right balance between fiscal measures and
monetary-policy tools.
Whether Trump continues the post-1945 US tradition of international leadership, or instead
chooses an "America first" approach, he will not be alone in his quest for growth: Japan and
eurozone countries are also struggling to bring about sustainable recoveries and meet central
banks' inflation targets. Project Syndicate commentators have been at the forefront of the
ongoing debate about what policymakers can do to achieve these goals. In particular, while Trump
and policymakers elsewhere are embracing fiscal activism, how far they are willing or able to go
remains uncertain, raising the question of what more central banks could do to stimulate demand
and boost growth.
Spinning in Circles
The recent shift toward fiscal expansion reflects widespread agreement that policymakers are
running out of stimulus options. Central banks can no longer rely on "forward guidance," such as
half-promises that interest rates will remain low indefinitely. And quantitative easing (QE) is
quickly losing its potency, perhaps because it is inherently more effective as a crisis-response
mechanism than as a long-term fix.
"... ""This analysis raises a host of questions: If the unsecured credit lines that make the payments system function smoothly are liquidity, then are these credit lines also money? Should they be money? If these credit lines that are so important to the operation of the payments system are not money, then what is the point of defining money at all? I am still puzzling over these questions so I only ask them and don't pretend to answer them here."" ..."
"... Sissoko acknowledges the role that sovereign governments play in establishing money systems but I think gives too much credit :) to private bank credit creation. ..."
"... If money grew on trees it would be worth very little (Wray 2004) ..."
"... Money is the result of the struggle between debtors' demand for money and creditors' belief that the state can service its debt, which in turn depends on tax revenues. And it is the need to work for a taxable income that gives it value. (Ingham) ..."
"... Taxes don't finance spending but are necessary for money to have state backed value. They are also an important way for the state to transfer resources whether for bank bailouts, wars, social security, health care or whatever the state deems important. ..."
Carolyn Sissoko has an interesting new paper out,
Financial Stability
, in which she takes on the nature of money problem.
I think her concluding paragraph is interesting
""This analysis raises a host of questions: If the unsecured credit lines that make the payments
system function smoothly are liquidity, then are these credit lines also money? Should they be money?
If these credit lines that are so important to the operation of the payments system are not money, then
what is the point of defining money at all? I am still puzzling over these questions so I only ask them
and don't pretend to answer them here.""
As a derivatives expert she takes on the interesting question of how these complex sources of credit
function, they provide credit but are they really money.
I think Ingham makes a great point relevant to this, "all money is credit but not all credit is money"
Sissoko acknowledges the role that sovereign governments play in establishing money systems but I
think gives too much credit :) to private bank credit creation.
If money grew on trees it would be worth very little (Wray 2004)
Money is the result of the struggle between debtors' demand for money and creditors' belief that
the state can service its debt, which in turn depends on tax revenues. And it is the need to work for
a taxable income that gives it value. (Ingham)
Taxes don't finance spending but are necessary for money to have state backed value. They are also
an important way for the state to transfer resources whether for bank bailouts, wars, social security,
health care or whatever the state deems important.
If money grew on trees it would be worth very little (Wray 2004)
That would depend on the rate of growth and, assuming every citizen had an equal number and quality
of such trees, be an ethical means to create fiat apart from normal deficit spending for the general
welfare.
Of course there are no such trees but equal fiat distributions to all adult citizens could have
the same effect.
You know that money that your bank lent you to
buy your new house? Well, I want to let you in on a little
secret: That wasn't the bank's money they lent you. And it
wasn't some billionaire's money either. It was some of your
own money, along with a little bit of mine and Tom's and
Susie's and everybody else in this country. Can you imagine
that?
It's a fact. It's why Henry Ford supposedly said that "if
people understood our banking and monetary system, I believe
there would be a revolution before tomorrow morning".(1)
When the bank lent you that money it took your promise to
pay them back (a promissory note and title to the house as
collateral) and in exchange it punched some numbers into a
computer, creating your deposit account and thereby creating
the money it lent to you.(2)
But how can that be, you say. How can the bank just invent
money like that? Well they do "just invent money" and they
can do it because our government agrees with them that they
can do it.
But don't they have to pay for that money, you say. No,
they don't. But they do have to be a depository institution (
a place you can keep your money on deposit) and there is some
expense for them to that.
But they are charging me interest on that money, you say.
Yes indeed, they are charging you interest on your own money,
and mine, and Tom's, and Susie's, etc.
But that bank is a private business, and banks make a lot
of profit, why should we pay them to loan us our own money,
you say. Good question.
"But don't they have to pay for that money, you say. No, they
don't. But they do have to be a depository institution ( a
place you can keep your money on deposit) and there is some
expense for them to that."
Again? Take a look at the income
statement of any bank. There is interest expense for them on
those deposits. OK, it is low but then there are those
subsidized services which is why noninterest expenses exceed
noninterest income. Again - no exactly a total expense of 5%
but mortgage rates today are not exactly 6% either.
We all do. But I see you waste no time doing actual financial
economics. If you did, you might realize how to capture
monopoly profits. Look at the average return to equity
compared to what you'd predict from a CAPM model. When I do
this for health insurance companies, their average return is
3 times what they would be from a competitive market. When I
do this for major banks, the average return to equity = the
CAPM prediction. Estimated monopoly profits = 0.
Of course
you have no idea what any of this means as all you know is
word salad.
Banks sell public
money as their product and they extract interest for doing
so. They thus act as a transfer agent of wealth from the real
economy to rentiers.
The return to equity for
banks is about what one would expect from a risk-adjusted
return perspective. Oh yes - the Capital Asset Pricing Model
properly applied would show what utter nonsense this is.
Banks will always exist. Of course proper regulation of
financial institutions can address this problem. But your
word salad has nothing to do with the real issues.
He does but what is the percentage of JPM's total assets? Do
you even know? You might need a microscope to see it. And no
- I am not defending banks. But your word salad is not
getting at the real issues. And yet you persist.
In finance, the capital asset pricing model (CAPM) is a model
used to determine a theoretically appropriate required rate
of return of an asset, to make decisions about adding assets
to a well-diversified portfolio.
Let's do this for a bank. Expected return to assets =
risk-free rate (1%) plus a 1% premium for bearing operational
risk. But then the equity to asset ratio for banks is only
10% so the expected return to equity includes a 10% premium
for bearing both operational risk and leverage risk. As such,
the expected return to equity = 11% for these highly levered
firms. And on average that is their actual return to equity.
For a great application of these thoughts - see that paper by
Sarin and Summers. You may not remember when I put it up
weeks ago but my internet stalker put up a link to it just
yesterday. Of course this was PeterK's childish way of
attacking someone who actually contributes to this blog. I
said he should read it. So should RGC. They might learn
something.
LOL! pgl assumes that banks' investors have a god-given right
to a risk premium of 10%.
Of course, risk premiums are more
in the range 4-5%, far below pgl's banker-coddling
assumption.
"Some economists argue that, although certain markets in
certain time periods may display a considerable equity risk
premium, it is not in fact a generalizable concept. They
argue that too much focus on specific cases – e.g. the U.S.
stock market in the last century – has made a statistical
peculiarity seem like an economic law."
http://www.investopedia.com/terms/e/equityriskpremium.asp#ixzz4OOLOzdqg
As for the economic concept of the time value of money,
whereby savers get rewarded for setting money aside...the
longer the time, the greater the reward, well, central banks
have pretty well destroyed that with negative interest rates.
Time value of money: RIP. Nonetheless investors are still
supposed to reap their extravagant risk premiums!!!
He can't figure out this aggregator thing. He cannot figure
out the investor thing. He certainly has no knowledge of the
secondary market.
He takes tiny little pieces of things,
ignores the rest and then comes to a conclusion. Of course
the conclusion is that MMT makes sense. Everyone knows it
doesn't make sense and cannot work world.
He ignores basic finance. But then so does PeterK as actual
thinking just gets him all angry. Which means you and I are
tagged "liar". This is the intellectual garbage that is
ruining this place.
RGC -> EMichael...
, -1
"Money creation in practice differs from some popular
misconceptions - banks do not act simply as intermediaries,
lending out deposits that savers place with them, and nor do
they 'multiply up' central bank money to create new loans and
deposits."
"... I'm increasingly interested in the metaphors around banking, which seem to still come out of early 19th c invention of engines, all of which used ' fuel ' as a central tenet: 'the money supply fuels the economy'. Economics seems drenched in outdated, antiquated metaphors where ' fuel ' is always and everywhere a good thing, with no polluting externalities, and no downside costs. ..."
"... Fuels don't lie, cheat, or steal - continuing to use fuel as a central metaphor enables banks, economists, and central bankers to put their fingers in their ears and howl "La! La! La! Using metaphors shaped by sail-powered whaling ships hunting for blubber is working just great for us!!" After all, calculus had been invented by the 1820s - so math + moneyAsEngineSpeak = economics. ..."
"... If money were more widely regarded as a social tool: recognized as a tool that requires communication, social networks, and flourishes within civil society, then Haldane's observations would be met with "Doh, you betcha!" ..."
"... Then, also, Bill Black's observations that crime actually does exist, and often looks exceptionally respectable, would be impossible to ignore. ..."
"... I interpreted Brexit as a 'tea leaf' that the banks could no longer be made fine-proof without triggering social unrest. ..."
"... The way that I read this, contemporary economics and finance leads to utter, unmanageable disaster from which there is absolutely no way out. The engine 'melts down', so to speak. I feel as if I have spent the past 8 years watching systems nearly implode, be saved by extraordinary (lunatic) measures, and in the end the systems of thinking that created these problems are precisely the mental pathways that keep people stuck in a labyrinth of dysfunction. ..."
"... It's hard to work out how "1. Implode, not too violently" could give rise to anything other than lethal shortages, especially in urban environments, and how this could lead to anything but "2. blow up, social unrest" anyway. ..."
"... Money is social relations, power relations, if Gold is law then the powerful will grab the gold. If not, they'll grab the money creating buttons in various spreadsheets, unless opposed by all. ..."
"... Maybe there is a way to make the vulnerability that the central banks and banksters and CorpoStates like GE and Cigna and Goldman Sux nd the rest impose on the vast rest of us into a mutual exposure? ..."
"... There is nothing wrong with interest, as long as the rate is reasonable. It is a service charge for someone handing you money now to buy what you want now instead of waiting to save up the money. Interest does not make an economic system unstable. It's the same as a massage or other service you buy. You just need enough income to cover it, and the principal payment of course. ..."
"... "As noted in the article [money is] a concept created by human beings and should be considered a very malleable tool that we can use to do pretty much whatever we as a society decide we want to with it. If we truly wanted to create a more equitable society there is nothing stopping us from doing so except the greed of the few." ..."
"... The Big Lie that the federal government needs tax revenue in order to operate, so we "can't afford" the social benefits that help the non-rich, must be constantly debunked and rejected. ..."
"... The terminology of finance is designed to hide predatory and extractive activities behind a curtain of beneficial-sounding words. These terms are deeply embedded, and serve both to put some friendly makeup on the business, and allow the "consumers" to feel better about their capitulation. The process is akin to the way politicians wrap themselves in the flag while they sell out the citizenry. We know deep down that they are lying, but we prefer the false patriotism because it serves the lies we prefer to tell ourselves. We bitch and moan, but we play our part, because not doing so leads to trouble. It is the way most of us live our lives. ..."
"... Most people go along the big lie because of hope. ..."
"... Money is nutrition, not a snack. It's food and fertilizer. It makes things grow. You have to share it with other life like bacteria and worms: without these organisms in your gut ecology, you get sick (autism, diabetes, obesity, M.S.). Idiots try to convince us these organisms are parasites instead of symbionts just like Monsanto thinks bees are disposable or Donald Trump likes to think of pregnant women as drags on business profits. ..."
"... If you think altruism is for suckers, your Ayn Rand economy collapses because you confuse parasites with symbionts and symbionts with parasites. You can't distinguish between compensation for earned and unearned income. What's a tax and what's theft? Try living without bacteria making butyrate in your gut. Wells Fargo can no more survive without little people like airport janitors to scrub out the TB and Ebola stains than our cells can breathe without mitochondria. Yet who gets their pay driven down in corporate America? ..."
Clive, FWIW, I'm increasingly interested in the metaphors around banking, which seem to still
come out of early 19th c invention of engines, all of which used ' fuel ' as a central tenet:
'the money supply fuels the economy'. Economics seems drenched in outdated, antiquated metaphors
where ' fuel ' is always and everywhere a good thing, with no polluting externalities, and
no downside costs.
Hence, what matters is 'efficiency': it's moneyAsEngineSpeak, so to speak.
Lordy, it's all petrochemical: from a time when chemical and mechanical engineering (and physics)
were in their relative infancies and whaling schooners were sailing out of Nantucket.
Fuels don't lie, cheat, or steal - continuing to use fuel as a central metaphor
enables banks, economists, and central bankers to put their fingers in their ears and howl "La! La!
La! Using metaphors shaped by sail-powered whaling ships hunting for blubber is working just great
for us!!" After all, calculus had been invented by the 1820s - so math + moneyAsEngineSpeak
= economics.
Egads.
In that paradigm, Bill Black is a mere scold, an oddball, a scruffy prophet in the wastelands,
so to speak.
If money were more widely regarded as a social tool: recognized as a tool that requires communication,
social networks, and flourishes within civil society, then Haldane's observations would be met with
"Doh, you betcha!"
Then, also, Bill Black's observations that crime actually does exist, and often looks exceptionally
respectable, would be impossible to ignore.
Timmy Geithner is probably not a fan of: (a) Bill Black or (b) the idea of money as inherently
social. Fuel is an emotionally sterile construct to work within; it enables one to avoid moral
qualms, or any sense of personal responsibility when ' engines blow up', or when they 'run
out of fuel '.
The fact that Haldane's observations and analysis are not more widely embraced suggests that somehow
the business schools, economics departments, and bankers all still use thought processes shaped in
the era of whalers seeking blubber for lanterns and lamps. Also, they probably still receive endowments
from the Kochs, Exxon, and other fuel obsessed interests.
Egads.
Until the metaphors move to biology, with a concomitant recognition that some kinds of ' fuel
' (aka Coke, Fritos, Doritos, donuts) work for short-term energy bursts, but carry extremely
negative longer term costs, I doubt that even the best attempts to muddle through will get us out
of this mess. Without amendment, this system is going to do one of two things: (1) implode (not too
violently) or else (2) blow up (social unrest).
I have no idea what the banker equivalent of 'chard, lettuce, and celery' would be, but some bright
mind ought to be thinking about it. (You distinguish yourself as such a mind; I hope that my metaphor
is not too offensive…)
I interpreted Brexit as a 'tea leaf' that the banks could no longer be made fine-proof without
triggering social unrest. Then I read your comment, esp:
the U.K. government is stuck with its vast holding in RBS. The only way it could ever be rid
of the RBS albatross is for RBS to have some vague hope of (eventually) earning its way back to
being something other than a complete basket case.
Apart from, ironically, the central banks' own ZIRP policy, the biggest threat to this is endless
redress for wrongdoing.
The way that I read this, contemporary economics and finance leads to utter, unmanageable
disaster from which there is absolutely no way out. The engine 'melts down', so to speak. I feel
as if I have spent the past 8 years watching systems nearly implode, be saved by extraordinary (lunatic)
measures, and in the end the systems of thinking that created these problems are precisely the mental
pathways that keep people stuck in a labyrinth of dysfunction.
Banking needs to be completely rethought, using the social sciences, which include the realities
of criminal conduct corroding the system to such a degree that it is threatening to implode. I'm
moving toward being agnostic as to whether this is a good thing, or not. Either way, the present
systems as I've read you describe them do not seem even remotely sustainable.
The metaphor I think applies is that we use money as both medium of exchange and store of value.
While the first is inherently dynamic, the second is static, so a good analogy is that in the
body, the medium is blood, while the store is fat. The trick has been how to store extreme amounts
of notional wealth and that is largely by having the government borrow it back out and spend in
ways which support the private sector, but don't compete with it in the hunt for profits. So are
all those pallets of money going to fund our wars really about war, or is it about keeping that
money flowing in one end and out the other? Consider all those super secure US savings bonds are
mostly just being poured down various rat holes, rather then building a sustainable society.
This probably goes back to Roosevelt, who borrowed a lot of unemployed capital to put a lot
of unemployed workers back to work.
Money is not a commodity to be mined or manufactured, whether gold or bitcoin, but a contract.
Every asset is the other side of an obligation. It allows a large economy to function, but it
also reduces community reciprocity, creating atomized societies.
Like blood, the economy needs very regulated amounts of money, as it functions as a voucher
system and storing lots of excess vouchers eventually causes the system to collapse, when everyone
tries to dump them at once. If government threatened to tax excess out, people would have to find
other ways to store value, like in stronger communities and healthier environments, aka the commons.
Most people save for the same general reasons, housing, healthcare, retirement, etc, which are
ultimately community functions anyway.
Finance as a public utility doesn't have to be subservient to government. Much as government
is analogous to the central nervous system, finance is to the circulatory system and the head
and heart are separate organs.
Government started out as a private business, institutionalized as monarchy, before becoming
a public utility. Now is the time to do the same with finance.
I'm leaning strongly to the idea that money is information . More specifically, it's
information about general claims on national commerce. That gold coin in your hand is a bidding
right . The obligation isn't to any one person, but your possession of it means that there's
one less gold coin's bidding power throughout the rest of the economy.
I'm still sorting out my thoughts on this, but Frederick Soddy, the Technocrats (a short-lived
1920s – 1930s US movement), and the ecological economists (Georgescu-Roegen, Daly, Boulding, etc.)
seem to make more sense to me.
The more I read of traditional / classical / neoclassical / post-Keynesian monetary theory
the more I suspect nobody has much of a clue.
Excellent and original points that make a tremendous amount of sense. Thank you.
One tiny quibble. It's hard to work out how "1. Implode, not too violently" could give
rise to anything other than lethal shortages, especially in urban environments, and how this could
lead to anything but "2. blow up, social unrest" anyway.
US Grant rode in a horse-drawn carriage from his inauguration to a White House lit with coal-gas,
while oil or candles. Medicine, sanitation, and agriculture was hardly different than it was in
Roman times. The railroad and the telegraph represented technological progress.
A little more than 30 years later McKinley rode in an automobile to a White House lit with
electric lamps, that had running water and sewage. Steel framed buildings could rise more the
3-4 stories off the ground. The causes of many diseases were known and somewhat preventable. The
first radio transmission was months away, and the first powered flight was 3 years away. The standard
of living of an average American doubled during that period. And it was all done under the gold
standard.
DGP per capita of the US peaked in 1973, the same time Bretton Woods formally ended. A dollar
today buys what 3 cents could buy when the Fed was formed. Do these FACTS escape the Krugmans
of the world or are they merely inconvenient and in conflict with what seems to be the true nature
of academic economics, to provide pseudo-science cover to political policy?
By all means let's go back to worshipping a dumb, shiny metal rather than, for instance, removing
all priviledges for the banks. And let's replace theft by inflation and deflation with theft by
deflation alone.
And let's confuse correlation with cause since the massive gold and silver strikes during that
period greatly increased the money supply and indeed, in some places, caused huge price inflation.
And let's forget that it is the government's authority to tax that gives value to fiat and give
gold owners a huge bonanza by making fiat needlessly expensive.
Setting aside your implied straw man, that it's a binary choice between unconstrained credit
creation, and "worshipping" gold, would you argue that today's society is better or worse than
that of 1970, just before the final (golden) constraint was broken?
Does the answer to this question answer the question? Money is social relations, power
relations, if Gold is law then the powerful will grab the gold. If not, they'll grab the money
creating buttons in various spreadsheets, unless opposed by all.
Or both. Hitler thought Chartalism (grandfather to MMT) was a great idea, then invaded France
and stole France's sizeable gold horde too! These greedy people want it all!
just before the final (golden) constraint was broken? Tinky
The central bank should not be allowed to create fiat for the private sector (e.g. Open Market
Purchases) AT ALL so no constraint is needed there other than absolute prohibition.
As for the monetary sovereign, price inflation is a restraint wrt fiat creation since the voters
hate it.
Also, please note that the demand for fiat is greatly reduced via other privileges for the
banks. Eliminate those and the demand for fiat shall greatly increase – greatly increasing the
amount of new fiat that can created without significant price inflation. This will be especially
the case when government provided deposit insurance is properly abolished since a huge amount
of new fiat should be required*.
*For the xfer of at least some currently insured deposits to inherently risk-free accounts
at a Postal Checking Service or equivalent.
Sounds good in theory, but how do you imagine that we might get to the point at which central
banks are prohibited from creating credit for the private sector?
How much of that fiat creation gets done via electronic means? Maybe there is a way to
make the vulnerability that the central banks and banksters and CorpoStates like GE and Cigna
and Goldman Sux nd the rest impose on the vast rest of us into a mutual exposure?
I mean, "they" can leverage and disappear and derivatize "capital" and ZIRP and NIRP with impunity,
and steal people's homes and garnish and change contract terms on personal accounts unilaterally.
Is there a turnabout, or are "we" so terrified of "instability" (where no "stability" really
exists, "disruption " and all that, not to act? As well demonstrated in many posts in this very
blog, it's not like the Fortress of FIRE's walls are any stronger than the foundations it is "coded"
on…
@scott 2 – "A dollar today buys what 3 cents could buy when the Fed was formed."
That something is true does not make it relevant; it can also be misleading. The real (domestic)
purchasing power of a dollar is determined by the amount of labor it takes to earn that dollar.
With the gains in labor productivity since 1913, it takes much less labor to earn today's dollar
than it took to earn that 3 cents 103 years ago. Comparing the nominal cost of a loaf of bread
in 1913 with its nominal cost today tells us nothing useful.
Yes isn't it awful when the prices of goods and services go down, I hate it when I have to
spend less money to eat and obtain shelter and all of the other necessaries of life.
Agricultural productivity rises so food costs less; industrial productivity rises so goods
cost less; and these are what is known as "progress". Increasing productivity is what raises our
standard of living.
But ah, there's a fly in the ointment, we have a debt-based money creation system. Problem
1.): Banks can print the principal but they can't print the interest. This leads to
Problem
2.): people borrow either because they think they can grow money faster than the debt service,
or because they are desperate and have no other choice.
Problem 2 (a) is that debt pulls demand from the future to the present, and when enough demand
is pulled forward people will no longer feel they should borrow for future growth because there
is none in sight. This leaves only desperate people borrowing to service existing outstanding
debt and that prophecy fulfills itself.
We are told this is somehow a "steady state" system but that is mathematically and obviously
incorrect. Even with unnatural acts like interest rates below zero (how can time preference be
below zero, and what does that say for the prospects for growth?) the system winds down and needs
to be completely reset.
The percentage of times that debt-based currency systems have failed in the past and gone to
zero = 100…leave it to alchemists economists to insist they can pull it off though.
Like the Soviet Union we now live in an era of centrally-planned price fixing for the most
important price of all in the economy: the price of money.
It's true that in eras where the price of money fluctuated wildly there were also wild fluctutaions
in the economy, booms and busts.
But someone made the statement: "The Fed makes the economy more stable. But I do not think
that word means what you think it does".
So no more busts…and no more booms, either. So put the periods of fastest economic growth and
fastest rises in the standard of living out of your mind, those are history. And given the mathematics
of "unlimited" debt creation, we'll get the bust anyway.
There is nothing wrong with interest, as long as the rate is reasonable. It is a service
charge for someone handing you money now to buy what you want now instead of waiting to save up
the money. Interest does not make an economic system unstable. It's the same as a massage or other
service you buy. You just need enough income to cover it, and the principal payment of course.
Some people seem to have this idea that x amount of money was created to buy a car, but none
was made to pay the interest. This causes the world to end. Not so. Money circulates and we know
that around a trillion or so in circulation seems to be enough to support our $18 T in annual
GDP. What is does mean is to pay off the 5 year car loan, you spent 4 years paying off the car
and another year paying the interest.
A benefit of interest is it may allow people to live past retirement age – but there there
is little economic focus on this phenomena.
There is nothing wrong with interest, as long as the rate is reasonable.
In principle this is true, but it leads to a paradox in an economy in which money is based
on debt. You start your second paragraph with an acknowledgement of this, but then you back down.
In such an economy, money is created when it is loaned - this money is the principal of the loan.
When the money is paid back, the money disappears.
But wait - the debtor must also pay back more than the principal of the loan; he or she must
also pay back the interest. How is the interest created? The same way as the principal, but it
is created by someone else's loan. So in a debt based economy, the amount of money in existence
is less than the total amount of people's debts.
If everyone is thrifty, and pays back their loans promptly, some people will never be able
to get the money to pay their interest. It's a game of musical chairs.
Pretty close, but consider this. The loan got paid back, the "money" disappeared, but the bank
gained it as new loan capacity. The bank makes a new loan. So far I think I'm repeating what you
stated. One minor problem is you say money is less than debt – it will be – debt is the contract
for the entire amount. But not everyone pays it all off at once – we just need the liquidity to
be there so the payor's personal bank account, or the one of their employer, doesn't run dry.
So at this point it's a matter of the banking system and the Fed managing liquidity. But the
size of the Fed balance sheet and reserves steadily increases over the years to account for growth
and any other liquidity needs the banks may have. It's either done directly with banks – buying
treasury bond assets or loans to banks, or they buy Treasuries in the market, the money goes somewhere,
then there is interbank lending to make it go where it's needed. (all in theory, of course. But
the theory seems sound, when uncorrupted.)
You make it sound like a steady state system, but it's not, debt is *always* issued in excess
of people's capacity to pay whether for political, psychological, or other reasons. The Fed knows
this. So they desperately want to reduce the total indebtedness by inflating it away, and this
puts everyone on a giant rat race treadmill, working two jobs trying to outrun the rise in prices.
Given the rise in productivity we're all supposed to be living like the Jetsons by now but Oh
No gatta keep running to stay in one place.
The Fed has forgotten that there is another way to reduce serial overindebtedness and that is
B-A-N-K-R-U-P-T-C-Y. It has the added advantage of being an actual capitalistic endeavor, and
not the inverted hyper-socialism we have today.The Fed keeps putting out brush fires so the dead
wood keeps building up, eventually there is an unholy crowning conflagration that takes the whole
forest with it.
Firstly, I said there is nothing wrong with interest . If you want to shift to "could
something go wrong with principal_plus_interest in a fractional reserve central banking system",
then, why yes! Plenty!
No, the system is by no means steady state – the economy has ups and downs and there are those
occasional "credit crunch" periods where banks get spooked over some such thing and stop lending
completely and then it seems like all the money disappeared. But that's why we have the Fed and
everyone furiously managing liquidity.
Since we're on a terminology thread (and my grandfather was a whaler), the whaling vessels
out of Nantucket tended to be square-rigged - barques, brigs, etc. Schooners were coastal vessels
used by fishermen more often than by whalers, who travelled long distances to launch their hunts.
Great post - I want to puke every time I hear Wall Street referred to as an "economic engine."
More like "social engineering" - of fraud schemes.
A couple of generations ago most people lived on farms. Many would trade grain to pay the miller.
In essence, hard cash was needed for goods at the general store.
Debt was used to finance big projects that were based on hard assets, land, commodities.
Fast forward to today…. banks still favour collateral based on hard assets yet services are
a much bigger part of our economy. I would venture to say that banks lend on soft collateral when
it is fed by sectors that have hard asset collateral or with a government guarantee.
IMO, get government out of everything and watch the economy drop to an economy of sustenance
based on hard asset collateral which will get increasingly constrained with world population going
from 7 to 9B. Exactly what rentiers LOVE!
Debt was used to finance increases in productivity. Unless you have a sweat shop in your basement,
a house is not a productive asset. It's a slowly appreciating consumer of capital, real and financial
(utilities, maintainance, and taxes). In distorted markets like California, it can make a lucky
few a lot of money while turning the area into a feudal system of land owners and serfs.
A side effect of financialization has been to turn the US economy into one that lives, temporarily,
on housing speculation. When people realize that spending $2 million on a bungalow that should
only cost $40K is the TRUE mis-allocation of capital, let's hope they don't realize that all at
once.
A couple generations ago land in many places was still relatively cheap. Asked my father once
how our family of dairy farmers managed to have as much land as we do and was told that my grandfather
often received land as payment. He'd give someone an animal or a side of beef and they'd give
him an acre they owned abutting his property that they weren't using for anything anyway. I've
seen some of the old ledgers found in his attic and as you noted, cash was not just in essence
but in fact used for goods at the general store. The barn itself was built with the help of the
community although I'm not sure how that was paid for but I'd wager that any financing was minimal.
The economy was a few steps above just sustenance but the population was a lot less and there
weren't nearly as many rich people from the city coming in looking for second (or 3rd or 4th)
homes in the country driving up the cost of real estate. Two generations later land is much more
dear to the point where our family likely wouldn't be able to afford to purchase property if they
needed extra acreage.
There are far too many economists who seem to think that money actually does grow on trees
in the sense that it's a naturally occurring resource that human beings can't control – it's all
determined by markets. In that sense I'd describe money not so much as a fuel but as a weapon.
I believe Jon Perkins had a similar description in his Confessions of an Economic Hitman. Weaponized
war is no longer the first option among advanced economies – first they'll try to bleed other
countries dry with economics. It's only when the victims won't cave that the bombs start dropping
now.
But money does not occur naturally and it should not be considered a fuel or a weapon. As noted
in the article it's a concept created by human beings and should be considered a very malleable
tool that we can use to do pretty much whatever we as a society decide we want to with it. If
we truly wanted to create a more equitable society there is nothing stopping us from doing so
except the greed of the few.
@lyman alpha bob – "As noted in the article [money is] a concept created by human beings
and should be considered a very malleable tool that we can use to do pretty much whatever we
as a society decide we want to with it. If we truly wanted to create a more equitable society
there is nothing stopping us from doing so except the greed of the few."
Adding: The Big Lie that the federal government needs tax revenue in order to operate,
so we "can't afford" the social benefits that help the non-rich, must be constantly debunked and
rejected.
Weaponizing money. That's a valuable concept. It reminds me of the end of David E. Martin's
(true-story-called-fiction-to-avoid-lawsuits) book "The Apostles of Power". And this was the reason
he wrote the book, actually–to fend off a major play to steal all the electronically-stored reserves
of the Fed into their own accounts, and destroy the evidence of their actions by triggering a
nuclear explosion of the precise nuclear power station that provided the power to the NYC/NJ computers
that stored the data. By telling enough about the plan in process (only the minor, human-created
fake "earthquake" at the Santa Ana reactor occurred, as the charges had been set before the book
was published; the book predicts the "earthquake"), a nuclear disaster and major financial theft
were averted.
Martin spoke about this, and the other real events described in the book, in a number of radio
interviews he gave in 2012, the year the book was published.
"Here's the [Machine] trick: Design the machine that will produce the result your analysis
indicates occurs routinely in the situation you have studied. Make sure you have included all
the parts – all the social gears, cranks, belts, buttons, and other widgets – and all the specifications
of materials and their qualities necessary to get the desired result."
Well, great! That part of the great discourse has been decoded and unpacked and all that, I
feel much better for the personal increase in awareness of how fokked things are.
Now, how are "we" going to get billions of other humans to the same state of awareness, to
stop talking about "fuel" when talking (using a gazillion other "terms of art" and memes and tropes
that are similarly opaque and whitewash and FUD-laden) about "the economy" and "economics" and
while generating ever more momentum for those same deadly (but profitable for the few) terms,
tropes, memes and shorthands? "Profitable" being one of them, "profit" being part of the disease
process, because after all, for the individual or the firm s/he belongs to, "profit" (ignoring
externalities, of course) is the summum bonum that lets you buy stuff and experiences galore?
Other Juggernaut words, just a very few: "bonus", "healthcare", "entitlement", "MArket", "free
trade," and a personal favorite, "donor" meaning very simply "BRIBER/corrupter" but hey, those
very few squillionaires who own everything including the "political process" are described millions
of times a DAY on the intertubes as "donors," "donors" to political candidates and PACs and "think
tanks" (??another fave). Giving a kidney to a person with terminal kidney failure, "donating"
one's corneas and body parts or those of deeply loved ones suddenly deceased, those are ""donations."
Not Koch or Adelman or Soros or Gates etc. billions to "Foundations" or operas or art museums.
"We," who are Aware, perceive some of this, often argue and debate and cavil over nitty bits
of those perceptions. That is so very effective, isn't it, the few hundreds or thousands of "us"
who participate in or observe the Flow in NCspace, in bringing about any kind of regression to
a mean that is hardly defined or maybe undefinable, a mean that might actually be "kind" and "decent"
and "fair" and "just" (whatever those terms are taken to mean)?
What is to be done about it? "We" ain't either powerful or certain enough to do something like
a "global search and replace" across the entire internet, with a burning of all the books and
papers, and a quarantine of all the GeithnerDimonGreenspanKrugmans and their myriad of citers
and followers and extenders, that carry the infection forward into the label minds of future "policy
makers" who like most humans who (I am assured by others) are wired to seek dominance and pleasure
and reproductive success? And who obviously are the dominant, successful vector and segment of
the "political economy?"
The plagues that Pandora was tricked into loosing on "humanity" have been out there probably
too long to be re-packaged. Nice effort for those who try, try and try again, but that effort
seems to me mostly pissing into the wind…
TINA. Sadly it's true, we appear somewhat stuck in this mode of what's working. I personally
appreciate the credit union / co-op model of accomplishing financial intermediation but that is
also a continuation of what we have.
Biggest problem in the US, no one competing with the FED.
"some of the recent coinages, like "sharing economy" are downright Orwellian". Yes, but that
phrase can be and is easily replaced in casual conversation with "the sharecropper economy".
(Be prepared to deliver a short explanation what a sharecropper is to the youg 'uns.)
Another valid word out of the past is "the man," as in the giver of overpriced credit to the
sharecropper who often ended up with zero profits and thus was kept in perpetual debt. Central
bankers?
Everybody talks about "thought leaders" but no one ever talks about "thought followers," much
less actually claims to be one. But without "thought followers" how can you have "thought leaders"?
I'm suspicious….
And anyway, wouldn't "thought leader" be applicable to anybody whose thinking ends up being
followed by others, for good or ill? Wouldn't Charles Manson be a "thought leader"? He certainly
was for the Manson Family….just a thought…
I always thought the exhortation to be thought leaders was a ruse for encouraging people to
speak up and try to act as thought leaders. That way those who worked us could identify the taller
daisies and thereby identify which flowers to top.
Seems like some combination of Frederick Soddy and Michael Hudson is called for here. Soddy
is apparently a tough slog even for otherwise intelligent people. So at the risk of over-simplification
here is my attempt to convey his ideas about money and wealth:
Money is not wealth. It is a claim on wealth, i.e. debt.
Wealth. Soddy provides both a practical and a more abstract definition of (the ingredients
of) wealth:
"But economics, in a national sense, is concerned with wealth as what is produced by human
beings to maintain their lives.
Discovery, Natural Energy and Diligence, the Three Ingredients of Wealth
For Discovery, think research and development (R&D) and of course education so R&D is even
possible. For Natural Energy, think, for most of the Industrial Revolution (IR), fossil fuels.
(Pretty obviously we need to do something different if we want to keep the machine the IR built
functioning, sustainably producing the wealth which sustains our civilization.)
One of my favorite passages from Soddy's "Wealth, Virtual Wealth and Debt" is:
"As Ruskin said, a logical definition of wealth is absolutely needed for the basis of economics
if it is to be a science."
But without a science-based definition of wealth, i.e. continuing to use profit and money as
a measure of 'productivity', just 'printing' more money (even Hudson's MMT) will solve nothing.
Put these observations together and you get an idea what should 'back' money – wealth not gold
or as Hudson puts it "Debts that can't be repaid (and) won't be."
Hudson's 'clean slate' provides the other part of the solution. As Hudson notes, the 'miracle
of compound interest' is not sustainable – particularly when the West's 'financial engineers'
are busy cranking out money (as debt) at rates well in excess of going interest rates. Just continuing
to use profit and money as a measure of 'productivity', 'printing' more money (even Hudson's MMT)
will solve nothing. Probably by the middle of the 20th century, the West had 'enough' wealth its
people could begin to find other purposes in life than creating ever more of it (to make ever
more money, i.e. acquire ever more debt to be paid by someone – the unborn?). Again from Soddy
/ Ruskin – real "Wealth rots." That's what's happening to the West's 'culture' as its ruling classes
mindlessly attempt to acquire ever more money.
It isn't just the 1% who are going to have to take their lumps, to stop playing games with
the world's future so they can, as candidate Trump put it, 'run up a bigger score' with money
for which they have no immediate need. It is those of us in the 99% who do not possess the skills
and aptitudes required for the genuine creation of wealth, wealth the world needs and can sustainably
afford. Those numbers are going to grow as the Industrial Revolution succeeds, with human labor
and rote intelligence replaced more and more by machines powered by "natural energy". But, even
if we can't find our niche, I take it as a given that we are all born with a right to life.
Wealth is hard to define because what we view as wealth might be a money pit that guarantees
our decline…
For example, instead of injecting money directly in the faculty of medicine, a university might
have decided to fund a football team to attract the capital and end up building a stadium… Instead
of just funding the faculty.
All these activities related to the sports team contribute to GDP. The bankers might have been
productive and efficient in raising capital, the coach might be productive and make a winning
team, the builders of the stadium might have been very productive building a fine structure but
all these activities sucked up resources and energy that could have been used by other sectors
to better serve the future of the country. Maybe these activities are totally unsustainable. They
might appear as wealth currently but will lead to poverty over time.
Since ou basic needs have been met, we have been investing in a forever greater number of non-essential
resource intensive activities which show how disconnected we have become from the earth supporting
us.
The terminology of finance is designed to hide predatory and extractive activities behind
a curtain of beneficial-sounding words. These terms are deeply embedded, and serve both to put
some friendly makeup on the business, and allow the "consumers" to feel better about their capitulation.
The process is akin to the way politicians wrap themselves in the flag while they sell out the
citizenry. We know deep down that they are lying, but we prefer the false patriotism because it
serves the lies we prefer to tell ourselves. We bitch and moan, but we play our part, because
not doing so leads to trouble. It is the way most of us live our lives.
One of the biggest problems people face in discussing matters financial, is that the very terminology
of the system undercuts the critiques. Just as criticizing the wars invokes in some the specter
of failing to support the troops and the specter of criticizing America, criticizing Wall Street's
predatory aspects invokes in many the specter of criticizing institutions we have been led to
believe represent the essence of American freedom. Doing so makes you at least a malcontent or
troublemaker, and maybe even some sort of subversive pinko. Either way, you're rocking a boat
many do not want rocked.
Using analogies and metaphors to discuss such matters can outflank the loaded-terminology question
to a significant degree. You can cut through a lot of the fog of jargon by describing the activities
in other terms. (E.g., Dave's "sharecropping" for "sharing economy.")
We are in an era in which the financial world is being downsized and consolidated, the giant
speculative bubble which dominated most of our lives is being deflated and wound down before our
eyes. There is still speculative activity, to be sure, but there is also a rise in the use of
rentier income. This downsizing process involves shifting losses wherever possible down the food
chain, including to institutions which previously were integral parts of the system. Insiders
are finding themselves outsiders, jettisoned by other insiders.
This reminds me of the situation of a pack of wolves, grown large in an era of plentiful food,
but now finding that food supply dwindling. The pack must shrink to survive, the excess members
culled in often brutal ways. The strongest eat the most, the rest are left with the scraps, or
nothing at all. The financial system is similar, a pack in which the herd is being culled. Individual
institutions, even important ones like Barings or Lehman, are ephemeral. They come and they go,
just like individual wolves in the pack. But the pack lives on, and so does the financial system.
To the wolves, the pecking order, who lives and who dies, is very important. But for the creatures
the pack eats, such concerns are irrelevant.
Either way, you're rocking a boat many do not want rocked.
Perhaps. Or perhaps the alternatives to our ruling narratives and power mechanisms have been
ruthlessly dismantled and extinguished. For example, I would love to join a union. But I live
in a right-to-work state.
I would love to have representation at my workplace and have some degree of bargaining power.
I guess there's always the complaint box. Or the "freedom" to hit the bricks.
Luckily, I went to school when it was affordable, so I don't have student loan debt. I rent,
and although rents continue to rise every year, I don't have a mortgage hanging over my head.
My younger colleagues are saddled with outrageous student loan debt that they will never likely
repay. Unfortunately many/most of them bought into the housing market. How likely are they to
even entertain the idea of speaking truth to power?
I'm past 50, and you know what that means to my prospects of finding another job. Young and
old, we just keep our mouths shut and do what we're told.
The US represents 5% of world population but consumes a much larger share of world energy and
resources. The 99% are concerned about fairness but if they truly cared, they'd understand that
the global economy needs to shrink their share of resources to 5%. And the leveling is getting
stronger by the day. Most people go along the big lie because of hope.
Question about your numbers - I think our share of resources needs to shrink but I'm not sure
5% is the right number. Are some of the resources in that 5% dedicated to our Industry? Is our
industry productive? and who gets the stuff? It may be we need to shrink our use of resources
to 4%. And what about the who uses how much of what resources? How do you count the resources
used to support our car, bus, and truck industries while deliberately stifling mass transit. I
only make these quibbles to avoid your logic of proportions. Clearly we must take/steal less from
the rest of the world and share what we have. I believe there is enough to go around - once a
few (quite a few) problems here and there are taken care of.
I'm not sure how much hope continues to hold up the big lie. I think the supports for the big
lie need a lot of maintenance to keep it from falling. Maybe we can simply stop using that road.
I don't know what the number is but from my vantage point , it looks like the western work
is heading for a world of pain. Americans want America to be great again but it's based on materialism.
To be great again would mean a different kind of greatness where the economy is based on a
reduction of it share of resources.
But the population is still very far away from the fact that its way of life depends on an
unfair distribution of world resources which will probably lead to a big world struggle meaning
a focus on the military.
This is not what I want by what I see in the horizon.
There's a reason money and fuel are in the same sentence. It's because the a nation's power
depends on energy.
It might seem trite, but if an American is patriotic, he or she will try to reduce the nation's
energy use by using energy efficiently. Whether it's transportation, home heating, home cooling,
or nighttime illumination, one should use the energy efficiently. Aside from the immorality of
using so much more than many other people in the world, it's a way to reduce pollution and to
avoid sending money to the Wahhabi nut jobs in Saudi Arabia. Plus, energy efficiency saves money!
Our country has the capacity to help the world get through the crises of Global Warming and
the end of oil. Our country has responsibility as one of the guilty parties - one of the most
most guilty in taking more than our share and sharing less than we are able or should share. The
meaning of riches is best enjoyed through the sharing of those riches. In ancient times - at least
in some places - that was the privilege and obligation of the rich.
I would feel deep shame for our country if it is to be remembered in the future for what it
has done so far.
Great comment, ROTL! Accords very well with my understanding of the power of metaphors, to
bring into being the world stage on which we strut our stuff.
Many here at NC often comment on the quasi-religious nature of economics. I'm always struck
by the conflation of the organic/natural world with mechanics. Wrongly conceiving of market forces
as natural forces and so on. I think you've struck a blow against this wrong-headed mythos at
its weakest point. If the metaphors that bring into being this world of pain we're living in themselves
are discredited, the whole edifice could come crashing down in no time.
If anyone's interested in a little exercise, trying paying attention to the metaphors one uses
for organic systems, and society at large. Even though I'm aware of their inappropriateness, it's
hard not to think in mechanistic terms. And not just mechanistic, but weaponized, at that. You
can't even listen to a baseball game without hearing metaphors of war all the damn time. Then
there are "Twitter wars" and "Facebook wars" ad nauseaum.
Money is nutrition, not a snack. It's food and fertilizer. It makes things grow. You have
to share it with other life like bacteria and worms: without these organisms in your gut ecology,
you get sick (autism, diabetes, obesity, M.S.). Idiots try to convince us these organisms are
parasites instead of symbionts just like Monsanto thinks bees are disposable or Donald Trump likes
to think of pregnant women as drags on business profits.
Where does he propose business find future workers if not in wombs? From where will his future
customers come?
Perhaps in sharing economy of future America, companies will have to share their dwindling
customers and make do with less?
If you think altruism is for suckers, your Ayn Rand economy collapses because you confuse
parasites with symbionts and symbionts with parasites. You can't distinguish between compensation
for earned and unearned income. What's a tax and what's theft? Try living without bacteria making
butyrate in your gut. Wells Fargo can no more survive without little people like airport janitors
to scrub out the TB and Ebola stains than our cells can breathe without mitochondria. Yet who
gets their pay driven down in corporate America?
Money weaves a supporting web of trust, a mutual network of obligations and payments – and
what happens biologically when that web inside us is broken and friends become enemies and we
treat enemies as friends? Is fraud any different than autoimmunity or cancer?
Well, I was gobsmacked to see this show up when I finally logged on to the Internet today.
Many heartfelt thanks to all who commented so thoughtfully and insightfully; and also to the remarkable
NC crew (Yves, Lambert, Jerri-Lynn, the IT folks), as well of course to Clive.
I think that we are all rooting for the time when Haldane's insights are met with 'Doh', and
when we celebrate Bill Black as a Nobel in Economics ;-)
Peter K. :
September 27, 2016 at 06:45 AM DeLong on helicopter money: "The swelling wave of argument and
discussion around "helicopter money" has two origins:
First, as Harvard's Robert Barro says: there has been no recovery since 2010.
The unemployment rate here in the U.S. has come down, yes. But the unemployment rate has come
down primarily because people who were unemployed have given up and dropped out of the labor force.
Shrinkage in the share of people unemployed has been a distinctly secondary factor. Moreover, the
small increase in the share of people with jobs has been neutralized, as far as its effects on how
prosperous we are, by much slower productivity growth since 2010 than America had previously seen,
had good reason to anticipate, and deserves.
The only bright spot is a relative one: things in other rich countries are even worse.
..."
I thought Krugman and Furman were bragging about Obama's tenure.
"Now note that back in 1936 [John Maynard Keynes had disagreed][]:
"The State will have to exercise a guiding influence... partly by fixing the rate of interest,
and partly, perhaps, in other ways.... It seems unlikely that the influence of banking policy on
the rate of interest will be sufficient by itself.... I conceive, therefore, that a somewhat comprehensive
socialisation of investment will prove the only means of securing an approximation to full employment;
though this need not exclude all manner of compromises and of devices by which public authority will
co-operate with private initiative..."
By the 1980s, however, for Keynes himself the long run had come, and he was dead. The Great Moderation
of the business cycle from 1984-2007 was a rich enough pudding to be proof, for the rough consensus
of mainstream economists at least, that Keynes had been wrong and Friedman had been right.
But in the aftermath of 2007 it became very clear that they-or, rather, we, for I am certainly
one of the mainstream economists in the roughly consensus-were very, tragically, dismally and grossly
wrong."
DeLong sounds very much left rather than center-left. His reasons for supporting Hillary over
Sanders eludes me.
Hillary's $275 billion over 5 years is substantially too small as center-leftist Krugman put it.
Now we face a choice:
Do we accept economic performance that all of our predecessors would have characterized as grossly
subpar-having assigned the Federal Reserve and other independent central banks a mission and then
kept from them the policy tools they need to successfully accomplish it?
Do we return the task of managing the business cycle to the political branches of government-so
that they don't just occasionally joggle the elbows of the technocratic professionals but actually
take on a co-leading or a leading role?
Or do we extend the Federal Reserve's toolkit in a structured way to give it the tools it needs?
Helicopter money is an attempt to choose door number (3). Our intellectual adversaries mostly
seek to choose door number (1)-and then to tell us that the "cold douche", as Schumpeter put it,
of unemployment will in the long run turn out to be good medicine, for some reason or other. And
our intellectual adversaries mostly seek to argue that in reality there is no door number (3)-that
attempts to go through it will rob central banks of their independence and wind up with us going
through door number (2), which we know ends badly..."
------------
Some commenters believe more fiscal policy via Congress is politically more realistic than helicopter
money.
I don't know, maybe they're right. I do know Hillary's proposals are too small. And her aversion
to government debt and deficit is wrong given the economic context and market demand for safe assets.
"Moreover, the small increase in the share of people with jobs has been neutralized, as far as
its effects on how prosperous we are, by much slower productivity growth since 2010 than America
had previously seen, had good reason to anticipate, and deserves."
?????? The rate of (measured) productivity growth is not all that important. What has happened
to real median income.
And why are quoting from Robert Barro who is basically a freshwater economist. Couldn't you
find somebody sensible?
Barro wants us to believe we have been at full employment all along. Of course that would mean
any increase in aggregate demand would only cause inflation. Of course many of us think Barro
lost it years ago.
These little distinctions are alas lost on PeterK.
[1] Do we accept economic performance that all of our predecessors would have characterized
as grossly subpar-having assigned the Federal Reserve and other independent central banks a mission
and then kept from them the policy tools they need to successfully accomplish it?
[2] Do we return the task of managing the business cycle to the political branches of government-so
that they don't just occasionally joggle the elbows of the technocratic professionals but actually
take on a co-leading or a leading role?
[3] Or do we extend the Federal Reserve's toolkit in a structured way to give it the tools
it needs?
Helicopter money is an attempt to choose door number (3). Our intellectual adversaries mostly
seek to choose door number (1)-and then to tell us that the "cold douche", as Schumpeter put it,
of unemployment will in the long run turn out to be good medicine, for some reason or other. And
our intellectual adversaries mostly seek to argue that in reality there is no door number (3)-that
attempts to go through it will rob central banks of their independence and wind up with us going
through door number (2), which we know ends badly...""
---------------------
Conservatives want 1 and 2 ends badly, so 3 is the only choice.
So I was peacefully drinking my coffee this morning, and was accosted by someone waving the latest
Wall Street Journal editorial on the dollar * in my face, demanding my reaction. Um, this is not cool.
Also, with apologies to Brad DeLong, when reading WSJ editorials you need to bear two things in mind:
1. The WSJ editorial page is wrong about everything.
2. If you think the WSJ editorial page is right about something, see rule #1.
After all, here's what you would have believed if you listened to that page over the years: Clinton's
tax hike will destroy the economy, you really should check out those people suggesting that Clinton
was a drug smuggler, Dow 36000, the Bush tax cuts will bring surging prosperity, Saddam is backing Al
Qaeda and has WMD, there isn't any housing bubble, US households have a high savings rate if you measure
it right. I'm sure I missed another couple of dozen high points.
Today's editorial was in the grand tradition. A few months ago falling stock prices showed Obama's
failure - never mind, we meant the falling dollar. And just to provide extra spice, the editorial cited
David Malpass ** as the wise expert on all this.
But more specifically, you need to see the Journal's fear of a weak dollar in terms of its long-term
gold-bug position. The Journal has always maintained that changes in exchange rates play no useful role,
that stable exchange rates - preferably enforced by some barbarous relic like the gold standard - are
the essence of sound policy.
I explained why this is all wrong a long time ago. *** But it's especially important to understand
the wrongness of this view right now. If there's one overwhelming lesson from the Great Depression,
it is that putting a higher priority on stabilizing your currency than on domestic recovery is utterly
disastrous. Barry Eichengreen **** pointed out years ago that major economies went off gold in the following
order: Japan, Britain, Germany, US, France. And here's what happened to their industrial output:
[Slowest to leave the gold standard, slowest to recover.
All that glitters went off gold.]
The WSJ may not realize it, but it wants us to be France in the 1930s. Let's not.
The legend of King Midas has been generally misunderstood. Most people think the curse that turned
everything the old miser touched into gold, leaving him unable to eat or drink, was a lesson in the
perils of avarice. But Midas' true sin was his failure to understand monetary economics. What the gods
were really telling him is that gold is just a metal. If it sometimes seems to be more, that is only
because society has found it convenient to use gold as a medium of exchange--a bridge between other,
truly desirable, objects. There are other possible mediums of exchange, and it is silly to imagine that
this pretty, but only moderately useful, substance has some irreplaceable significance.
But there are many people--nearly all of them ardent conservatives--who reject that lesson. While
Jack Kemp, Steve Forbes, and Wall Street Journal editor Robert Bartley are best known for their promotion
of supply-side economics, they are equally dedicated to the belief that the key to prosperity is a return
to the gold standard, which John Maynard Keynes pronounced a "barbarous relic" more than 60 years ago.
With any luck, these latter-day Midases will never lay a finger on actual monetary policy. Nonetheless,
these are influential people--they are one of the factions now struggling for the Republican Party's
soul--and the passionate arguments they make for a gold standard are a useful window on how they think.
There is a case to be made for a return to the gold standard. It is not a very good case, and most
sensible economists reject it, but the idea is not completely crazy. On the other hand, the ideas of
our modern gold bugs are completely crazy. Their belief in gold is, it turns out, not pragmatic but
mystical.
The current world monetary system assigns no special role to gold; indeed, the Federal Reserve is
not obliged to tie the dollar to anything. It can print as much or as little money as it deems appropriate.
There are powerful advantages to such an unconstrained system. Above all, the Fed is free to respond
to actual or threatened recessions by pumping in money. To take only one example, that flexibility is
the reason the stock market crash of 1987--which started out every bit as frightening as that of 1929--did
not cause a slump in the real economy.
While a freely floating national money has advantages, however, it also has risks. For one thing,
it can create uncertainties for international traders and investors. Over the past five years, the dollar
has been worth as much as 120 yen and as little as 80. The costs of this volatility are hard to measure
(partly because sophisticated financial markets allow businesses to hedge much of that risk), but they
must be significant. Furthermore, a system that leaves monetary managers free to do good also leaves
them free to be irresponsible--and, in some countries, they have been quick to take the opportunity.
That is why countries with a history of runaway inflation, like Argentina, often come to the conclusion
that monetary independence is a poisoned chalice. (Argentine law now requires that one peso be worth
exactly one U.S. dollar, and that every peso in circulation be backed by a dollar in reserves.)
So, there is no obvious answer to the question of whether or not to tie a nation's currency to some
external standard. By establishing a fixed rate of exchange between currencies--or even adopting a common
currency--nations can eliminate the uncertainties of fluctuating exchange rates; and a country with
a history of irresponsible policies may be able to gain credibility by association. (The Italian government
wants to join a European Monetary Union largely because it hopes to refinance its massive debts at German
interest rates.) On the other hand, what happens if two nations have joined their currencies, and one
finds itself experiencing an inflationary boom while the other is in a deflationary recession? (This
is exactly what happened to Europe in the early 1990s, when western Germany boomed while the rest of
Europe slid into double-digit unemployment.) Then the monetary policy that is appropriate for one is
exactly wrong for the other. These ambiguities explain why economists are divided over the wisdom of
Europe's attempt to create a common currency. I personally think that it will lead, on average, to somewhat
higher European unemployment rates; but many sensible economists disagree.
"... Minsky famously quipped that everyone can create new money; the problem is to get it accepted as such by others. ..."
"... But even money-proper is not the same for everyone. Central banks create the money in which banks pay each other, while private banks create money for households and firms. Money is hierarchical , and moneyness is a question of immediate convertibility without loss of value (at par exchange, on demand). ..."
"... To convert shadow money into settlement money in case of default, repo lenders sell collateral. An intricate collateral valuation regime, consisting of haircuts, mark-to-market, and margin calls, maintains collateral's exchange rate into (central) bank money. ..."
"... What makes repos money – at par exchange between "cash" and collateral – is what makes finance more fragile in a Minskyan sense. ..."
"... Liquid markets become more fragile, he argued, by giving investors the "illusion" that they can exit before prices turn against them. This is a crucial insight for crises of shadow money. ..."
"... Criminality and corruption is embedded at the top of the financial food chain, by law. ..."
"... Motion seconded: Government sanctioned counterfeiting. ..."
"... …and does anyone remember the triumph of the desk slaves of the Crimson Permanent Assurance? Monty Python understood something about political economies and how one might achieve more fairness in outcomes… https://vimeo.com/111458975 ..."
"... Shadow money sounds to me like fictional capital by another name. And contractual based deposits sounds like counterfeiting. With the distinction that the man with counterfeit printing press robs the train, while the man who runs the Wall St Investment bank repo trading desk robs the whole railroad. ..."
"... Therefore, Money becomes a victim of the ontological argument for God by St Anselm. If God does not exist, an all powerful, all knowing, all present infinitely great in all categories of Supreme Being could not be written or spoken about, lacking the quality of existence. The fact that we CAN speak about an Omnipotent Supreme Deity means that one in fact exists, due to existence is part and parcel of Omnipotence. But of course, because we can talk or write about something, does not make it real. ..."
"... It can become socially acceptable as in the case of shadow money, but it is fictional capital, a shadow of the real thing. Time to get out of the cave of finance with its shadows dancing from the light of the fires and walk eyes wide open in the bright light of sunshine! ..."
"... Money is actually the easiest thing to write about, because it's formless energy. It's not that the phenomenon is shadow money, it's shadow assets. ..."
"... You have to be able to separate in your mind the ideas of 1) Quantity and 2) Form. That's why economics is a mental disorder, because it doesn't separate quantity and form. If you can't or don't, then yes, it's diabolically hard to write about because you're writing about two different things simultaneously without realizing it. Money is a quantity that is infinite and continuous, but form is an idea that is discontinuous and finite. People do what the forms tell them to do. The money is just like electricity that powers the animation of the forms. Repo is a form it's not money. It's existence results in a certain ordering of social relations, that's also a form. But money is just the energy that makes the forms potent. ..."
"... I guess that's why they used to call it "political economy" before the mental disorder fully usurped the power of perception and reasoning. ..."
"... Marx failed to acknowledge that supposedly hard-headed Capitalism is actually all about living beyond your means and mortgaging the future. ..."
"... It was designed from the Fuggars' and the Medici's to be about debt and fractional reserves and interest. A system based on a finite supply of money is going to grow not much faster, at best, than the money available allows. ..."
"... Capitalism allows explosive growth by supplying explosive amounts of credit. All this shadow banking activity is designed to get around reserve requirements; nothing else I can see calls all this complexity into existence. The banks always need more, because lending is how they make their money, so they want an infinite amount to lend in order to drive their profits towards the infinite. ..."
"... This article I think defines shadow money alright as starting where bank deposits leave off but as the above comments suggest seems to miss some key points. I think a major problem with the article is seeing central banks as separate from the state rather than seeing the central bank along with the Treasury as the state itself. ..."
"... The article gets Treasury debt wrong by seeing it as the central bank funding the state rather than as actually coming from the state. This leads to wrong policy choices such as this state money being used to bail out useless financial transactions and asset appreciation rather than the public purpose. I think crazyman has it right. We left behind the power of perception and reasoning by not realizing the importance of political economy . ..."
"... This is reminscent of Gramsci's idea that the state and civil society are to be distinguished only for purposes of exposition. ..."
By Daniela Gabor, associate professor in economics at the University of the West of England,
Bristol, and Jakob Vestergaard, senior researcher at the Danish Institute for International Studies.
Originally published at the Institute for New Economic Thinking
website
Struggles over shadow money today echo 19th century struggles over bank deposits.
Money, James Buchan once
noted , "is diabolically hard to write about." It has been described as a promise to pay, a social
relation,
frozen
desire , memory, and fiction. Less daunted, Hyman Minsky was interested by promises of unknown
and changing
properties
. "Shadow" promises would have
fascinated him. Indeed, Perry Mehrling, Zoltan
Pozsar , and
others argue that in shadow banking, money begins where bank deposits end. Their insights are
the starting point for the first paper of our Institute for New Economic Thinking
project on shadow money. The footprint of shadow money, we argue,* extends well beyond opaque
shadow banking, reaching into government bond markets and regulated banks. It radically changes central
banking and the state's relationship to money-issuing institutions.
Minsky famously quipped that everyone can create new money; the problem is to get it accepted
as such by others.
General acceptability relies on the strength of promises to exchange for proper money, money
that settles debts. Banks' special role in money creation, Victoria Chick
reminds us, was sealed
by states' commitment that bank deposits would convert into state money (cash) at par. This social
contract of convertibility materialized in bank regulation, lender of last resort, and deposit guarantees.
But even money-proper is not the same for everyone. Central banks create the money in which
banks pay each other, while private banks create money for households and firms. Money is
hierarchical , and moneyness is a question of immediate convertibility without loss of value
(at par exchange, on demand).
Using a money hierarchy lens, we define shadow money as repurchase agreements (repos), promises
to pay backed by tradable collateral. It is the presence of collateral that confers shadow money
its distinctiveness. Our approach advances the debate in several ways.
First, it allows us to establish a clear picture of modern money hierarchies. Repos are nearest
to money-proper, stronger in their moneyness claims than other short-term shadow
liabilities . Repos rose in money hierarchies as finance sidestepped the state, developing its
own convertibility rules over the past 20 years. To convert shadow money into settlement money
in case of default, repo lenders sell collateral. An intricate collateral valuation regime, consisting
of haircuts, mark-to-market, and margin calls, maintains collateral's exchange rate into (central)
bank money.
Second, we put banks at the center of shadow-money creation. The growing shadow-money literature,
however original in its insights, downplays banks' activities in the shadows because its empirical
terrain is U.S. shadow banking with its institutional peculiarities. There, hedge funds issue shadow
money to institutional cash pools via the balance sheet of securities dealers. In
Europe or
China , it's also banks issuing shadow money to other banks to fund capital market activities.
LCH Clearnet SA, a pure shadow bank, offers a glimpse into this world. Like a bank, it backs money
issuance with central bank (Banque de France) money. Unlike a bank, LCH Clearnet only issues shadow
money.
Third, we explore the critical role of the state beyond simple guarantor of convertibility. Like
bank money, shadow money relies on sovereign structures of authority and credit worthiness. Shadow
money is mostly issued against government bond collateral, because liquid securities make repo convertibility
easier and cheaper. The legal right to re-use (re-hypothecate) collateral allows various (shadow)
banks to issue shadow money against the same government bond, which becomes akin to a
base asset with "velocity." Limits to velocity place demands on the state to issue debt, not
because it needs cash but because shadow money issuers need collateral.
With finance ministries unresponsive to such demands, we note two points in the historical development
of shadow money in the early 2000s. In the United States, persuasive lobbying exploited concerns
that U.S. Treasury debt would fall to dangerously
low levels
to relax regulation on repos collateralized with asset and mortgage-backed
securities
. In Europe, the ECB used the mechanics of monetary policy implementation to the same end. When
it lent reserves to banks via repos, the ECB used its collateral valuation practices to generate
base-asset privileges for "periphery" government bonds, treating these as
perfect substitutes for German
government bonds, with the
explicit
intention of powering market liquidity.
Fourth, we introduce fundamental uncertainty in modern money creation. What makes repos money
– at par exchange between "cash" and collateral – is what makes finance more fragile in a
Minskyan sense. Knightian uncertainty bites harder and faster because convertibility depends
on collateral-market liquidity.
The collateral valuation regime that makes repos increasingly acceptable ties securities-market
liquidity into appetite for leverage. Here, Keynes' concerns with the social benefits of private
liquidity become relevant. Keynes voiced strong doubts about the idea of "the more liquidity the
better" in stock markets (concerns now routinely
voiced by central banks for securities markets). Liquid markets become more fragile, he argued,
by giving investors the "illusion" that they can exit before prices turn against them. This is a
crucial insight for crises of shadow money.
A promise backed by tradable collateral remains acceptable as long as lenders trust that collateral
can be converted into settlement money at the agreed exchange rate. The need for liquidity may become
systemic once collateral falls in market value, as repo issuers must provide additional collateral
or cash to maintain at par. If forced to sell assets, collateral prices sink lower, creating a liquidity
spiral
. Converting shadow money is akin to climbing a ladder that is gradually sinking: The faster
one climbs, the more it sinks.
Note that sovereign collateral does not always stop the sinking, outside the liquid world of U.S.
Treasuries. Rather, states can be dragged down with their shadow-money issuing institutions. As Bank
of England
showed , when LCH Clearnet tightened the terms on which it would hold shadow money backed with
Irish and Portuguese sovereign collateral, it made the sovereign debt crisis worse. Europe had its
crisis
of shadow money, less visible than the Lehman Brothers demise, but no less painful. "Whatever
it takes" was a
promise
to save the "shadow" euro with a credible commitment to support sovereign collateral values.
Shadow money also constrains the macroeconomic policy options available to the state. That's because
what makes shadow liabilities money also greatly complicates its stabilization: it requires a radical
re-think of many powerful ideas about money and central banking. The first point, persuasively made
by Perry
Mehrling , and more recently by
Bank of England , is that central banks need a (well-designed) framework to backstop markets
, not only institutions . Collateralized debt relationships can withstand a systemic need
for liquidity if holders of shadow money are confident that collateral values will not drop sharply,
forcing margin calls and fire sales. Yet such overt interventions raise
serious moral hazard issues.
Less well understood is that central banks need to rethink lender of last resort. Their collateral
framework can perversely destabilize shadow money. Central banks cannot mitigate convertibility
risk for shadow money
when they use the same fragile convertibility practices. Rather, central banks should lend unsecured
or
without seeking to preserve collateral parity.
We suggest that the state, as base-asset issuer, becomes a de facto shadow central bank.
Its fiscal policy stance and debt management matter for the pace of (shadow) credit expansion and
for financial stability. Yet, unlike the central bank, the state has no means to stabilize shadow
money or protect itself from its fragility. It has to rely on its central bank, caught in turn between
independence and shadow money (in)stability, which may require direct interventions in government
bond markets.
The bigger task that follows from our analysis, is to define the social contract between the three
key institutions involved in shadow money: the state as base collateral issuer, the central bank,
and private finance. In the new
FSB
or Basel III provisions, we
are witnessing a struggle over shadow money with many echoes from the long struggle over bank money.
The more radical options, such as disentangling sovereign collateral from shadow money, were never
contemplated in regulatory circles. Even a partial disentanglement has proven
difficult
because states depend on repo markets to support
liquidity in government bond markets. Our next step, then, will be to map how the crisis has
altered the contours of the state's relation to the shadow money supply, comparing the cases of the
U.S., the Eurozone, and China.
Financial anarchy is my interpretation of shadow banking.
. . . The legal right to re-use (re-hypothecate) collateral allows various (shadow) banks
to issue shadow money against the same government bond , which becomes akin to a base asset
with "velocity." Limits to velocity place demands on the state to issue debt, not because it
needs cash but because shadow money issuers need collateral .
---- The bigger task that follows from our analysis, is to define the social contract between the
three key institutions involved in shadow money: the state as base collateral issuer, the central
bank, and private finance .
Who does shadow banking serve? It is so far from capitalism, it should be illegal.
Bernie Sanders: The business of Wall Street is fraud and greed.
Well…yes and no. There is real "need" for some shadow banking services. However, the idea of
having Central Banks (issuers of money, or whatever) loaning based on … nothing?
Less well understood is that central banks need to rethink lender of last resort. Their
collateral framework can perversely destabilize shadow money. Central banks cannot mitigate
convertibility risk for shadow money when they use the same fragile convertibility practices.
Rather, central banks should lend unsecured or without seeking to preserve collateral parity.
"Europe had its crisis of shadow money, less visible than the Lehman Brothers demise, but
no less painful. "Whatever it takes" was a promise to save the "shadow" euro with a credible
commitment to support sovereign collateral values."
Yes, but Lehman was not a taxing authority (although to be fair, Ireland et.al. were not money-issuing
sources).
I am having a hard time understanding all of this–but as far as I can tell, the authors are
basically suggesting that sovereign governments should be backing up the shadow banking system.
However, I have not seen them suggest any reason for it except that the entire house of cards
could come falling down. Boo hoo for the banksters–tell them to do things out of the "shadows".
Why is there a need for 'shadow money' in the first place?
Afaik, banks create money when they loan and central banks(especially the Fed) issues the most
secure assets, their securities, which are used as collateral.
Thanks Yves for sharing Gabor…what a Mess! towards the end of 2012 the US shadow banking was
said to be around
67 Trillion …did something get baked-in? 2014 the IMF has a much smaller 'account'…(Japan
being the worst laughing stock). the gaps are no small detail:
The IMF's latest Global Financial Stability Report analyzes the growth in shadow banking in
recent years in both advanced and emerging market economies and the risks involved.
According to the report, shadow banking amounts to between 15 and 25 trillion dollars in the
United States, between 13.5 and 22.5 trillion in the euro area, and between 2.5 and 6 trillion
in Japan-depending on the measure- and around 7 trillion in emerging markets. In emerging markets,
its growth is outpacing that of the traditional banking system.
https://www.imf.org/external/pubs/ft/survey/so/2014/pol100114a.htm
That sure seems a Rx for destabilizing the world currencies to precipitate a collapse. Track
and publicize the visits of Congressmen and Senators to the BIS and COL to start. Why are they
making these visits under cover? Who are they meeting with? Are they being prepared as to what
to expect a deliberate world currency crash? . Our political elite are so beholden to the bankers
to allow for the theft of the wealth of nations for unattainable expanding growth and skimming
of millions. Is it possible in regard the corporate banks to have the strings attached on the
use of shadow money at time of chartering or in the case of the do over at time of bankruptcy?.
How is this done? I'd also like to know a good proposal for the private investment boutique banks.
Have any bills at state and federal levels been proposed and if not, why not? What would the main
sections of such a bill look like. Thanks.
A derivative promise made by a Wall Street prostitute, ultimately contingent upon the ability
to liquidate the very users of the instrument, with currency debasement, and war to restock.
Paying people to buy stuff from others being paid to buy stuff, with the full faith and credit
of dependent seniors in a collapsing actuarial ponzi, with nothing more than made for TV mercenaries,
isn't likely to end well.
Craps, the bank moves to the next suckers, with nothing more than the promise of an exotic
vacation, billed to someone else.
– Limits to velocity place demands on the state to issue debt, not because it needs cash but
because shadow money issuers need collateral.
There's a dirty linchpin. Even if the diabolical multiplier from cnchal's quote were removed,
and the dollar was hard-pinned to a pound of silver to pay the sheriff with, infinite debt issuance
can step in to the feed the hungry beast.
Promises to pay kept mercenaries in line during the city-states. If you didn't win you didn't
get paid. Unless you turned around and took your employers gold instead. Which is a bit like capturing
the central banks.
Still, debt can be put to good uses. Infrastructure, maybe. Basic necessities and health. 'When
the people are strong, the nation is strong.' Instead, the gearing seem like the machine in Princess
Bride, sucking time from peoples lives.
Ask any highway patrolman, the faster the speed limit, the worse the accidents.
On the famed autobahns of Europe, the no speed limit means that when an accident occurs, the
results are likely to be catastrophic.
And I really love the observation that central banks need a mechanism to backstop the market.
Reminds me of the main problem with the famous Vincent Black Shadow motorcycle, it could attain
speeds close to 200 mph, but brake designs at the time didn't work at those speeds, so as Hunter
S. Thompson remarked;
"If you rode the Black Shadow at top speed for any length of time, you would almost certainly
die."
Wall $treet wants to go fast, the faster the better, but they haven't got any brakes, and worse
than that, we're all along for the ride whether we like it or not.
Oh, says Red Molly to James, "That's a fine motorbike
A girl could feel special on any such like"
Says James to Red Molly, "My hat's off to you
It's a Vincent Black Lightning, 1952"
[James gets shot in a robbery]
When she came to the hospital, there wasn't much left
He was running out of road, he was running out of breath
But he smiled to see her cry
And said I'll give you my Vincent to ride
Oh, he reached for her hand then he slipped her the keys
He said, "I've got no further use for these
I see angels on Ariels, in leather and chrome
Swooping down from heaven to carry me home"
And he gave her one last kiss and died
And he gave her his Vincent to ride
It was sorta like that when Bernanke handed J-Yel the keys to his QE penny farthing bike.
The Bernanke and J-Yel witnessed the header that Greenspan took on that bike, and decided to
leave it standing against the wall. When you consider the fact that neither of them could reach
the pedals, let alone mount the thing and ride, that was probably a good idea.
When did the central banks' framework to backstop markets morph into an organized effort to
push the value of repo collateral relentlessly upward forever?…
What about increasing the relentless decline in the Velocity of Money by gradually increasing
interest rates? Yes, that might be a catalyst to trigger a "liquidity spiral". So what? We now
have moral hazard in spades and at some point will have to cross the Rubicon, whether willingly
or not.
i am reading one of the
links from the post titled "Regulating money creation after the crisis", and it's even worse
than government approved fraud. I am only part way through it, but here is a gem.
On page 10
. . . Instead, OLA was designed to preserve the value of the assets of failed financial
firms until they are liquidated, a worthy aim, but a very different one. At the same time,
the Dodd-Frank Act has imposed significant new limitations on the government's freestanding
panic-fighting tools . These limitations, absent future congressional action, would render
next to impossible the kind of aggressive government rescue operation that was staged
during the recent crisis.
Criminality and corruption is embedded at the top of the financial food chain, by law.
Before we complicate the issue, it is fairly obvious no one understands conventional money
and it is one of the best kept secrets on the planet.
Learn how normal money works and how its mismanagement has led to many of today's problems.
Banks create money out of nothing to allow you to buy things with loans and mortgages (fractional
reserve banking).
After years of lobbying the reserve required is often as good as nothing. Mortgages can be
obtained with the reserve contained in the fee.
After the financial crisis there were found to be £1.25 in reserves for every £100 issued on
credit in the UK.
Having no reserve shouldn't be a problem with prudent lending.
Creating money out of nothing is the service they really provide to let you spend your own
future income now.
They charge interest to cover their costs, for the risk involved and the service they provide.
Your repayments in the future, pay back the money they created out of nothing.
The asset bought covers them if you default, they will repossess it and sell it to recover
the rest of the debt unpaid.
At the end all is back to square one.
The bank has received the interest for its service.
You have paid for the asset you have bought plus the interest to the bank for its service of
letting you use your own money from the future.
Today's massive debt load is all money borrowed from the future for things already bought.
It can also go wrong another way, when banks lend into asset bubbles that collapse very quickly.
The repossessed asset doesn't cover the outstanding debt and money gets destroyed on the banks
balance sheets.
When banks lend in large amounts, on margin, into stock markets, the bust shreds their balance
sheets (1929).
When banks lend in large amounts on mortgages into housing markets, the bust shreds their balance
sheets (2008).
If banks don't lend prudently you are in trouble.
Then they developed securitisation …… oh dear (no need to lend prudently now).
Housing booms and busts around the world …… oh dear.
All that money borrowed from the future and already spent …… oh dear.
This is so interesting. It seems to be approaching the subject that Wray speculated about a
while back – that we should give central banks fiscal responsibility. Because otherwise a sovereign
state has no control over its sovereign money? It seems to me that money itself becomes a rehypothecated
asset by virtue of being invested over and over again – if it is well allocated and under good
fiscal control all is well. If not we get the Great Recession.
So let the state become the defacto shadow central bank so it had direct control of its own
money. Instead of hanging on to the old gold standard mindset of top down management, why not
think of people, not collateral, as the root of the system – the grass roots. How much money does
a system – a sovereign country – need per person. And then establish a sovereign central bank
to deal directly, bringing the shadows into the sunlight of fiscal control.
…and does anyone remember the triumph of the desk slaves of the Crimson Permanent Assurance?
Monty Python understood something about political economies and how one might achieve more fairness
in outcomes… https://vimeo.com/111458975
Moneyness, like doggitas, you just can't scratch behind its ears. If shadow money is distinguished
by its relationship to collateral, as opposed to money issued by the state, with the entire human
enterprise of civilization as its basis, it still seems to me that at the top of the money hierarchy
is fiat money, the real money by the real social order empowered by the social forms of power
that sustain human life in all of its aspects, not just the financial conveniences. Shadow
money sounds to me like fictional capital by another name. And contractual based deposits sounds
like counterfeiting. With the distinction that the man with counterfeit printing press robs the
train, while the man who runs the Wall St Investment bank repo trading desk robs the whole railroad.
Am I right or Am I right. What a bunch of Losers!!!
And if there is any doubt about the fictional quality of $Trillions and $ Trillions of dollars,
physicists can not find anything naturally occurring in the universe beyond billions and billions.
Money, simply a numbered record, a counting or cardinal number, transforms into money in name
only, MINO, when it refers to fictional amount that can only appear contractually as words, and
do not count how much economic activity or output has been produced.
Therefore, Money becomes a victim of the ontological argument for God by St Anselm. If
God does not exist, an all powerful, all knowing, all present infinitely great in all categories
of Supreme Being could not be written or spoken about, lacking the quality of existence. The fact
that we CAN speak about an Omnipotent Supreme Deity means that one in fact exists, due to existence
is part and parcel of Omnipotence. But of course, because we can talk or write about something,
does not make it real.
It can become socially acceptable as in the case of shadow money, but it is fictional capital,
a shadow of the real thing. Time to get out of the cave of finance with its shadows dancing from
the light of the fires and walk eyes wide open in the bright light of sunshine!
I don't know about this one. It seems to me to be some pretty queasy thinking. It kind of wanders
around in circles of confusion. "my existence led by confusion boats, mutiny from stern to bow".
That's pretty funny somebody would say that money is diabolically hard to write about. That's
pretty funny.
Money is actually the easiest thing to write about, because it's formless energy. It's
not that the phenomenon is shadow money, it's shadow assets.
You have to be able to separate in your mind the ideas of 1) Quantity and 2) Form. That's
why economics is a mental disorder, because it doesn't separate quantity and form. If you can't
or don't, then yes, it's diabolically hard to write about because you're writing about two different
things simultaneously without realizing it. Money is a quantity that is infinite and continuous,
but form is an idea that is discontinuous and finite. People do what the forms tell them to do.
The money is just like electricity that powers the animation of the forms. Repo is a form it's
not money. It's existence results in a certain ordering of social relations, that's also a form.
But money is just the energy that makes the forms potent.
The primary challenge is to come up with an ordered way of thinking about the forms themselves.
That's frankly not easy. The ideal would be to understand them in the manner in which Euclid understood
geometrical ideas. If you can get the vision, then you can see all the possibilities for structure
and ordered relationships. there's really no triangle in reality and there's no point and there's
no line and there's no plane. They just made them up to approximate physical reality. Then they
thought to themselves "Holy shit! These ideas interrelated in an astounding range of symmetries
and causations." Then they became a lens or a framework through which physical reality was interpreted.
But they didn't confuse the idea of "number" with the idea of "triangle" or "circle".
Certainly in math the algebraic interpretation doesn't rely completely on the geometrical interpretation.
But if there is no geometrical interpretation and it's only algebra, then so much is missing,
so much is lost. I guess that's why they used to call it "political economy" before the mental
disorder fully usurped the power of perception and reasoning.
Certainly in math the algebraic interpretation doesn't rely completely on the geometrical
interpretation. But if there is no geometrical interpretation and it's only algebra, then so
much is missing, so much is lost.
With that firmly in mind, I think it's necessary to mention the fact that the " study
" of "economics" relies on calculus, wherein we are introduced to the notion of change over
time, volume, motion, acceleration, rates of change, vectors, etc.
Algebra and geometry are, as you point out, obvious abstractions, but once you add volume motion,
and rates of change, the models become very seductive, and it's easy to see how one can be convinced
that they are approaching an understanding of 'reality'.
The trouble is of course, that the egg-heads busy trying to describe economic "reality" with
calculus, are, for the most part in the employ of savages who will forever cling to a simple arithmetic
where their only interest is in "having it all".
Genius employed to make excuses for demented indifference.
'Central banks should lend unsecured … we suggest that the state, as base-asset issuer,
becomes a de facto shadow central bank.' - Daniela "Zsa Zsa" Gabor
This statement desperately needs Walter Bagehot's qualifications: "to solvent institutions"
and "at a penalty rate."
Otherwise, we're just talking about another squalid round of "TARP for Jamie," as we peasants
reach for our pitchforks.
It should however be pointed out that the idea of shadow banking is not remotely new. The
concept was presaged well over a century ago by Walter Bagehot, the legendary English banker,
essayist, and theorist. In 1873, Bagehot wrote Lombard Street: A Description of the Money Market,
his canonical work on the money market and central banking. In it, he observed that the great
London banks were accompanied by a parallel set of financial firms, known as "bill brokers," which
in many ways resembled modern-day securities dealers. Like today's dealers, these bill-brokers
financed themselves with borrowings that, Bagehot informs us, were "repayable at demand, or at
very short notice."
Formally speaking these firms were not banks but to Bagehot they might as well be. "The London
bill brokers," he observes, "do much the same [as banks]. Indeed, they are only a special sort
of bankers who allow daily interest on deposits, and who for most of their money give security
[i.e., collateral]. But we have no concern now with these differences of detail." At times, Bagehot
is careful to note that the short-term obligations of bill-brokers were not technically deposits;
he observes that the maturing of these liabilities "is not indeed a direct withdrawal of money
on deposit," although "its principal effect is identical."
Other times, however, Bagehot dispenses even with this distinction: "It was also most natural
that the bill-brokers should become, more or less, bankers too, and should receive money on deposit
without giving any security for it." Here we have an unambiguous identification of the shadow
banking phenomenon about 140 years ago .
I would posit that there are two types of money
A – money of the 0.001% – if they walk into a casino, real estate transaction, or any asset for
that matter they can NOMINALLY lose money – in fact the 0.001% NEVER lose any of THEIR money,
they just lose your money. All winnings, of anybody doing anything anywhere, belong to them.
B – money of everybody else – this money nominally is yours to do with as you see fit, but it
ALL belongs to the 0.001%. The collateral that backs it up is everything you earn and own and
when necessary your, and your family's, internal organs…
"The nation [England] was not a penny poorer by the bursting of these soap bubbles of nominal
money capital. All these securities actually represent nothing but accumulated claims, legal titles
to future production. Their money or capital value either does not represent capital at all …
or is determined independently of the real capital value they represent."
– Marx
Banking Capital's Component Parts
Capital: Volume Three
James Levy , April 17, 2016 at 6:07 am
Marx failed to acknowledge that supposedly hard-headed Capitalism is actually all about
living beyond your means and mortgaging the future.
It was designed from the Fuggars' and the Medici's to be about debt and fractional reserves
and interest. A system based on a finite supply of money is going to grow not much faster, at
best, than the money available allows.
Capitalism allows explosive growth by supplying explosive amounts of credit. All this shadow
banking activity is designed to get around reserve requirements; nothing else I can see calls
all this complexity into existence. The banks always need more, because lending is how they make
their money, so they want an infinite amount to lend in order to drive their profits towards the
infinite.
A sovereign can create its own currency, but theoretically couldn't it create any currency?
Couldn't Greece for example click a few key boards put some ones and zeros in and say, "oh our
account with $1,000,000 US is actually $10,000,000,000 US?
This article I think defines shadow money alright as starting where bank deposits leave
off but as the above comments suggest seems to miss some key points. I think a major problem with
the article is seeing central banks as separate from the state rather than seeing the central
bank along with the Treasury as the state itself.
The article gets Treasury debt wrong by seeing it as the central bank funding the state
rather than as actually coming from the state. This leads to wrong policy choices such as this
state money being used to bail out useless financial transactions and asset appreciation rather
than the public purpose. I think crazyman has it right. We left behind the power of perception
and reasoning by not realizing the importance of political economy.
Some issues with the piece and questions for the authors (and fellow NCers):
I really wish such analyses would use the more-precise term "credit-money" in reference to
money creation by banks, to distinguish it from government money creation, which similarly may
have repayment requirements attached (bonds), but need not be so. The "need not be so" may occur
via outright fiat emission, but more commonly appears in form of a public debt stock which continually
increases with time, at least in nominal terms.
The legal right to re-use (re-hypothecate) collateral allows various (shadow) banks to
issue shadow money against the same government bond, which becomes akin to a base asset with
"velocity."
Fine, but what about that other crucial element of modern bank credit-money creation, leverage?
Are there any practical limits on shadow banks' issuance of multiple units of shadow money against
the same government-bond money unit? If so, how are they enforced (if at all)? Note also the key
concept of "implied leverage" inherent in such schemes, where the leverage ratio may fluctuate
drastically with the mark-to-market valuation of the collateral. Banks play endless games with
"fictional reserves"; it would be naive to imagine that non-bank shadow lenders don't do similarly
with their alleged collateral.
The first point, persuasively made by Perry Mehrling, and more recently by Bank of England,
is that central banks need a (well-designed) framework to backstop markets, not only institutions.
Erm, markets are the *only* thing the government should be committed to ensuring functioning
of - we have overwhelming evidences from multiple boom-bust-crisis episodes over the last 3 decades
of the toxic results of governments backstopping hyperleveraged fraud-riddled institutions and
the crooks running same.
Resurgence of voodoo science is typical during crisis periods. "Deficits does not matter" voodoo
does not work in a world were there are strong economic competitors to the USA and where euro and
Yuan exists. The idea of deficit spending which
Michelle
Jamrisko discusses actually came from Keynesian economics, not from MMT.
Notable quotes:
"... Bridgewater's Ray Dalio, head of the world's biggest hedge fund, and Janus Capital's Bill Gross say policy makers are cornered and will have to resort to bigger deficits. ..."
"... "I have no problem with deficit spending," said Aneta Markowska, chief U.S. economist at Societe Generale in New York. "But this idea of the government printing money -- unlimited amounts of money -- and running unlimited, infinite deficits, that could become unhinged pretty quickly." ..."
"... Many more agree that it's precisely when households are cutting back that governments should do the opposite, to prevent a slump in demand. ..."
"... Most economists don't expect an imminent U.S. recession. But financial-market turmoil and America's political upheaval have added to a sense that nobody has figured out a cure for the economy's malaise. ..."
In an American election season
that's turned into a bonfire of the orthodoxies, one taboo survives pretty much intact: Budget deficits
are dangerous. A school of dissident economists wants to toss that one onto the flames, too.
It's a propitious time to make the case, and not just in the U.S. Whether it's negative interest
rates, or
Calls for governments to take over the relief effort are
growing louder. Plenty of economists have joined in, and so have top money managers. Bridgewater's
Ray Dalio, head of the world's biggest hedge fund, and Janus Capital's Bill Gross say policy makers
are
cornered and will have to resort to bigger deficits.
"There's an acknowledgment, even in the investor community, that monetary policy is kind of running
out of ammo," said Thomas Costerg, economist at Standard Chartered Bank in New York. "The focus is
now shifting to fiscal policy."
Currency Monopoly
That's where it should have been all along, according to Modern Money Theory. The 20-something-year-old
doctrine, on the fringes of economic thought, is getting a hearing with an unconventional take on
government spending in nations with their own currency.
Such countries, the MMTers argue, face no risk of fiscal crisis. They may owe debts in, say, dollars
or yen -- but they're also the monopoly creators of dollars or yen, so can always meet their obligations.
For the same reason, they don't need to finance spending by collecting taxes, or even selling bonds.
The long-run implication of that approach has many economists worried.
"I have no problem with deficit spending," said Aneta Markowska, chief U.S. economist at Societe
Generale in New York. "But this idea of the government printing money -- unlimited amounts of money
-- and running unlimited, infinite deficits, that could become unhinged pretty quickly."
To which MMT replies: No one's saying there are no limits. Real resources can be a constraint
-- how much labor is available to build that road? Taxes are an essential tool, to ensure demand
for the currency and cool the economy if it overheats. But the MMTers argue there's plenty of room
to spend without triggering inflation.
The U.S. did dramatically loosen the purse strings after the 2008 crisis, posting a deficit of
more than 10 percent of gross domestic product the next year. That's since been trimmed to 2.6 percent
of GDP, or $439 billion, last year.
... ... ...
Tighten Belts?
Those who push back sometimes argue that money-printing puts countries on a path that eventually
leads, in a worst-case scenario, to Zimbabwe -- where money-printing debased the currency so badly
that all the zeros could barely fit on banknotes. Or
Venezuela, whose spending spree helped push inflation to 180 percent last year. Japan's a more
mixed picture: years of deficits haven't scared off borrowers or unleashed inflation, but haven't
produced much growth, either.
There's also a peculiarly American enthusiasm for balanced budgets, according to Jim Savage, a
political science professor at the University of Virginia. He's traced it to the earliest days of
the U.S., rooted in a "longstanding fear of centralized political power, going back to England."
Wray says there are episodes in American history when a different understanding prevailed. During
World War II, he says, U.S. authorities learned a lesson that's since been forgotten -- that "we've
always got unemployed resources, including labor, and so we can put them to work."
Savage says Americans have historically tended to conflate household and government debts. That
category error is alive and well.
"Small businesses and families are tightening their belts," President Barack Obama said in 2010
as he announced a pay freeze for government workers. "Their government should, too."
It's not just MMT economists who winced at the comment. Many more agree that it's precisely when
households are cutting back that governments should do the opposite, to prevent a slump in demand.
That argument doesn't carry much sway in Congress, though. That's one reason the Fed has had to
shoulder so much of the burden of keeping the recovery alive, Societe Generale's Markowska says.
"When it comes to deciding on monetary easing, it's a handful of people in the room," she said.
"It's going to take more pain to build that political consensus around the fiscal stimulus."
Wray says he'd expected attitudes to start shifting after the last downturn, just as the Great
Depression gave rise to Keynesian economics and the New Deal, but "it really didn't change anything,
as far as the policy makers go."
"I think it did change things as far as the population goes," he said, citing the anti-establishment
campaigns of Sanders and Republican Donald Trump. It might take another crash to change minds, Wray
says.
'Strange Period'
Most economists don't expect an imminent U.S. recession. But financial-market turmoil and America's
political upheaval have added to a sense that nobody has figured out a cure for the economy's malaise.
Bill Hoagland, a Republican who's senior vice president of the Bipartisan Policy Center, has helped
shape U.S. fiscal policy over four decades at the Congressional Budget Office and Senate Budget Committee.
He says a farm upbringing in Indiana helped him understand why "it's engrained in a number of
Americans outside the Beltway that you equate your expenditures with your revenue." He also acknowledges
that government deficits are different, and could be larger now to support demand, so long as there's
balance in the longer term.
Most of all, Hoagland says he sees profound change under way. The "catastrophic event" of the
2008 crash may be reshaping American politics in a way that's only happened a handful of times before.
And economic orthodoxy has taken a hit too.
"We're going through a very strange period where all economic theories are being tested," he said.
"... By Perry Mehrling, a professor of economics at Barnard College. Originally published at his website . ..."
"... Yes, the money creation process has been a big lie for a long time. In any case the Bank of England came clean a couple of years ago and admitted that standard story of money creation was false. They even acknowledge that it is not properly explained in most money and banking textbooks, which is a staggering admission. ..."
"... Paul Krugman wrote a column a couple of months ago where he claimed that banks take in savings from depositors and lend them out to borrowers which tells you either: 1) he doesnt know how banking works or 2) he is part of the conspiracy to keep the public in the dark. ..."
"... The truth right from the mouth of the worldss oldest central bank. http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf ..."
"... Yeah, I saw that. It is amazing that a supposedly foremost Princeton Nobel winning economist apparently doesnt understand where money comes from… ..."
"... There is evidence that Krugman seems to have great difficulty admitting he was wrong. ..."
"... And what he writes makes me think he doesnt know how banking works. I find it difficult to believe he is part of any conspiracy. But I may be wrong. ..."
"... My take is that the fractional reserve and intermediation models are just ways of obfuscating the way banking actually works and the credit creation model is the accurate one. I have some advice for anyone who is struggling with the concepts which is as follows: always merge all the banks in the banking system into one bank in your mind. Assuming multiple banks as the author above does is irrelevant to the analysis and only serves to add confusion. ..."
"... I enjoyed the article very much. And it does seem to me that money creation is made to seem very, very, complex. Now maybe Im just too stupid, but it always strikes me that when people simply describe something, they either really dont know, or they are trying to bamboozle you… ..."
By Perry Mehrling, a professor of economics at Barnard College. Originally published
at
his website .
In his recent paper, "A Lost Century
in Economics: Three Theories of banking and the conclusive evidence" , Richard Werner argues
that the old "credit creation theory" of money is true (empirically "accurate"), while both the newer
"fractional reserve theory" and the presently dominant "debt intermediation theory" are false. For
him, this matters mainly because the false theories are guiding current bank regulation and development
policy, leading down a blind alley.
But it matters also simply because we need correct understanding of how the economy actually works,
"we" meaning not just economists but also the general public. "Today, the vast majority of the public
is not aware that the money supply is created by banks, that banks do not lend money, and that each
bank creates new money."
Why is the public ignorant of the truth? Much of Werner's paper is devoted to an account of how
the correct theory was pushed out of the conversation, first in the 1930s by the fractional reserve
theory, and then after WWII by the debt intermediation theory. One culprit was a shift toward deductive
and away from inductive methods. Another culprit, he suggests, was the self-interested "information
management" by central banks, i.e. direct suppression of truth in their own publications. And in
this suppression, he further suggests, Keynesian academics were at the very least complicit: "attempts
were made to obfuscate, as if authors were at times wilfully trying to confuse their audience and
lead them away from the important insight that each individual bank creates new money when it extends
credit."
In this history, Werner gives special attention to Keynes himself since Keynes seems to have held
each of the three theories in succession throughout his life. Keynes' own intellectual trajectory
thus foreshadows the subsequent evolution of monetary thought, and so probably is partly responsible
for leading successive generations astray. Just so, one apparent legacy of Keynes is that the Bank
of England is currently holding all three theories at the same time! "Since each theory implies very
different approaches to banking policy, monetary policy and bank regulation, the Bank of England's
credibility is at stake." BoE credibility is thus a third reason that all of this matters.
But is it really true, as Werner claims, that these three theories are "mutually exclusive"?
He is at considerable pains to show that they are mutually exclusive, by using a succession of
stylized balance sheet examples. The credit creation theory says that banks make loans by creating
deposits, essentially expanding their balance sheets on both sides by the same amount. (The borrower
of course also expands his own balance sheet, the loan being his liability and the deposits being
his asset. In my own "money view", I call this a swap of IOUs.) In this way, money (bank deposits)
is created that was not there before.
By contrast, the debt intermediation view says that banks make loans by lending reserves that
they are already holding, essentially swapping one asset for another, these reserves having previously
been obtained by someone's deposit. The balance sheet expands when the deposit is made, not when
the loan is made. Banks merely intermediate between savers and borrowers, and do not create money.
In between these two views, the fractional reserve view says that individual banks make loans
by lending reserves, but that the banking system as a whole can and does create money, up to a multiple
of reserve holdings. The banking system does create money, but only after and as a consequence of
the central bank increasing reserves–this is the famous "money multiplier".
So the difference between the theories seems clear, and it also seems like that difference should
be testable empirically simply by watching actual bank balance sheets and seeing what happens when
a loan is made. Does the balance sheet expand or does it not? With the cooperation of an actual bank,
Werner books a dummy loan and finds that the balance sheet of the bank does in fact expand. This
he takes to be scientific proof that the credit creation theory is correct and the others are false.
Not so fast. Let's look a bit closer.
Let me begin by admitting my sympathy for Werner (as I have already hinted by mentioning my own
"money view" as a version of the credit creation view). In fact, Werner's heroes–H.D. McLeod and
Joseph Schumpeter–are my own heroes as well, and I suspect that graduate school exposure to these
authors sent him off on his own intellectual journey just as it did me. Even more, thirty years after
that initial exposure, I find Werner's (co-authored) money and banking textbook
"Where Does Money
Come From?" one of the best introductions to the subject. Last fall I assigned Chapters 2 and
4 in the first two weeks of "Economics of Money and Banking" which I teach at Barnard College, Columbia
University. I'm sympathetic.
But I don't think these three theories are quite as mutually exclusive as he makes them out to
be.
Let us suppose, with Werner, that Citibank makes a mortgage loan to me of $200,000, simply by
swapping IOUs. I then transfer my new asset (the new Citibank deposit) to you, and you transfer your
house to me. As my payment clears, you have a new deposit in your own bank (let's say Chase, to make
it interesting), Citibank has a "due to" at the clearinghouse, and Chase has a "due from". Again,
to make it interesting, let's suppose that Citibank has no reserves, so it enters the interbank market
to borrow some, from Chase. At the end of the day, what we see is that the Citibank balance sheet
is still expanded, so is Chase's, and so is mine. Only your balance sheet stays the same size, since
you have swapped one asset (your house) for another (money). That's the payments perspective.
What about the funding perspective? If we follow the balance sheets through, it is clear that
your money holding is the ultimate source of funds for my borrowing. (You lend to Chase, which lends
to Citi, which lends to me.) In this sense, we can think of both Chase and Citibank as intermediaries,
channeling funds from one place in the economy to another. But, in this example, there is no saving
and there is no investment. The sale of the house adds nothing to GDP, it is just a transfer of ownership.
The expansion of the banking system has facilitated that transfer of ownership by creating a liability
(the deposit) that you apparently prefer to your house, at the same time acquiring an equivalent
asset of its own (the loan). Citibank collects the spread between the mortgage rate and the interbank
rate; Chase collects the spread between the interbank rate and the deposit rate.
But all of that is only what happens right at the moment of payment. What happens afterwards depends
on the further adjustment of all of these balance sheets. One way this could all work out is that
Citibank packages my mortgage with others to create a mortgage backed security, and that you spend
your Chase deposit to acquire a mortgage backed security (perhaps indirectly through a mutual fund
that stands in the middle). In this scenario, the newly created money is newly destroyed, the balance
sheets of both Citi and Chase contract back to their original size, and the end result is that you
are funding my loan directly. But again, no saving and no investment, just a change in your asset
allocation, away from money toward fixed income investment.
Obviously this final scenario is a limiting case on one side. The limiting case on the other side
is that you (or whoever you transfer your money to) are willing to hold the newly created money balances
as an asset, so you continue to fund my loan indirectly. Now when Citibank securitizes and sells,
it is able to repay its interbank liability to Chase, and for simplicity let's say that Chase uses
that payment to acquire a different money market asset. One way this could all work out is that a
shadow bank–money market funding of capital market lending–acquires the security and uses it as collateral
for wholesale money market borrowing from Chase. Again, no saving and no investment, but the new
money stays in circulation and is not destroyed.
These are the limiting cases, and obviously anything in between is also possible, depending on
the portfolio decisions of Citibank, Chase, and you. But in all the cases, the debt intermediation
view of banking is perfectly consistent with the credit creation view of banking. One focuses on
the ultimate funding, while the other focuses on the initial payment.
That said, I have to agree with Werner that the credit creation process is all too commonly left
out of the story–most modern courses never even mention the payments system–and it is a real (and
important) question how this came to be so. It is a further real (and important) question why the
intellectual memory of how the process actually works was left to marginalized sections of academia–Werner
mentions specifically the Austrians and post-Keynesians. I'm not so sure that it was a central bank
plot, though I do think that the shift in academic fashion toward studying equilibrium of a system
of simultaneous equations played a role in obscuring the kind of dynamic balance sheet interactions
that are the essence of the story.
What I would emphasize however is not the negative but the positive. The fact of the matter is
that today the credit creation view is out of the shadows, and no longer the exclusive property
of the marginalized . In evidence of this, I would direct your attention to the two Bank
of England papers that Werner himself cites:
here and
here . But I would add to that also the most recent report coming out of the Group of 30
"Fundamentals
of Central Banking, Lessons from the Crisis" . On page 3 you will find the following:
"In a barter economy, there can rarely be investment without prior saving. However, in a world
where a private bank's liabilities are widely accepted as a medium of exchange, banks can and do
create both credit and money. They do this by making loans, or purchasing some other asset, and simply
writing up both sides of their balance sheet."
That's the truth that Werner wants central banks to admit, and now it appears that they have admitted
it. The next question is what difference it makes, and that's a question for next time. Already it
should be clear that progress toward answering that question will require us to be more careful about
issues of payment versus funding.
P.S. BTW, the title of this post [at Merhling's site, which is "Great and mighty things which
thou knowest not" [?]] is taken from Jeremiah 33:3 which Werner references in a footnote to his title:
"should grains of wisdom be found in this article, the author wishes to attribute them to the source
of all wisdom." Werner is apparently listening to powers higher than just McLeod and Schumpeter!
I think another aspect that should be considered is the preservation of surplus money through
government debt.
For example, Volcker is credited with curing inflation through higher interest rates, but that
slowed the economy as well and so reduced the need for money. It wasn't until Reagan had increased
the deficit to 200 billion in 82 that inflation seemed to come under control enough that they
could lower rates.
Now one way to create higher rates is for the Fed to sell debt it bought to create the money
in the first place. So what is the difference between the Fed selling debt it is holding and the
Treasury issuing fresh debt, other than the Fed destroys its money and the Treasury spends it
on public works, thus Keynsian pump priming.
So who buys this debt, but those wealthy enough to have surplus money. Which suggests that
if there is a surplus of money in the system, causing inflation, the easiest place to remove it
is from those with a surplus of money.
Now money really does function as an enormous, glorified voucher system and what is more destructive
of such a system, than enormous amounts of surplus vouchers?
So given that those with lots of such excess vouchers consequently have leverage over the rest
of the system, what way to better preserve this wealth, than to have the public borrow it back
and pay interest, even if much of what it gets spent on doesn't produce sufficient income to pay
that interest, if not actually lost?
Eventually though even the public can't afford to keep this up, so what is the alternative?
Now most people save for predictable reasons, from raising children, housing, healthcare, to
retirement and funerals. So what if the government, i.e., the public, were to threaten to tax
excess money back out of the system, rather than just borrow it? Necessarily people would quickly
find means to invest into these future needs directly, rather than trying to save up notational
value. The problem is that we don't know exactly what we will need for what, which would mean
we would have to invest into community and public projects, rather than save for our own specific
needs.
While this might seem onerous, consider that we currently live in a highly atomized society,
that is largely mediated by that failing financial mechanism. So if we had to start functioning
as a more holistic group, with more organic interactions and public spaces and commons, people
might have to come out of their shells a little more and deal with lots of other social and personal
issues, which might not be a bad thing.
Basically we treat money as both medium of exchange and store of value, but these are different
functions, as a medium is dynamic and a store is static. For instance, in the body, blood is the
medium and fat is the store. Try storing fat in the arteries and you get clogged arteries, poor
circulation and high blood pressure to compensate, which is analogous to our financial issues,
with a clogged banking system, poor circulation to the rest of the economy and quantitive easing
to compensate.
While the brain might need more blood than the feet, it does neither any good for the feet
to rot and die from lack of circulation, nor does it do the brain any good to have excess blood.
Similarly we need a stronger social structure and a leaner, more efficient economic medium, in
which the excess is stored as the muscle of a stronger society and a healthier environment, rather
than just treating them as stores of wealth to be monetized and siphoned away.
Yes, the money creation process has been a big lie for a long time. In any case the Bank of England came clean a couple of years ago and admitted that standard
story of money creation was false. They even acknowledge that it is not properly explained in
most money and banking textbooks, which is a staggering admission.
Paul Krugman wrote a column a couple of months ago where he claimed that banks take in savings
from depositors and lend them out to borrowers which tells you either: 1) he doesn't' know how
banking works or 2) he is part of the conspiracy to keep the public in the dark.
In the mainstream world money is just a "veil" that obscures your view of how the divine markets
work. They deliberately leave it out because it just confuses things…
No wonder no one in that world saw the GFC coming, they still all claim whocuddaknowed?
There is evidence that Krugman seems to have great difficulty admitting he was wrong. He even
contends that using IS-LM is a good too for introducing students to the macroeconomy, even when
they must unlearn it when they delve deeper in to the workings of the macroeconomy, and this is
after Hicks himself rejected it as being an inaccurate depiction of the macroeconomy later in
his life. I can't say what Krugman is thinking, but then I don't have to. I can go just by what
he writes. And what he writes makes me think he doesn't know how banking works. I find it difficult
to believe he is part of any conspiracy. But I may be wrong.
Yes it's hard to believe that Krugman might not know how money/banking works but he is a very
ideological guy. I happen to be sympathetic to many of his ideological views but any one who is
intensely ideological is rarely a critical and independent minded thinker. Ideology is way of
simplifying complex things and making your self more comfortable, and doesn't lead to knowledge.
I am no expert on money and banking but I have read ten books on the subject over the last four
years and numerous papers. I am pretty sure I understand it now. I think this guy Werner is right.
It seems probable that there was an orchestrated campaign to obfuscate how banking and money creation
work and one can imagine why that might have happened. Banking is quite literally a pyramid scheme
under even the most conservative circumstances! Such a system can work and makes sense if it is
prudently managed, regulated and limited in scope.
My take is that the fractional reserve and intermediation models are just ways of obfuscating
the way banking actually works and the credit creation model is the accurate one. I have some
advice for anyone who is struggling with the concepts which is as follows: always merge all the
banks in the banking system into one bank in your mind. Assuming multiple banks as the author
above does is irrelevant to the analysis and only serves to add confusion.
I enjoyed the article very much. And it does seem to me that money creation is made to seem
very, very, complex. Now maybe I'm just too stupid, but it always strikes me that when people
simply describe something, they either really don't know, or they are trying to bamboozle you…
I think the article would have been more enlightening though if the example had been for a
house that was TO BE BUILT.
Using that as an example, it seems to me that money is LOANED into existence – the person who
wants the home loan has a good reputation, but the whole point of the loan is that they don't
have nearly enough money to buy the house.
The carpenters and other workers don't get paid until they have done work (they loan their
work to their employer), i.e., produced a house (or some portion of it). The money in the loan
becomes real because a house that didn't exist now exists. There is more stuff in the world, and
there is more money. And I think it explains something important – not any loan is useful. A house
worth 100K that is sold for 1000K but than is foreclosed upon – somebody has to take a real loss
– either the person who got the home loan, and to the extent that they can't pay the loan back,
a builder or the bank takes the loss (if the foreclosed value is less than the original loan value)
So, is that correct?
Again, thanks for the article and I am looking forward to the next one!
Pick any year post WWII (because the data is readily accessible).
Compare the levels of federal spending and credit expansion.
Federal spending created more money every year except for the years 1998 thru 2007, where it
was about even, and for 2006 and 2007 credit expansion was some 50% higher.
Then we got the mother of all credit crises.
Over that post WWII period federal spending created ~$78T while credit created ~$46T.
The common refrain is that federal taxes subtract from federal spending so it ends up being
less.
Except in what universe do income taxes accrue only against income resulting from federal spending?
It's nonsense and should be derided as such. It's an accounting convenience that does not reflect
what is actually happening.
It may make sense for National Accounting (and to keep banksters in the drivers seat) but it
makes zero sense in a rational analysis of a real-world system. That is the only way banks could
be touted as the source of most of our money.
Despite an otherwise sound argument this article perpetuates the myth.
The banksters apparently have a hold on everyone, including the so-called 'good guys'.
Some justification based on the level of bank reserves or some other convoluted argument in
5,4,3,2,1 …
Very interesting and I'm looking forward to your next installment.
I'm especially interested in the transfer of reserves from Chase to Citi and as you further
point out 'Chase possibly using its reserves to acquire a different money market asset. One way
this could all work out is that a shadow bank–money market funding of capital market lending–acquires
the security and uses it as collateral for wholesale money market borrowing from Chase.'
This seems to be a transmission mechanism for asset appreciation as Eric Tymoigne is getting
into is his excellent series:
"post 7 will start the private-bank posts) on monetary policy and the QE -asset price channel
will be explained. But here is a short answer:
No bank's don't use cash to buy assets. If they deal with non-bank agents they just credit bank
accounts, if banks deal with a fed account holder they debit their reserve balances to make payments.
The link works through interest rate, arbitrage, search for yield, and the fact that QE reduces
the quantity of securities available in the market."
"the issue is how they would transfer the funds to make the purchase? They could buy securities
if they find a fed account holder willing to sell them securities: Treasury is one, GSE is another
one. Non-financial institutions no."
All they do is talk about how the parts of the machine move - which is itself an amazing problem
of conceptual collinearity - but not the phenomenon of the machine itself.
More and more you just say "Why not go to Youtube and check out a Rhianna video, rather than
read another one of these essays."
Eventually maybe they'll get it. But when they study economics their whole adult life - and
nothing else - it makes it hard. It's not like they're dumb or that they lack mental ability.
In fact, they're all intelligent individuals who are quite capable in most areas of thinking.
It's just that the conceptual language they need to use in order to perceive the phenomenon itself
is a language they do not know. And so they look at reality and they try to make sense of it using
the language they do know, and because words themselves and the ideas in the words catalyze perception,
their limited language is not fully adequate, and they don't see or know that. What can you do?
Everybody has to see it for themselves.
At any rate, you'd think by now it wouldn't be so hard. But most people aren't interested in
this sort of thing so progress is really slow. Most people just go right to Youtube.
Adenosine triphosphate. The example several years ago in the comments, by a biologist, that
it would be an extinction event for a colony of amoeba if a few of them decided to short amoeba
futures and just hoard all the adenosine triphosphate – the one chemical every amoeba must have
to transfer energy. Wish it had been an analogy to symbolic ADP which had usurped the real stuff
and was being hoarded to make sure it maintained its value.
You assured me susan was a bona ride adjunct professor of theosophical studies at the University
of Magonia. I want, nay, I demand my tuition fee, which apparently I had to pay in advance because
otherwise 42 other Chinese applicants would be in line for my place, back.
Dunno why they have all these theories. It's simple. The Fed lowers interest rates, the mark
to market value of bank assets go up, which greatly improves cap ratios, then banks don't need
liabilities anymore. They just can make endogenous money and give it out to borrowers' banks.(it's
all done electronically and fast so no one notices) All the Big Guy econ types know that.
All the rest of it is just details banks go thru just for show. Plus they can securitize and
sell any assets they think may drop in value. They're smart people.
Now, the other thing all the Big Guy econ dudes always say is once us little folk figure it
out, something wonderful is supposed to happen. Maybe I missed it, but what thing is that???
Let us suppose, with Werner, that Citibank makes a mortgage loan to me of $200,000, simply
by swapping IOUs. I then transfer my new asset (the new Citibank deposit) to you, and you transfer
your house to me. As my payment clears, you have a new deposit in your own bank (let's say Chase,
to make it interesting), Citibank has a "due to" at the clearinghouse, and Chase has a "due from".
Again, to make it interesting, let's suppose that Citibank has no reserves, so it enters the interbank
market to borrow some, from Chase. At the end of the day, what we see is that the Citibank balance
sheet is still expanded, so is Chase's, and so is mine. Only your balance sheet stays the same
size, since you have swapped one asset (your house) for another (money). That's the payments perspective.
Is the house owned free and clear? If not, the exchange eliminates that original liability/asset
on someone else's balance sheet so everything is now at a net zero as far as new money circulating
in the economy. Banks did not create anything new. They only exchanged one Asset/Liability
for another Asset/Liability. Even if the house was paid off 20 years ago, there is no new money
created from this transaction. The only way "new money" is created would be through interest
paid on Treasuries, and direct deficit spending by federal government.
As the commenters on the post at Prof. Mehrling's site have observed, his argument is logically
flawed. He concludes: "But in all the cases, the debt intermediation view of banking is perfectly
consistent with the credit creation view of banking."
The intermediation view of banking "says that banks make loans by lending reserves that they
are already holding," as he explains at the beginning of his piece. In his example, the deposit
that is created by the banking system funds the loan. Of course, in both case intermediation takes
place but the nature of the intermediation is not comparable.
In the first case, banks have no special status in the economy. After all any of us who has
a balance of $100 can lend out that balance of $100. In the second case, the only reason the bank
can make the loan is because of a social norm in which the public trusts the banking system and
is willing to keep its money in banks. This fact has always been a fundamental component of the
credit creation theory of money - it is founded on the public's trust in the banking system. This
trust allows banks to expand the money supply - at the potential expense of the public.
While I have great respect for Prof. Mehrling, it is far from clear that he has a good understanding
of the credit creation view of money.
When I looked into the data about 5 years ago, it appeared that only a few large banks were
actually operating on a credit-creation basis. Most banks (meaning your local, independent banks
and credit unions) appeared to be operating on an intermediation model. Deposits are always the
cheapest way to fund a loan, and for small banks, that looks like pretty much the only way they
do it – iirc, loans were 60-80% of deposits in most banks. However, at JPM, BofA, etc, their loans
were well over 100% of their deposits…like waaaay over. So it looked to me like just a few big
players were driving endogenous money creation, while most banks actually were doing, essentially,
what fractional-reserve theory says they do.
That's my understanding, but I don't claim to be an expert.
Banks no longer keep their loans on balance sheet, so a simple static analysis of their balance
sheet doesn't tell us much about how much credit creation they are doing. To study the degree
to which banks create money you have to look at the role they play in the shadow banking system
as well.
Too some degree… my concerns about the shadow sector vastly out weigh the traditional sector
e.g. has the traditional sector become [increasingly] just a front house op to generate velocity
for the shadow sector, and the latter just needs a – store of – when the economy gets a black
eye.
Therein lies the rub e.g. some fixate on one component of a veritable galaxy of operational
scope, so at this juncture on can surmise that new universes of credit are created and inserted
into the multiverse to survive on their own [inhabitants luck of the draw]. Maybe theoretical
physics would be a better methodology of describing credit activity's at this juncture than thermodynamics,
ideology, or socio-economic-political optics…
There's a confusion here. Suppose a bank with reserves R and corresponding deposits X, in addition
to other balance-sheet items, has
R X.
at the top of its balance sheet. It makes loan L, which creates new deposit D to obtain balance
sheet
L D *
R X.
The borrower/deposit-holder transfers her deposit to another bank, so the original bank's balance
sheet drops down to
L X,
while the new bank gains this on its balance sheet:
R D.
So the sequence is (1) create new deposit D and (2) transfer the deposit to the new bank. This
is the money-creation model in action. It is correct.
When we imagine that reserves are being loaned instead, we are actually skipping the balance
sheet marked * above. Comparing the balance sheet before and after the skipped one, we come to
believe that reserves have been turned into a loan. This is incorrect. The newly created deposit
is simply in a different bank. To see what is really going on, we have to consider the loan and
transfer separately.
Can anyone tell me where that $100 came from? Or the $200,000 to buy that archetypical house?
We got lots of "blind philosophers feeling their part of the elephant and pronouncing its essence"
but where does "wealth" originate, as opposed to money and "assets?"
"In the first case, banks have no special status in the economy. After all any of us who has
a balance of $100 can lend out that balance of $100"
yes you can lend it out, but the bank is 1) at the top of collectors line 2) has backing from
the FDIC. When you loan 100$ to someone, you dont have that money anymore. When you lend 100$
to the bank, you still have that money, and about 10 other people have it as well.
I'm sure it must be obvious to brighter and more subtle folks than me, but where does that
$100 that's referenced here come from?
I have an antique wood-bodied block plane (the woodworking kind) made by my great-grandfather
( except for the perfect cast iron blade and two nails). He used tools he made or bought to carve
the body and chisel out the throat and make the wedge. I was offered $100 for it recently. Where
does the wealth or value that my ancestor's plane, now mine by inheritance and survival, come
from? Or all the other $100s that make up " the economy" that the MorgulBankers are conjuring
derivatives out of?
. . .I was offered $100 for it recently. Where does the wealth or value that my ancestor's
plane, now mine by inheritance and survival, come from?
From your ancestor's labor in creating the plane and an ongoing demand from people interested
in acquiring the plane.
Where the $100 offer comes from is the perceived value of the plane compared to other planes
on offer, such as for example the Chinese made crap in Home Depot.
Since it sounds like you didn't sell it for $100, you value it at a higher price. Wondrous
market eh.
What is truly amazing about this is that in year 2016 there is still massive confusion and
ambiguity about how money and banking work. How can that be? Bizarre!
A. Easily: "the false theories are guiding current bank regulation and development policy,
leading down a blind alley." If correct understanding would lead to a correct regulation, then
those whose interests would no be served by correct regulation will obfuscate correct understanding.
Baby yoga for kids living in the forest, who never go outside alone; the highest real mortality
rate in the US; and the prototype for Family Law feeding Obamacare in the big city – does it get
any dumber than that?
The psychologists are just smart enough to get the majority killed. The markets are an exercise
in control, a game, and nothing more, until Little Johnny jumps off Science Building and shorts
the insanity all together. Did you see that last impulse, transferring wealth to the Soros clan,
now demanding another bailout?
The assumption of emotion-based decisions, lest one be a robot, is ludicrous, but that is the
basis of empire marketing. The majority short-circuits itself, with the false assumptions presented
by empire media broad band, the frequency it chooses to occupy, to mirror itself, and obsessive-compulsive
behavior begets itself. The brain stem is a geared Archimedes Screw.
Because the body is grounded to earth, the dc side of the brain is self-obsessed, and LSD offsets
the signal into the noise of the clutch, is no reason to hand your life over to a psychologist
printing money. Because the predicitive subconscious exists in a feedback loop with adaptation
doesn't mean that everyone is sick, stuck on an empire frequency, and mentally ill if they don't
seek diagnosis. Money is not reality, except for those who choose it.
Wall Street sells mortgages with increasing duration, Madison Avenue produces crap for compliance
at increasing cost, and the majority indentures future generations with bonds, until they can't.
Global finance simply liquidates natural resources and moves, in planetary rotation. Relative
to unincorporated farming, the land is largely fallow, but the participants have TV, cardboard
and gadgets, dependent upon empire for a battery.
Net, populations vacillate between denial and depression, with growing impulses of anger, in
a market for psychologists who see others as a reflection of themselves. Married people raising
independent children cannot afford to be quite so stupid. And without such children, the economy
can only implode, reflecting the psychologists' own self-obsession.
Do you remember that story about the natives not seeing Christopher's ship, until the shaman
pointed it out, when the natives were slaughtered by war, disease and poverty?
Females can breed on equal rights for a thousand years, with males providing the technology,
but they will just end up a thousand years behind the curve. Women are bred to think in linear
time, and men to think in frequency, because that is what children need. One is the counterweight
and the other is the cab.
The majority, focused on self, rides the counterweight to floors on one side, all dead ends,
and is jealous of children exiting on the other side. The choice at the crossroad is always the
same, investment or consumption. The majority is not experiencing falling living standards and
increasing income inequality because some banker provided the money, an excuse, for multicultural
unicorn dreaming.
Retired people generally prefer a Fred and Wilma economy, city kids generally prefer a rat
race, and once separated for the purpose, the police are generally dispatched to slice and dice
families into sausage to feed the former, by authorities always pleading ignorance, majority vote.
Once you see those cops, promoting gang awareness, it's time to go. At empire cycle begin, you
have plenty of time; now you have none.
When I began writing this, I had no idea where the focus would be, but I do have a pattern
database and a linear time translator, such as it is. My wife can tell you the weather 25 years,
3 months and 10 days ago. Choose a wife that enjoys living in the moment, and a husband that enjoys
an independent frequency, compliments capable of trust in an untrustworthy world.
My mind is a steel trap, my wife's is Disneyland, and we live in the feminist capital of the
world, as you might suspect with an ac mind. Your perspective is your own, if you choose to have
one, and we all go through phases, climbing and descending the ladder of consciousness. I am simply
sharing, after decades of listening and saying not a damn word, in the empire, on the eve of WWIII.
From the perspective of legacy, which has no clue what is in those libraries, the Internet
was designed to extend linear thinking, to nowhere. From the perspective of labor, the Internet
was designed to demonstrate the fallacy of limiting yourself to linear thinking. Contrary to popular
mythology, choice is not about the color of your tennis shoes made in China.
If it's not anonymous cash, it cannot store value, because independent children are reared
beyond empire's grasp, the physical manifestation of intellectual self-obsession, which Sweden
is now learning, way to late, a slave to Germany, and Austria in particular. Knowing what needs
to be done and doing it are two different things. The psychologists in New Hampshire produce drug
addiction, their solution is drug rehab, and Iowa is supposed to be nuts.
You didn't think Keynes sprang from nothing did you?
Thanks. The wife likes to keep track of water. She's like a human testing machine. Best water
I had was up at bay of fungi, big moose. That document on Ford's car made of hemp and plastic
was pretty cool, before he was told he would be making cars out of steel, finance.
Always thought I would end up in Australia, but like the doctor thing, the critters have to
destroy everything they touch.
"Contradictions, of which money is merely the palpable manifestation, are then to
be transcended by means of all kinds of artificial monetary
manipulations. It is no less clear that many revolutionary
operations with money can be carried out, in so far as an attack on
it appears only to rectify it while leaving everything else
unchanged. We then beat the sack on the donkey's back, while
aiming at the donkey. But so long as the donkey does not feel the
blows, one actually beats only the sack, not the donkey;
contrariwise, if he does feel the blows, we are beating him and not
the sack."
At the end of the day, what ultimately needs to be impacted is not the pieces of paper.
All we can ever do with those is hand people claims against future production.
And when the theory of "managing" an economy stops at the control of aggregate numbers as its
only allowable tool to influence the process, it can never accomplish the objective of avoiding
major crises.
"... The US empire is one of Multi-National corporations and International Trade Deals. ..."
"... Im intrigued by that assertion, especially if this comes from a more libertarian perspective and an author who actually mentions NATO. Of course corporate welfare in various forms is a key part of what is happening, but the core issue is a literal military empire, not some vague commercial facsimile of one. ..."
"... The direct imperial threats include economic warfare, as displayed by the IMF and ECB. As demonstrated in Greece, Ukraine, and before Greece Ireland. ..."
"... By 1978, US inflation had risen to 9% while inflation in the rest of the world slowed dramatically by comparison. Both the Carter administration and the Fed did everything in their power to control dollar devaluation, but it was clear by this time that without the assistance from foreign governments the dollar would not be able to survive . … Over the course of the next six years the dollar experienced a meteoric rise in value. ..."
The US empire is one of Multi-National corporations and International Trade Deals.
I'm intrigued by that assertion, especially if this comes from a more libertarian perspective
and an author who actually mentions NATO. Of course corporate welfare in various forms is a key
part of what is happening, but the core issue is a literal military empire, not some vague commercial
facsimile of one.
One of the most successful Big Lies in our domestic political discourse
is to blame convenient corporate villains instead of the public officials who are responsible
for decision-making and implementation.
This isn't the 1980s anymore. The global financial system (post Bretton Woods) collapsed somewhere
there in the 1990s. Today, things are held together by direct imperial threats, not corporate
board rooms.
It is not dollar hegemony that rules the world, but the global financial system which
gives the dollar its place of privilege.
Syllogism? What came first the chicken or the egg?
Where to begin – one could suggest the author read Chapter 1 of Wray's MMT and rewrite considering
sector balances and fiat currencies, and present the different line of argument which would arise.
"By 1978, US inflation had risen to 9% while inflation in the rest of the world slowed
dramatically by comparison. Both the Carter administration and the Fed did everything in their
power to control dollar devaluation, but it was clear by this time that without the assistance
from foreign governments
the dollar would not be able to survive
." … "Over the
course of the next six years the dollar experienced a meteoric rise in value."
Maybe not central to the main argument but I found this claim (in bold) implausible.
NYTimes post:
"Republicans unhappy with the Federal Reserve are circulating an idea that long ago
lost currency with most economists: a gold standard….But economic historians describe
this as nostalgia for a time that never was. Proponents of the gold standard
generally overstate the benefits of putting golden handcuffs on a central bank,
historians say, and the costs of that reduced flexibility are considerable…In 2012,
the University of Chicago asked 40 leading economists whether a gold standard would
improve the lives of average Americans. All 40 said no. "You can do a lot better than
a gold standard," said Michael Bordo, an economist and director of the Center for
Monetary and Financial History at Rutgers University. He described the political
interest in the precious metal as "pretty crazy."… Economists generally regard a gold
standard as a crude and outdated method of inflation control. There is nothing
inherently stable about the value of gold. It fluctuates, like the value of
everything else, as more is extracted from the ground and as demand waxes and wanes.
The bigger problem, however, is that economic conditions are unstable. And during
recessions, printing money can help revive economic activity."
Great discussion. And nice picture of William Jennings Bryan whose "Cross of Gold"
speech in 1896 won him the Democratic nomination for president. This is the best
expression of the progressive agenda ever.
But wait for it – our gold bug troll JohnH will later wake up drunk again to tell
us how evil the FED is and how awesome the period of the gold standard was. After all
trolls nothing about history and less about economics.
"...Real median weekly earnings have grown 8.6% since 1985. Nonfarm output per hour is up 79% over
that time. Yet the instant that there is even a glimmer of hope that labor might get an upper hand,
the Federal Reserve looks to hold the line on wage growth. It still appears that the Fed's top priority
is making sure the cards remain stacked against wage and salary earners." . ".When you recruit from the banksters, as the Fed does, you have to expect that their interests
align with the kleptocratic rentiers." . "...Notice that the labor share of business income has declined by 10.6% since 2000, while real
after-tax corporate profits have increased by 143.5%."
Some argue there must be excessive slack in labor markets if wage rates are not accelerating.
But real wages are tied to productivity growth, and productivity growth has been slow for several
years now. Wage growth in real terms has at least kept pace with productivity increases over
that time period, which is perfectly consistent with an economy from which labor market slack
has largely dissipated.
Real wage growth is consistent with productivity, thus there is no excess slack in the labor
market. If you think this is some crazy hawk-talk, think again.
Fed Chair Janet Yellen in July:
The growth rate of output per hour worked in the business sector has averaged about 1‑1/4 percent
per year since the recession began in late 2007 and has been essentially flat over the past
year. In contrast, annual productivity gains averaged 2-3/4 percent over the decade preceding
the Great Recession. I mentioned earlier the sluggish pace of wage gains in recent years, and
while I do think that this is evidence of some persisting labor market slack, it also may reflect,
at least in part, fairly weak productivity growth.
For more than three decades, the pace of productivity growth has exceed that of real compensation:
Another view from real median weekly earnings:
Real median weekly earnings have grown 8.6% since 1985. Nonfarm output per hour is up 79% over
that time. Yet the instant that there is even a glimmer of hope that labor might get an upper
hand, the Federal Reserve looks to hold the line on wage growth. It still appears that the Fed's
top priority is making sure the cards remain stacked against wage and salary earners.
"But real wages are tied to productivity growth, and productivity growth has been slow for
several years now."
Productivity by definition is output per worker. So when a recession lowers output, it lowers
measured productivity. So much for this garbage circular "reasoning".
Oh and the canard that JohnH does a lot - look at only what has happened of late:
"Wage growth in real terms has at least kept pace with productivity increases over that time
period, which is perfectly consistent with an economy from which labor market slack has largely
dissipated."
Tim Duy has already exposed this fallacy by looking at this over a longer period of time.
pgl -> Paine ...
Dude - this is a whole literature on this. Recessions do lower output by more than it lowers
employment but this is not exactly because firms are nice. Recessions are bad news for everyone.
Wages do not keep up with what is even limited inflation - again firms are not exactly nice. So
recessions sort of screw firms but unbelievably screw workers. Eventually the economy gets back
to full employment but workers never fully recovery.
This is why recessions are bad for everyone in the short fun but especially bad for workers
short-run and long-run.
Which brings me to why I did not go after Yellen. It seems she and hubbie Akerlof have written
some of the best papers on this topic.
Paine - stop being an arrogant lazy ass and actually check up on this literature.
Now if your point is that the FED borg (I coined this term) is about to take over Yellen's
mind, I fear this too. It seems to have taken over Stan Fischer's mind and he used to be brilliant.
ilsm -> Paine ...
The fed hawks are like pentagon version hawks since 1946.....
we cannot have any more pearl harbors
or inflation......
DrDick :
DrDick :
When you recruit from the banksters, as the Fed does, you have to expect that their interests
align with the kleptocratic rentiers.
mrrunangun :
Domestic US wage rates have been flat. In the graph, the lines cross between 1975 and 1985.
During those years, international competition increased in the tradable goods sector, IMO due
to the recovery of Japanese and European industrial economies from the destruction suffered in
WWII. The divergence between the curves expands more rapidly as more free trade agreements come
on line in the 90s (e.g. NAFTA in 1992 and PNTR for China in 1999).
It may be that intensifying competition in the tradable goods sector has slowed wage gains
in the US by a supply and demand imbalance for labor. The increasing wage premium to education
over the past 40 years and the capture of the domestic political system, and thus capture of the
government, by the very rich, has made it impossible for the political system to make adjustments
to the change in international competition that would benefit the unskilled or semiskilled worker.
Mike Sparrow -> mrrunangun...
The trade agreements are vastly overrated in terms of competition and instead, they are what
help surge productivity. The US began to have offshoring in the 1950's, especially after the Korean
war era boom. Companies began to bail as the US had developed a consumer base. This is very typical
of capitalism. It happened in Europe in the 19th century because of the same reason.
Keeping a strong consumer base and industrial base would liquidate capitalist positions and
turn the economy into laborism.
Mike Sparrow :
I would argue productivity is too high, still. Real productivity really zoomed from the mid-90's
and really never came back down. The late 00's recession made it worse.
Persistently high productivity causes real wages to struggle to keep up. I think many hobbyists
have it backwards with wages including myself. Yes, real wages rose rapidly between 1997-2000,
but that was only because productivity surged. The long run problem of that was wage stagnation
due to the previous high productivity, which has been there since the 80's. Real wage acceleration
coupled with correcting productivity is a good sign and the Fed doesn't like it because they want
high productivity all the time.
The Rage -> Peter K....
I think what he is trying to say, reading through his posts: technology is driving down the
need for labor investment and the information/computer/plastic/whatever you want to call it revolution
really drove that point home to the end.
So productivity is high, creating profits from reduced pace of hiring and keeping pipelines
of credit open for future output. However, productivity is slowing lately and real wages have
accelerated implicating that near term output will be higher than while future output will be
lower. Yeah, that part is a bit confusing, but the drift is that productivity/real wages need
to track together closer or you get problems. When they come unglued, the offender, this case
productivity, needs to come down for wages to catch up. Real wages were to high before 1980 and
productivity should run a bit higher than wages. So by 1995, the problems that helped spur the
great inflation had ebbed, but a new problem started: rapid productivity growth.
I read this in 2009 believe it or not in a article. Their belief was if productivity stayed
high and growing, the economy would be in permanent recession. They believed to maintain stability,
productivity had to decline for the next decade. Mercy, I wish I could remember where I read that
from. 6+ years leaves a large gap. I do think the chart shows the "panic" over slowed productivity
is pure noise. Between 95-00 it when "boom boom". Notice the pre-95 trend and the post-95 trend.
To the productivity must decline squad, a decline in productivity will help real wages rise boosting
real incomes and reducing nominal debt, creating a more stable economy.
Dickeylee :
We are still in a slave labor economy. The whole world is looking for the next labor market
to enslave. Nike in Vietnam, Apple in China, and China looks poised to take over Africa.
If you can't get your slaves shipped to you, go to your slaves!
pgl -> Dickeylee...
China looks poised to take over Africa? I guess the Chinese capitalists hate paying $3 an hour
and so will pay Africans less. If you check - multinationals are in Africa and they are mainly
US and European based companies. It seems we beat the Chinese to this.
ilsm -> pgl...
Pentagon deploying to keep the peace in Africa for the job creators........
Lafayette -> pgl...
PITY AFRICA
The plight of Africa is that it has been plundered by both Europe and America over the past
two centuries. By America principally for cheap labor brought over on slave-ships.
Do not overlook the fact that damn few African countries can seem to develop a leadership that
does not plunder its country's assets for their own personal profit.
This plague of profiteering has existed since time immemorial and China is just the newest
entrant to the game ...
DrDick -> pgl...
China has been making significant inroads there for over a decade and are currently the largest
single player there.
Your comment actually has some merit in two senses. China has recognized that its habit of
investing in government bonds of other nations (e.g. US) is giving them a lower return than what
foreign direct investment offers. And Africa is attracting a lot of foreign direct investment.
I went searching for who the big players are and this gave an interesting list:
But it shows the BRIC nations (C for China) has been doing FDI in Africa for a while.
If multinationals are going global, maybe the labor movement should do the same. Workers of
the world unite!
Julio :
Rasputin explained why the Fed must raise rates before the next recession, so it can lower
them later:
"Certainly our Savior and Holy Fathers have denounced sin, since it is the work of the Evil
One.
But how can you drive out evil except by sincere repentance?
And how can you sincerely repent if you have not sinned?"
"...Much of Macro is still operating under the Friedman myth of Monetary policy domination. Monetary
policy can have strong effects, but at other time Fiscal and Regulatory Policy are much stronger and
needed for the best economic outcomes. . A problem with the US Fed is limited powers to set monetary and regulatory policy and it can be
totally uncoordinated from fiscal and regulatory policy that are under control of Congress and the Executive.
In the mid 1990s, the Fed and Clinton administration were using the same playbook and cajoled a reluctant
Congress. Do the Fed an Executive even try to coordinate policy now? This Congress is the anti-Fed and
operates on a playbook from the gamma quadrant. Total lack of policy coordination " . "...1) Real asset prices have gone up a lot as a result of QE. Now they are headed down as QE
is done with no real hope of another round.
2) Nominal and Real GDP are on the way up.
3) Inflation will be the last to respond. Waiting for inflation to show up is a mistake.
4) That still does not tell us the timing of getting off the zero bound. As I have said before, the
Fed has let asset prices go up too much (much has been said including Shiller's recent analysis).
The stock prices are now coming down. The fact that Netflix (which has zero exposure to China) is down
25% should give pause to anyone who believes parts of the market are not in a bubble. Add to that crashing
commodity prices and growth overseas in important economies. I think the Fed needs to wait and see how
it shakes out. It = asset prices, commodity prices, EM growth and finally, how all this impacts US growth."
[Actually Carmen Reinhart deserves a better pitchman here than the little comment pgl posted
above. Carmen presents a expressly well written and concise picture. Since it is international
then the same focus on core CPI that we get for domestic inflation is not referenced nor implied.
She includes commodities in the inflation. The full text following the short excerpt given by
pgl is below:]
...
Most of the other half are not doing badly, either. In the period following the oil shocks of
the 1970s until the early 1980s, almost two-thirds of the countries recorded inflation rates above
10%. According to the latest data, which runs through July or August for most countries, there
are "only" 14 cases of high inflation (the red line in the figure). Venezuela (which has not published
official inflation statistics this year) and Argentina (which has not released reliable inflation
data for several years) figure prominently in this group. Iran, Russia, Syria, Ukraine, and a
handful of African countries comprise the rest.
The share of countries recording outright deflation in consumer prices (the green line) is
higher in 2015 than that of countries experiencing double-digit inflation (7% of the total). Whatever
nasty surprises may lurk in the future, the global inflation environment is the tamest since the
early 1960s.
Indeed, the risk for the world economy is actually tilted toward deflation for the 23 advanced
economies in the sample, even eight years after the onset of the global financial crisis. For
this group, the median inflation rate is 0.2% – the lowest since 1933. The only advanced economy
with an inflation rate above 2% is Iceland (where the latest 12-month reading is 2.2%).
While we do not know what might have happened were policies different, one can easily imagine
that, absent quantitative easing in the United States, Europe, and Japan, those economies would
have been mired in a deflationary post-crisis landscape akin to that of the 1930s. Early in that
terrible decade, deflation became a reality for nearly all countries and for all of the advanced
economies. In the last two years, at least six of the advanced economies – and as many as eight
– have been coping with deflation.
Falling prices mean a rise in the real value of existing debts and an increase in the debt-service
burden, owing to higher real interest rates. As a result, defaults, bankruptcies, and economic
decline become more likely, putting further downward pressures on prices.
Irving Fisher's prescient warning in 1933 about such a debt-deflation spiral resonates strongly
today, given that public and private debt levels are at or near historic highs in many countries.
Especially instructive is the 2.2% price decline in Greece for the 12 months ending in July –
the most severe example of ongoing deflation in the advanced countries and counterproductive to
an orderly solution to the country's problems.
Median inflation rates for emerging-market and developing economies, which were in double digits
through the mid-1990s, are now around 2.5% and falling. The sharp declines in oil and commodity
prices during the latest supercycle have helped mitigate inflationary pressures, while the generalized
slowdown in economic activity in the emerging world may have contributed as well.
But it is too early to conclude that inflation is a problem of the past, because other external
factors are working in the opposite direction. As Rodrigo Vergara, Governor of the Central Bank
of Chile, observed in his prepared remarks at Jackson Hole, large currency depreciations in many
emerging markets (most notably some oil and commodity producers) since the spring of 2013 have
been associated with a rise in inflationary pressures in the face of wider output gaps.
The analysis presented by Gita Gopinath, which establishes a connection between the price pass-through
to prices from exchange-rate changes and the currency in which trade is invoiced, speaks plainly
to this issue. Given that most emerging-market countries' trade is conducted in dollars, currency
depreciation should push up import prices almost one for one.
At the end of the day, the US Federal Reserve will base its interest-rate decisions primarily
on domestic considerations. While there is more than the usual degree of uncertainty regarding
the magnitude of America's output gap since the financial crisis, there is comparatively less
ambiguity now that domestic inflation is subdued. The rest of the world shares that benign inflation
environment.
As the Fed prepares for its September meeting, its policymakers would do well not to ignore
what was overlooked in Jackson Hole: the need to place domestic trends in global and historical
context. For now, such a perspective favors policy gradualism.
Friday, September 04, 2015 at 02:44 AM
bakho said in reply to RC AKA Darryl, Ron...
Here conclusion was weak with a vague take home message.
Much of Macro is still operating
under the Friedman myth of Monetary policy domination.
Monetary policy can have strong effects, but at other time Fiscal and Regulatory Policy are
much stronger and needed for the best economic outcomes.
A problem with the US Fed is limited powers to set monetary and regulatory policy and it can be
totally uncoordinated from fiscal and regulatory policy that are under control of Congress and
the Executive. In the mid 1990s, the Fed and Clinton administration were using the same playbook
and cajoled a reluctant Congress. Do the Fed an Executive even try to coordinate policy now? This
Congress is the anti-Fed and operates on a playbook from the gamma quadrant. Total lack of policy
coordination
pgl said in reply to bakho...
My take was that she was advocating more aggressive aggregate demand stimulus in general. And
you are right - we need the fiscal side to step up to the plate.
Story in NYC as how bad just
the subway stops are. The rails suck as well and we need to expand the system. But at the rate
this is going this decaying stops which are very dangerous will not be fixed until 2065. Why?
Lack of funding is the stated reason. No one in this stupid nation can say - well provide more
funding? We are ruled by idiots.
RC AKA Darryl, Ron said in reply to bakho...
[Well, yeah but that would have diverged a long way from her topic:]
"Inflation – its causes
and its connection to monetary policy and financial crises – was the theme of this year's international
conference of central bankers and academics in Jackson Hole, Wyoming. But, while policymakers'
desire to be prepared for potential future risks to price stability is understandable, they did
not place these concerns in the context of recent inflation developments at the global level –
or within historical perspective..."
[She stuck with just inflation and monetary policy because that is what she chose to write
about at this time. However, Carmen is the other intellectual half of Rogoff of the debt limit
for economic growth flameout. So, we should not depend upon her for fiscal policy recommendations.
That even someone this popular with the establishment Republican elite can understand monetary
policy is notable in contrast to the inflationistas.
Peter K. said in reply to RC AKA Darryl, Ron...
Yes she did the 90 percent government debt cutoff with Rogoff that Krugman attacked.
Also the
vaguely righwing blogger from the St. Louis Fed, Andolfatto or something, recently had link where
they said inflation wasn't a problem and the Fed shouldn't raise rates until inflation is apparent.
Peter K. said in reply to bakho...
"In the mid 1990s, the Fed and Clinton administration were using the same playbook and cajoled
a reluctant Congress. "
I thought Clinton cut the deficit and the tech stock bubble helped balance
the budget so they had surpluses. Some people say those surpluses were a problem because of a
lack of safe assets. That drove money to seek safe returns in mortgage backed securities for instance.
Peter K. said in reply to Peter K....
Maybe he didn't cut the deficit - I think Dean Baker argues that - but at the beginning of his
Presidency, Clinton dropped his middle class spending bill in a deal with Greenspan who said he'd
keep interest rates low in return.
Peter K. said in reply to bakho...
"This Congress is the anti-Fed and operates on a playbook from the gamma quadrant."
haha yes.
The Fed regularly complained about fiscal "headwinds."
Chart
1 is key to understanding the rough timing. In the US and UK, we are a little past the dashed
vertical line (impact phase). UK has had a little more success importing inflation.
1) Real asset prices have gone up a lot as a result of QE. Now they are headed down as
QE is done with no real hope of another round.
2) Nominal and Real GDP are on the way up.
3) Inflation will be the last to respond. Waiting for inflation to show up is a mistake.
4) That still does not tell us the timing of getting off the zero bound. As I have said before,
the Fed has let asset prices go up too much (much has been said including Shiller's recent analysis).
The stock prices are now coming down. The fact that Netflix (which has zero exposure to China)
is down 25% should give pause to anyone who believes parts of the market are not in a bubble.
Add to that crashing commodity prices and growth overseas in important economies. I think the
Fed needs to wait and see how it shakes out. It = asset prices, commodity prices, EM growth and
finally, how all this impacts US growth.
"...Friedman and Schwartz were wrong about the cause and the cure of the Great Depression. Those
who learned monetarism as the "new truth" are having a difficult time unlearning it. We need re-education
courses for older economists and a new curriculum for younger ones." . "...I don't have the neo-classical faith in the "natural" healing powers of the economy as some
people do. Seems more likely that the economy would settle in to a lower equilibrium given enough
fiscal austerity." . "...But what if the FED is a rational captain of corporate capitalism.
Better then the opportunistic demagogues in the congress.
But still dedicated to wage stag " . "..."if wage increases for the business sector as a whole lag behind productivity increases deflation
occurs"..."
The summary "Deflation and money" by Hiroshi Yoshikawa, Hideaki Aoyama, Yoshi Fujiwara, and Hiroshi
Iyetomiof says:
Deflation and money,
Vox EU: Deflation is a threat to the macroeconomy. Japan had suffered from deflation for more
than a decade, and now, Europe is facing it. To combat deflation under the zero interest bound,
the Bank of Japan and the European Central Bank have resorted to quantitative easing, or increasing
the money supply. This column explores its effectiveness, through the application of novel methods
to distinguish signals from noises.
The conclusion:
...all in all, the results we obtained have confirmed that aggregate prices significantly change,
either upward or downward, as the level of real output changes. The correlation between aggregate
prices and money, on the other hand, is not significant. The major factors affecting aggregate
prices other than the level of real economic activity are the exchange rate and the prices of
raw materials represented by the price of oil. Japan suffered from deflation for more than a decade
beginning at the end of the last century. More recently, Europe faces a threat of deflation. Our
analysis suggests that it is difficult to combat deflation only by expanding the money supply
bakho said in reply to pgl...
Monetary policy weak is at the ZLB. Fiscal and regulatory can have much stronger effects and
complete swamp monetary like a tidal wave to a ripple.
Exchange rates and other economic shocks have more effect than monetary policy at the ZLB.
Friedman and Schwartz were wrong about the cause and the cure of the Great Depression. Those
who learned monetarism as the "new truth" are having a difficult time unlearning it. We need re-education
courses for older economists and a new curriculum for younger ones.
bakho said in reply to pgl...
Efficiency standards backed by a carbon tax would be much more effective that a carbon tax
alone.
Efficiency standards work for electric appliances and prevent a races to the bottom.
pgl said in reply to bakho...
True. It seems Carly and Jeb! do not want to regulate but rather to encourage innovation by
giving subsidies to rich people. Not only is this Republican reverse Robin Hoodism on steroids
- it will not has as much effect as a tax combined with regulations.
Simply put - conservatives should not be listened to as their agenda is not economic efficiency
but rather making the Koch Brothers ever richer.
Peter K. said...
As a thought experiment I would wonder what bakho's re-education course would look like.
There is this paper, but could it be it says the same thing as those graphs which show the
large increases in the monetary base would just sit there with at the Zero Lower Bound because
of the liquidity trap?
The inflationistas were wrong that all of that monetary policy would cause runaway inflation.
But considering what needed to be done to move long-term interest rates, was it really large
enough?
David Beckworth's blogpost in today's links suggests the Fed did what they wanted to do.
And maybe part of that was to offset the unprecedented fiscal austerity we say after Obama's
stimulus ran out. (And that stimulus was pretty much canceled out by 50 little Hoovers.)
If monetary policy supposedly didn't move prices, I found it surprising that austerity didn't
give us deflation as it did in Europe.
Maybe fiscal policy works better and more directly but if it is blocked or even reversed with
austerity, monetary policy shouldn't be ruled because it is supposedly ineffective.
Maybe Friedman and Schwartz's maximalist claims aren't true, but that doesn't mean one should
flip to the opposite extreme.
Bernanke says in a speech that Tobin suggested that the Fed could have mitigated the Great
Depression by lowering long-term rates.
Peter K. said in reply to Peter K....
"What is the total number of months during the Ford, Carter, Reagan and Bush I administrations,
plus the first term of Clinton, when the unemployment rate was lower than today?"
"The inflationistas were wrong that all of that monetary policy would cause runaway inflation."
When confronted they always say that once the economy normalized, all of those reserves will
go rushing out into the economy causing inflation.
But the Fed says it will use Interest on Excess Reserves to manage that outflow.
Peter K. said in reply to Peter K....
"If monetary policy supposedly didn't move prices, I found it surprising that austerity didn't
give us deflation as it did in Europe."
I don't have the neo-classical faith in the "natural" healing powers of the economy as some
people do. Seems more likely that the economy would settle in to a lower equilibrium given enough
fiscal austerity.
Paine said in reply to Peter K....
Very agreeably presented
But what if the FED is a rational captain of corporate capitalism.
Better then the opportunistic demagogues in the congress.
But still dedicated to wage stag
Deflation? Uupps, price theory, too, is wrong
Comment on 'Deflation and Money'
The current economic situation is a clear refutation
of both commonplace employment and quantity theory. The
core of the unemployment/deflation problem is that the
price mechanism does not work as standard economics
claims.
Roughly, the formula says that the consumer price
index declines if (i) the average expenditure ratio
falls, (ii) the wage rate falls, (iii) the productivity
increases, and (iv) the employment in the investment
good industry shrinks relative to the employment in the
consumption goods industry. The formula follows from
(2014, Sec. 5).
The crucial message is that the wage rate is the
numéraire of the price system. If at all, the quantity
of money plays an indirect role via the expenditure
ratio and the employment relation of the investment
good and the consumption good industry.
The rule of thumb says: if wage increases for the
business sector as a whole lag behind productivity
increases deflation occurs (the rest of the formula
kept constant).
For the rectification of the naive quantity theory
see (2011) (I)/(II).
Real per capita Gross Domestic Product for United States and Japan, 2010-2014
(Indexed to 2010)
[ These last 5 years real per capita GDP has increased by 5.6% in the United States and 3.6%
in Japan. ]
Peter K. said in reply to spencer...
Good point. This is why I am skeptical when I read people claim that Japan's extraordinary
monetary policy has had no effect.
And even if Japan has done more than before courtesy of Abe and Yoda Kuroda, they also mitigate
it with contractionary policy like by raising consumption taxes.
"...In stumbling to this outcome, Nixon's advisors were strikingly oblivious to the monetary
disorder they were unleashing. The passivity of the "religious floaters" club in the White House was
owing to their reflexive adherence to the profoundly erroneous monetarist doctrines of Milton Friedman." . "...The four decades since Camp David also show that the Friedmanite régime of floating
money is dynamically unstable. Each business cycle recovery since 1971 has amplified the ratio of credit
to income in the system, causing the daisy chains of debt upon debt to become ever more distended and
fragile." . "..."It is ludicrous to think that foreign exchange can be entrusted to a bunch of pork belly
crapshooters,"" . "..."When currency exchange rates were firmly fixed and some or all of the main ones were redeemable
in a defined weight of gold", With, then as now, less than an ounce of gold per person on Earth,
a third grader had arithmetic skills enough to know this was a ridiculous claim."
"I held in my hand the Holy Grail for the Chicago Mercantile Exchange. The most influential
economic mind of the twentieth century provided the CME with the intellectual foundation upon
which to build its financial superstructure."
Nixon's estimable free market advisors who gathered at the Camp David weekend were to an astonishing
degree clueless as to the consequences of their recommendation to close the gold window and float
the dollar. In their wildest imaginations they did not foresee that this would unhinge the
monetary and financial nervous system of capitalism. They had no premonition at all that
it would pave the way for a forty-year storm of financialization and a debt-besotted symbiosis between
central bankers possessed by delusions of grandeur and private gamblers intoxicated with visions
of delirious wealth.
In fact, when Nixon announced on August 15, 1971, that the dollar was no longer convertible to
gold at $35 per ounce, his advisors had barely a scratch pad's worth of ideas as to what should come
next.
Its first attempted solution was a Burns-Connally hybrid known as the Smithsonian Agreement of
December 1971. The United States needed precisely a $13 billion favorable swing in its balance of
trade. This was not to be achieved the honest way-by domestic belt tightening and thereby a reduction
of swollen US imports that were being funded by borrowing from foreigners. Instead, America's trading
partners were to revalue their currencies upward by about 15 percent against the dollar.
Connally's blatant mercantilist offensive was cut short in late November 1971, however, when the
initially jubilant stock market started heading rapidly south on fears that a global trade war was
in the offing.
As it turned out, a few weeks later Connally's protectionist gauntlet ended in an amicable paint-by-the-numbers
exercise in diplomatic pettifoggery. The United States agreed to drop the 10 percent import surtax
and raise the price of gold by 9 percent to $38 per ounce.
Quite simply, the United States had made no commitment whatsoever to redeem paper dollars for
gold at the new $38 price or to defend the gold parity in any other manner. At bottom, the
Smithsonian Agreement attempted the futile task of perpetuating the Bretton Woods gold exchange standard
without any role for gold.
During the next eight months, further international negotiations attempted to rescue the Smithsonian
Agreement with more baling wire and bubble gum. But the die was already cast and the monetary oxymoron
which had prevailed in the interim, a gold standard system without monetary gold, was officially
dropped in favor of pure floating currencies in March 1973.
Now, for the first time in modern history, all of the world's major nations would operate their
economies on the basis of what old-fashioned economists called "fiduciary money." In practical
terms, it amounted to a promise that currencies would retain as much, or as little, purchasing power
as central bankers determined to be expedient.
In stumbling to this outcome, Nixon's advisors were strikingly oblivious to the monetary disorder
they were unleashing. The passivity of the "religious floaters" club in the White House was owing
to their reflexive adherence to the profoundly erroneous monetarist doctrines of Milton Friedman.
A Friedmanite Fed would keep the money growth dial set strictly at 3 percent, year in and year
out, ever steady as she goes.
Friedman's pre-1971 writings nowhere give an account of the massive hedging industry that
would flourish under a régime of floating paper money. This omission occurred for good reason:
Friedman didn't think there would be much volatility to hedge if his Chicago-trained central bankers
stuck to the monetarist rulebook.
Most certainly, Friedman did not see that an unshackled central bank would eventually transform
his beloved free markets into gambling halls and venues of uneconomic speculative finance.
It thus happened that Leo Melamed, a small-time pork-belly (i.e., bacon) trader who kept
his modest office near the Chicago Mercantile Exchange trading floor stocked with generous supplies
of Tums and Camels, found his opening and hired Professor Friedman.
THE PORK-BELLY PITS: WHERE THE AGE OF SPECULATIVE FINANCE STARTED
Leo Melamed was the genius founder of the financial futures market and presided over its explosive
growth on the Chicago "Merc" during the last three decades of the twentieth century.
At the time of the Camp David weekend that changed the world, the Chicago Merc was still a backwater
outpost of the farm commodity futures business.
The next chapters in the tale of Melamed and the Merc are downright astonishing. In 1970, Melamed
made an intensive inquiry into currency and other financial markets about which he knew very little,
in a desperate search for something to replace the Merc's rapidly dwindling eggs contract. The latter
was the core of its legacy business and was then perhaps $50 million per year in annual turnover.
Four decades later, Leo Melamed's study program had mushroomed into a vast menu of futures
and options contracts-covering currencies, commodities, fixed-income, and equities, which trade twenty-four
hours per day on immense computerized platforms. The entire annual volume of the old eggs
contract is now exceeded in literally the blink of an eye.
The reason futures contracts on D-marks and T-bills took off like rocket ships is that
the fundamental nature of money and finance was turned upside down at Camp David. In effect, Professor
Friedman's floating money contraption created a massive market for hedging that did not have any
reason for existence in the gold standard world of Bretton Woods, and most especially under its more
robust pre-1914 antecedents.
When currency exchange rates were firmly fixed and some or all of the main ones were redeemable
in a defined weight of gold, exporters and importers had no need to hedge future purchases or deliveries
denominated in foreign currencies. The spot and forward exchange rates, save for technical differentials,
were always the same.
Even more importantly, the newly emergent need of corporations and investors to hedge against
currency and interest rate risk caused other fateful developments in financial markets; namely, the
accumulation of capital and trading resources by firms which became specialized in the intermediation
of financial hedges. Purely an artifact of an unstable monetary régime, this new industry
resulted in prodigious and wasteful consumption of capital, technology, and labor resources.
The four decades since Camp David also show that the Friedmanite régime of floating
money is dynamically unstable. Each business cycle recovery since 1971 has amplified the ratio of
credit to income in the system, causing the daisy chains of debt upon debt to become ever more distended
and fragile.
Currently, the daily volume of foreign exchange hedging activity in global futures and options
markets, for example, is estimated at $4 trillion, compared to daily merchandise trade of only $40
billion. This 100:1 ratio of hedging volume to the underlying activity rate does not exist because
the currency managers at exporters like Toyota re-trade their hedges over and over all day; that
is, every fourteen minutes.
Due to the dead-weight losses to society from this massive churning, the hedging casinos are a
profound deformation of capitalism, not its crowning innovation. They consume vast resources without
adding to society's output or wealth, and flush income and net worth to the very top rungs of the
economic ladder-rarefied redoubts of opulence which are currently occupied by the most aggressive
and adept speculators. The talented Leo Melamed thus did not spend forty years doing God's
work, as he believed. He was just an adroit gambler in the devil's financial workshop-the great hedging
venues-necessitated by Professor Friedman's contraption of floating, untethered money.
THE LUNCH AT THE WALDORF-ASTORIA THAT OPENED THE FUTURES
According to Melamed's later telling, by 1970 he had "become a committed and ardent disciple in
the army that was forming around Milton Friedman's ideas. He had become our hero, our teacher, our
mentor."
Thus inspired, Melamed sought to establish a short position against the pound, but after visiting
all of the great Loop banks in Chicago he soon discovered they weren't much interested in pure speculators:
"if you didn't have any commercial reasons, the banks weren't likely to be very helpful."
The banking system was not in the business of financing currency speculators, and for good reason.
In a fixed exchange rate régime the currency departments of the great international banks were purely
service operations which deployed no capital and conducted their operations out of hushed dealing
rooms, not noisy cavernous trading floors. The foreign currency business was no different than trusts
and estates. Even Melamed had wondered at the time whether "foreign currency instruments could succeed"
within the strictures designed for soybeans and eggs, and pretended to answer his own question: "Perhaps
there was some fundamental economic reason why no one had before successfully applied financial instruments
to futures."
In point of fact, yes, there was a huge reason and it suggests that while Melamed might have audited
Milton Friedman's course, he had evidently not actually passed it. There were no currency
futures contracts because there was no opportunity for speculative profit in forward exchange transactions
as long as the fixed-rate monetary régime remained reasonably stable.
Indeed, this reality was evident in a rebuke from an unnamed New York banker which Melamed recalled
having received in response to his entreaties shortly before the Smithsonian Agreement was announced.
"It is ludicrous to think that foreign exchange can be entrusted to a bunch of pork belly crapshooters,"
the banker had allegedly sniffed.
Whether apocryphal or not, this anecdote captures the essence of what happened at Camp
David in August 1971. There a motley crew of economic nationalists, Friedman acolytes, and political
cynics supinely embraced Richard Nixon's monetary madness. In so doing, they opened the financial
system to a forty-year swarm of "crapshooters" who eventually engulfed capitalism itself in endless
waves of speculation and fevered gambling, activities which redistributed the income upward but did
not expand the economic pie.
As it happened, Melamed did not waste any time getting an audience with the wizard behind the
White House screen. At a luncheon meeting with Professor Friedman at the New York Waldorf-Astoria
on November 13, 1971, which Melamed later described as his "moment of truth," he laid out his case.
After asking Friedman "not to laugh," Melamed described his scheme: "I held my breath as I put
forth the idea of a futures market in foreign currency. The great man did not hesitate."
"It's a wonderful idea," Friedman told him. "You must do it!"
Melamed then suggested that his colleagues in the pork-belly pits might be more reassured about
the venture if Friedman would put his endorsement in writing. At that, Friedman famously replied,
"You know I am a capitalist?"
He was apparently a pretty timid capitalist, however. In consideration of the aforementioned
$7,500, Melamed got an eleven-page paper that launched the greatest trading casino in world history.
It made Melamed extremely wealthy and also millionaires out of countless other recycled eggs and
bacon traders that Friedman never even met.
Modestly entitled "The Need for a Futures Market in Currencies," the paper today reads like so
much free market eyewash. But back then it played a decisive role in conveying Friedman's imprimatur.
In describing the paper's impact, Melamed did not spare the superlatives: "I held in my hand the
Holy Grail for the Chicago Mercantile Exchange. The most influential economic mind of the twentieth
century provided the CME with the intellectual foundation upon which to build its financial superstructure."
Hahaha, for the FIRST time I see a post here on ZH where the "profoundly erroneous monetarist
doctrine" of Milton Friedman gets blamed for what follows : the greatest monetary sin of the West
(after the
gold exchange standard according to Jacques Rueff).
The Friedmanite floating rate regime is what started the instability in the world monetary
casino and yes the
futures market did the rest.
Yipeeee, we have it right there. The monetary SIN laid out here at ZH and it had NOTHING to
do with Keynesian plays. The
Casino was a PURE product of the CHICAGO school so dear to Hayek. Who approved the supply
side "liberalisation" of Reaganomics that followed.
ZH has vindicated that very important piece of the puzzle in the global financial time line
of our present age.
Now Keynes's ghost can rest in piece. Monetarism will have to carry its own Cross on its Golgothan
march.
The Delicate Genius
I think there may be a middle you're excluding...
falak pema
May be a middle called Nixonian petrodollar anchoring. But that did not change the Casino mantra.
It just anchored "our money your problem" to Saud's Oil guzzler.
All that did was to suck the Oil into the fiat bonanza world.
Something the Sauds don't appreciate anymore as the Fiat pile is making Pax Americana fragile
and it cannot zero hedge its support of Sunni Saudi hubris. It has to HEDGE with IRAN...now having
showed its resilience after 40 years of confronting the USA.
C'mon Genius don't just mumble in your libertarian beard, put up or shut up.
Not all monetarists
are chicagoan. They became book cookers for Keynesian discretionary policy... Hence NK's, New
Classicals, "market monetarists," et cetera. Friedman's been reduced to the guy in the back room,
wearing a green visor and rigging up Keynes' insane monetary system.
Agreed, but only because you know more than I do when it comes to Economics, and because I
always thought that cocksucker Freidman, and the Chicago School, were crooked snakes-in-the-grass
all along. And frankly, Z/H does kind of beat on Keynes a bit too much sometimes, but the SOB
is dead, so who cares anyhow. Historiography has a nothing to do with reality in this day and
age, methinks.
1946 Keynes dies. 1965 De Gaulle starts talking about "exorbitant privilege" and US hubris.
At the end of the 60s the London Gold club that tries to bridge French concerns about US spending
profiglacy (Vietnam war, great society) and US balance of
trade deterioration, collapses. Harold Wilson caves in to "gnomes of Zurich" and London loses
pivotal role with a devalued £.
By 1969 the French have put the fear of God up Nixon when a french gunboat arrives reclaiming
French gold deposited in NY. SO...1971 and Nixon makes the plunge.
You can say what you like about Keynes. He had nothing to do with Nixon/Johnson's spending
spree which made gold revoke inevitable. It was not his
philosophy which was à la mode in 1969 but the Chicago school.
MASTER OF UNIVERSE
From what I have read about Keynes he was appropriately characterized as 'brilliant'. Of course,
no amount of Keynesian Stimulus could have shut down the Bear Stearns bear raid, or the Lehman
Bros. Chapter 11. Ergo, the downfall of Freidman's orthodoxy was bound to occur as soon as Glass-Steagall
deregulation provided the leverage via the FCC. Since the exemption on leverage for Bear Stearns
it took five years to melt down to a systemic Worldwide intractable problem. Keynes was right
about CB intervention, but he had no way of knowing that certain fundamentals would be altered
beyond logic of failsafe.
p.s. thanks for going into detail on history. I always appreciate historical background given
my background in Experimental Psychology/Personality/Biography/Historiography and Sociology.
withglee
Nixon's estimable free market advisors who gathered at the Camp David weekend were to an
astonishing degree clueless as to the consequences of their recommendation to close the gold window
and float the dollar.
Oh really? What would you have done ... with the street price of gold at over $70, the official
price at $35, and the French choosing to be compensated in gold rather than dollars, as they were
supposedly the same thing.
What would you have done?
knukles
Another reason the Chitown Loop banks were not supportive of Melamed's currency futures
ideas was that the Harris primarily was at the time "the" Bulge Bracket Big Swinging US Based
Dick of the cash and forward 4X markets as well as one of the largest financers of the futures
businesses on the CME and CBoT. They saw Leo not as a product extension, but a threat to their
dominance.
withglee
When currency exchange rates were firmly fixed and some or all of the main ones were redeemable
in a defined weight of gold,
With, then as now, less than an ounce of gold per person on Earth, a third grader had arithmetic
skills enough to know this was a ridiculous claim.
armageddon addahere
Everybody acts like Nixon closing the gold window was the beginning of something. It wasn't.
It was the end. At that point the US had been spending money like water overseas for everything
from the Marshall Plan, Volkswagens and Japanese transistor radios to the Korean and Vietnam wars.
There was a net inflow of gold during the depression and WW2, but after that there was a steady
outflow all through the fifties and sixties.
The whole world wanted American dollars, and a lot of it got turned in for American gold. The
gold was nearly gone. At the rate it was going, the last ounce would leave Fort Knox in less than
two years. They had no choice but to end the convertability of gold - sooner or later. Nixon's
only choice was to take action and make a smooth transition or let everything go to hell at once.
"The
Great Deformation by David Stockman" ... This is the most remarkable treatise on economic
history ever written. If you haven't read it you are still in the dark.You will continue to see
many excerpts from this book on ZH ... and well deserved.
David Stockman should be given a Nobel Prize for Economics ... for exposing Economics as the
insanity it is and fully captive to politics.
"Gold is looking like the dog that just did not bark -- but not uniquely so. Most safe-haven assets
are looking distinctly lackluster, including the VIX index. Either 5,000 years of safe-haven buying
has just become bunk, or there is a desire to portray what is evidently a financial and economic
crisis as nothing to be concerned about."
Ross Norman, Sharps Pixley
"In keeping silent about evil, in burying it so deep within us that no sign of it appears on the
surface, we are implanting it, and it will rise up a thousand fold in the future. When we neither
punish nor reproach evildoers, we are not simply protecting their trivial old age, we are thereby
ripping the foundations of justice from beneath new generations."
Aleksandr Solzhenitsyn, The Gulag Archipelago
At least in my judgement, the precious metal markets are being consistently rigged.
I believe the
reason that they are being rigged is that the financiers have convinced the political class that
this is a necessary action in order to prevent a panic, a run on the dollar and the bonds, and a
seepage of critical funds into an unproductive investment as compared to equities for example.
We are just defending what is ours, right? And what is ours is the global dollar hegemony.
This is really just another excuse for looting, picking both the global public pockets and the
Treasury's.
This sort of thing seems to happen periodically, at least once per generation, and the system
generally has to get washed out badly, and then reform may come. You can see a clear trend back to
the early Reagan years for this particular dalliance with the overreach and madness of the moneyed
interests.
Protracted market rigging tend to distort supply profoundly. And there should be no doubt that
the distortions and excesses of our current round of economic quackery have caused an historic imbalance
of wealth and power. And the rigging of the gold and silver markets have badly affected the
ability of supply to meet demand.
Yves here. This post is elegant in the way it challenges the standard (sloppy) definitions of
money. Even if you don't agree, it will force you to think and articulate why you don't agree (hopefully
in a rigorous manner).
Many people try to attribute a solidity to money (I suspect German has better words that correspond
to "thing-ness" for this sort of ideation) that it lacks. The desire to have money be concrete seems
to be linked in many cases to the enthusiasm for gold or gold-currencies. But gold's value isn't
enduring or fixed in any way; it's value depends on the structure of social relations. For instance,
in Vietnam, women typically get a necklace of gold beads in their youth. It's a dowry of sorts. When
conditions became desperate during the war, some women would try trading these beads for food or
medicine, or as a way to buy off a possible rapist. The beads, when they were accepted, went for
much less than the metal value.
The standard definition of money is given in terms of its three functions:
1: Money is a medium of exchange.
2: Money is a measure of value.
3: Money is a store of value.
Number 1 is at best misleading. Numbers 2 and 3 are simply wrong, and these things are easy to
show. It is also easy to show that this is important.
First, the actual definition of money:
1: Money is a token, or instrument, of demand, which is exchanged for goods or services. Or
simply: Money is demand.
2: Money is a measure of demand.
3: Money is a store of demand.
In the standard definition, Number 3 cannot possibly be true. Were Number 3 true, money would
have value of itself. The value of money would be independent of what ever else an economy produced.
But consider, the best monies are those instruments which have no intrinsic value whatever. How can
any amount of something which has no value, be a store of value? Even where commodities have been
used for money, (and this may be the origin of the error,) they have tended to be those commodities,
precious metals, for instance, which, because of their properties, were of only limited economic
use. The reason for this is known and simple: These commodities had to be more valuable as money
than they were valuable as commodities. If they were more valuable as commodities, they would be
consumed, and so their use as money would disappear. But this implies that the value of these commodities,
as money, over their value as a commodity, is not intrinsic, but as with plain fiat money, purely
a matter of other factors. That is, the value of the commodity as money is not based on any intrinsic
value of the commodity to the economy.
So fiat money has no intrinsic value, and therefore cannot be a store of value. If the economy
produced only money, that money would have no value. It does not have value as, say, a refrigerator
full of food has value, or a tank filled with gasoline. But, what the third function of money actually
is is as a store of demand. If you have $100 in the bank, or in your pocket, you have a store of
demand, which you can keep as long as you want, and when you choose to, you can spend it. You can
demand something which is offered for sale, to the amount of $100.
Then you can take your $100 of tokens of demand and you can go to the grocery store and with it
buy $100 worth of food. This shows that money is also a measure of demand: You have as much demand
for food, or anything else, as $100 will purchase. If you have more money, you have more demand.
If you have less money, you have less demand. If you have no money, you have no demand.
Money is not a store of value. Can it reliably be a measure of value? Economically worthless things
may be in much demand, and therefore command a price beyond their value. Yachts, for instance. Economically
valuable things may be in little demand, or supplied at prices below their value. Water, for instance.
With money, you have demand for these things, at the prices they are offered. But their prices do
not reflect their economic value, only the amount of demand, the amount of money, which must be exchanged
for them.
This counters the claim that the only value a thing has is that set and measured by the market:
The toys of the wealthy are much in demand, but of little value. The goods needed by the poor are
to them of great value, but it may be that those poor are only able to demand a meager portion of
them. Markets only measure demand. They need not measure value. This is the primary inadequacy of
markets.
So because money is demand, or more exactly a token or instrument of demand, it serves as a 'medium'
of exchange: Because money is not demand for any particular good or service, but is demand for any
offered good or service, it may be exchanged for any offered good or service. Money is a medium not
in the sense of being an environment for exchange, but in the sense of being a generalized instrument.
It is an abstract good, which is offered in exchange for other goods and services. The individual
who exchanges his good or service for money then himself has equal demand on others for different
goods or services. Money thus flows opposite to the flow of goods and services, not to the degree
of the value of these goods and services, but according to the demand for these goods and services
that are offered.
Goods or services are thus exchanged for an equal demand on other goods or services. Money, then,
is an instrument for comparing the demand for dissimilar objects. However, we have shown it is not
reliable for comparing the value of dissimilar objects.
By mistaking demand for value, the standard definition of money thus implicitly fails to distinguish
between the value of an object, and the demand for that object. In an informal sense, this results
in the failure to distinguish between the needs of an economy, and its wants.To provide another example,
the economy 'needs' streetlights in Highland Park, Mi. It 'wants' yachts in Newport, RI.
If we regard the economy as like a tree, money cannot distinguish between the fruits of a tree,
and its roots.
There is a larger issue. The standard definition of money goes back, essentially unchanged, to
1875. See eg. Wikipedia. It is, implicitly, a key part of the foundations of the entire field of
economics. That it is in error calls into question the soundness of the entire economics project.
Yves here. Over the years, we've regularly criticized economists like Bernanke and Krugman, who rely
on the so-called loanable funds model, which sees banks as conduits of funds from savers to borrowers.
Despite the fact that many central banks, such as the Bank of England, have stressed that that's
not how banks actually work (banks create loans, which then produce the related deposit), central
banks still cling to their hoary old framework. For instance, when I saw Janet Yellen speak at an
Institute of New Economic Thinking conference in May, she cringe-makingly mentioned how banks channel
scarce savings to investments.
Even worse, the macroeconomic models used by central banks incorporate
the loanable funds point of view. This article describes what happens when you use a more realistic
model of the financial system. Even though the paper is a bit stuffy, the results are clear: economies
aren't self-correcting as the traditional view would have you believe but have boom/bust cycles (the
term of art is "procyclical") and banks show the effects of policy changes much more rapidly.
Other economists who have been working to develop models that reflect the workings of the financial
sector more accurately, like Steve Keen, have come to similar conclusions: that the current mainstream
models, which serve as the basis for policy, present a fairy-tale story of economies that right themselves
on their own, when in fact loans play a major, direct role in creating instability. It's not an exaggeration
to depict the continued reliance on known-to-be-fatally-flawed tools as malpractice.
By Zoltan Jakab, Senior Economist at the Research Department, IMF, and Michael Kumhof,
Senior Research Advisor at the Research Hub, Bank of England. Originally published at
VoxEU
Problems in the banking sector played a seriously damaging role in the Great Recession. In fact,
they continue to. This column argues that macroeconomic models were unable to explain the interaction
between banks and the macro economy. The problem lies with thinking that banks create loans out of
existing resources. Instead, they create new money in the form of loans. Macroeconomists need to
reflect this in their models.
Problems in the banking sector played a critical role in triggering and prolonging the Great Recession.
Unfortunately, macroeconomic models were initially not ready to provide much support in thinking
about the interaction of banks with the macro economy. This has now changed.
However, there remain many unresolved issues (Adrian et al. 2013) including:
• The reasons for the extremely large changes to (and co-movements of) bank assets and bank
debt;• • The extent to which the banking sector triggers or amplifies financial and business cycles;
and
• The extent to which monetary and macro-prudential policies should lean against the wind in financial
markets.
New Research
In our new work, we argue that many of these unresolved issues can be traced back to the fact
that virtually all of the newly developed models are based on the highly misleading 'intermediation
of loanable funds' theory of banking (Jakab and Kumhof 2015). We argue instead that the correct framework
is 'money creation' theory.
In the intermediation of loanable funds model, bank loans represent the intermediation of real
savings, or loanable funds, between non-bank savers and non-bank borrowers;
Lending starts with banks collecting deposits of real resources from savers and ends with the
lending of those resources to borrowers. The problem with this view is that, in the real world, there
are no pre-existing loanable funds, and intermediation of loanable funds-type institutions – which
really amount to barter intermediaries in this approach – do not exist.
The key function of banks is the provision of financing, meaning the creation of new monetary
purchasing power through loans, for a single agent that is both borrower and depositor.
Specifically, whenever a bank makes a new loan to a non-bank ('customer X'), it creates a new
loan entry in the name of customer X on the asset side of its balance sheet, and it simultaneously
creates a new and equal-sized deposit entry, also in the name of customer X, on the liability side
of its balance sheet.
The bank therefore creates its own funding, deposits, through lending. It does so through a pure
bookkeeping transaction that involves no real resources, and that acquires its economic significance
through the fact that bank deposits are any modern economy's generally accepted medium of exchange.
The real challenge
This money creation function of banks has been repeatedly described in publications of the world's
leading central banks (see McLeay et al. 2014a for an excellent summary). Our paper provides a comprehensive
list of supporting citations and detailed explanations based on real-world balance sheet mechanics
as to why intermediation of loanable funds-type institutions cannot possibly exist in the real world.
What has been much more challenging, however, is the incorporation of these insights into macroeconomic
models.
Our paper therefore builds examples of dynamic stochastic general equilibrium models with money
creation banks, and then contrasts their predictions with those of otherwise identical money creation
models. Figure 1 shows the simplest possible case of a money creation model, where banks interact
with a single representative household. More elaborate money creation model setups with multiple
agents are possible, and one of them is studied in the paper.
Figure 1.
The main reason for using money creation models is therefore that they correctly represent the
function of banks. But in addition, the empirical predictions of the money creation model are qualitatively
much more in line with the data than those of the intermediation of loanable funds model. The data,
as documented in our paper, show large jumps in bank lending, pro- or acyclical bank leverage, and
quantity rationing of credit during downturns. The model simulations in our paper show that, compared
to intermediation of loanable funds models, and following identical shocks, money creation models
predict changes in bank lending that are far larger, happen much faster, and have much larger effects
on the real economy. Compared to intermediation of loanable funds models, money creation models also
predict pro- or acyclical rather than countercyclical bank leverage, and an important role for quantity
rationing of credit, rather than an almost exclusive reliance on price rationing, in response to
contractionary shocks.
The fundamental reason for these differences is that savings in the intermediation of loanable
funds model of banking need to be accumulated through a process of either producing additional resources
or foregoing consumption of existing resources, a physical process that by its very nature is gradual
and slow. On the other hand, money creation banks that create purchasing power can technically do
so instantaneously, because the process does not involve physical resources, but rather the creation
of money through the simultaneous expansion of both sides of banks' balance sheets. While money is
essential to facilitating purchases and sales of real resources outside the banking system, it is
not itself a physical resource, and can be created at near zero cost.
The fact that banks technically face no limits to instantaneously increasing the stocks of loans
and deposits does not, of course, mean that they do not face other limits to doing so. But the most
important limit, especially during the boom periods of financial cycles when all banks simultaneously
decide to lend more, is their own assessment of the implications of new lending for their profitability
and solvency. By contrast, and contrary to the deposit multiplier view of banking, the availability
of central bank reserves does not constitute a limit to lending and deposit creation. This, again,
has been repeatedly stated in publications of the world's leading central banks.
Another potential limit is that the agents that receive payment using the newly created money
may wish to use it to repay an outstanding bank loan, thereby quickly extinguishing the money and
the loan. This point goes back to Tobin (1963). The model-based analysis in our paper shows that
there are several fallacies in Tobin's argument. Most importantly, higher money balances created
for one set of agents tend to stimulate greater aggregate economic activity, which in turn increases
the money demand of all households.
Figure 2 shows impulse responses for a shock whereby, in a single quarter, the standard deviation
of borrower riskiness increases by 25%. This is the same shock that is prominent in the work of Christiano
et al. (2014). Banks' profitability immediately following this shock is significantly worse at their
existing balance sheet and pricing structure. They therefore respond through a combination of higher
lending spreads and lower lending volumes. However, intermediation of loanable funds banks and money
creation banks choose very different combinations.
Figure 2. Credit crash due to higher borrower riskiness
Intermediation of loanable funds banks cannot quickly change their lending volume. Because deposits
are savings, and the stock of savings is a predetermined variable, deposits can only decline gradually
over time, mainly by depositors increasing their consumption or reducing their labour supply. Banks
therefore keep lending to borrowers that have become much riskier, and to compensate for this they
increase their lending spread, by over 400 basis points on impact.
Money creation banks on the other hand can instantaneously and massively change their lending
volume, because in this model the stocks of deposits and loans are jump variables. In Figure 2 we
observe a large and discrete drop in the size of banks' balance sheet, of around 8% on impact in
a single quarter (with almost no initial change in the intermediation of loanable funds model), as
deposits and loans shrink simultaneously. Because, everything remaining the same, this cutback in
lending reduces borrowers' loan-to-value ratios and therefore the riskiness of the remaining loans,
banks only increase their lending spread by around 200 basis points on impact. A large part of their
response, consistent with the data for many economies, is therefore in the form of quantity rationing
rather than changes in spreads. This is also evident in the behaviour of bank leverage. In the intermediation
of loanable funds model leverage increases on impact because immediate net worth losses dominate
the gradual decrease in loans. In the money creation model leverage remains constant (and for smaller
shocks it drops significantly), because the rapid decrease in lending matches (and for smaller shocks
more than matches) the change in net worth. In other words, in the money creation model bank leverage
is acyclical (or procyclical), while in the intermediation of loanable funds model it is countercyclical.
As for the effects on the real economy, the contraction in GDP in the money creation model is
more than twice as large as in the intermediation of loanable funds model, as investment drops more
strongly than in the intermediation of loanable funds model, and consumption decreases, while it
increases in the intermediation of loanable funds model.
Banks are Not Intermediaries of Real Loanable Funds
To summarise, the key insight is that banks are not intermediaries of real loanable funds. Instead
they provide financing through the creation of new monetary purchasing power for their borrowers.
This involves the expansion or contraction of gross bookkeeping positions on bank balance sheets,
rather than the channelling of real resources through banks. Replacing intermediation of loanable
funds models with money creation models is therefore necessary simply in order to correctly represent
the macroeconomic function of banks. But it also addresses several of the empirical problems of existing
banking models.
This opens up an urgent and rich research agenda, including a reinvestigation of the contribution
of financial shocks to business cycles, and of the quantitative effects of macroprudential policies.
Disclaimer: The views expressed here are those of the authors and do not necessarily represent
those of the institutions with which they are affiliated.
craazyboy, June 19, 2015 at 11:35 am
Actually, the concepts of the money multiplier [hence the related concept of "bank money"]
and loanable funds both existed simultaneously in my econ 101 book in college. But they were in
different chapters.
The money multiplier, a consequence of fractional banking, does have a mathematical limit and
it depends on the reserve ratio. Of course since banks are in the middle, they have control over
whether they lend to the limit or not, if loan demand is there. If no loan demand, they would
be "pushing on string", which was in yet another chapter in my econ 101 book.
A common layman misinterpretation of the money multiplier is that banks have their own printing
press. That is not true – the banking system a whole creates bank money. When a loan is made,
the bank now has an "asset" on it's balance sheet. That where "capital ratios" come into play
limiting an individual bank.
craazyboy, June 19, 2015 at 11:07 am
Capital ratios, depending on how many SIVs you have. But if you get limited there, those numbers
can be fudged. Or if you don't like faking complicated financial statements, you can always say,
"faakit, I don't wanna be a bank. I'll be a CDO mill instead. Then maybe expand into insurance
with CDS. That sounds better."
But economists are hopeless. They spend 50 years arguing over whether the sky is blue or green,
then one comes along and says it's blue-green.
susan the other, June 19, 2015 at 11:32 am
Yes. Big ones. So big that it became necessary to start writing up more derivative contracts
than loan contracts. This post explains derivatives better than anything I have read and it doesn't
mention them once! But really, why else would Greenspin love them so much. Because it was the
perfect way for banks to have all the cake and eat all the cake.
As long as banks' balance sheets were OK, they were OK, except that they could crash the entire
world economy and then, oops, they weren't OK any more.
So enter derivatives to ensure their own balance sheets. Problem solved.
Banks create money when they issue loans to others: they obviously can't issue a loan
to themselves should they find themselves in a liquidity/solvency crunch. Hence the need for bailouts
by somebody else.
Nathan Tankus, June 19, 2015 at 2:26 pm
This is the problem with using imprecise language like money.
Banks create deposits which are money to non-bank businesses, individuals, state and local governments
and sometimes foreign governments. Deposits are however, not money to other banks. Settlement
balances (money in essentially bank's checking accounts at the central bank) are money to them
(in the sense that they can use them to settle their liabilities). A bank needs these to clear
payments with other banks and the government.
Normally the central bank makes sure there are enough settlement balances in the system to
clear payments between banks and those balances are distributed through the banking system when
banks make daily unsecured loans to each other. In the crisis however, since all these loans were
unsecured, banks stopped lending to each other. The government then had to guarantee interbank
loans in the trillions to get the payments system functioning again.
Bailouts serve to make people believe the financial system is stabilized and to increase their
official capital levels (capital levels matter because regulators are supposed to take over and
resolve banks that are under-capitalized or even have negative equity). They are however, not
essential to keep these banks going.
Letting banks lie about the value of their assets (which happened on a widespread level after
the financial crisis) is just as effective as keeping these banks running as official bailouts.
The dirty little secret is that as long as the central bank makes sure that banks can borrow
on the inter-bank loan market (or directly lend to them) and regulators all agree to lie (or not
check) about the net worth and capital levels of a bank, they can stay in business. This is the
nature of accounting control frauds in the modern age.
washunate, June 19, 2015 at 3:25 pm
So that leaves my original question. What is the policy value of the semantics?
In your description, banks are still constrained in their ability to lend. In order to loan
more, to create new money, government has to make sure the bank IOUs are interchangeable with
the national currency.
Nathan Tankus, June 19, 2015 at 3:45 pm
a) this is not true. in payment systems where bank liabilities don't trade at par (like antebellum
united states) what adjusts is the value of the liabilities, not the banks ability to issue liabilities.
b) the definition of a modern currency is making sure that insured deposits in the same country
equal each other in value. The most important Central Bank mandate is to preserve the integrity
of the payments system. not putting enough settlement balances into the banking system means making
interest rates explode and the payments system freeze. If you think that banks are at all constrained
in lending by the threat of the central bank deliberately blowing up the payments system country
wide, I have some penny stocks i would like you to invest in. What's interesting about Europe
right now is that they don't have a "federal" (as in europe wide) insured deposit system and thus
there is no such thing as insured deposits in the normal sense. as a result the ECB has blown
up the payments system in cyprus and seems to be contemplating doing the same in Greece and wrote
down deposits (in many ways like the antebellum banking system). Note that even in this case lending
hasn't been constrained, the resulting liabilities have just been written down and may be written
down in the future.
C) saying that banks are "constrained in lending" when this "constraint" is something that doesn't
exist in the real world ie the United States and most central banks in the world refusing to provide
the necessary amount of settlement balances to clear payments between banks at par is much more
of a semantic game with no value for understanding policy than the reverse.
washunate, June 19, 2015 at 4:02 pm
I hear what you are saying. What you are saying is that there is no alternative.
The public must bail out the banksters.
Ben Johannson, June 19, 2015 at 2:37 pm
They can't create money for the payments system. U.S. banks don't make dollars. British banks
don't make pounds sterling. They make bank IOUs for the deposit system.
Code Name D, June 19, 2015 at 3:32 pm
I am not sure this is completely true. The point of secularization is to sell these assets
into the shadow markets. So not the markets hold the assets just created by the banks while the
bank takes their money in exchange.
To create more money, all they have to do is find more loans to underwrite, then secularize the
results.
Ben Johannson, June 19, 2015 at 3:49 pm
Banks can create money denominated in the government's currency but they can't create that
currency. If you get a bank loan for $10,000 you're being given a bank IOU with a value of $10,000
- which means the bank isn't actually loaning you anything at all. They're agreeing to clear a
payment through the reserve system in exchange for a series of small payments from you in the
future.
Actual dollars can only exist in a reserve account or as cash.
OpenThePodBayDoorsHAL, June 19, 2015 at 4:22 pm
So far no one is mentioning the elephant in the room: why are money and credit necessarily
interconnected?
We could certainly have money, produced in a quantity that matched underlying economic activity
or population growth or something. On top of that we could have savings, investment, fractional
lending etc.
Instead we have a system where every banking crisis is also a monetary crisis.
Milton Friedman suggested a desktop computer that created 2% more money each year.
Then there are those who suggest using some rare, shiny substance that is materially difficult
to obtain:
Instead when we get a banking crisis (year 7 and counting) the only possible response is to
flood the system with scrip, with predictable results (runaway inflation, this time in financial
assets, last time in housing, the time before in commodities). Everybody moaning about the plunge
in oil prices, but nobody seems to ask how/why they got to $140/bbl in the first place. Excess
capacity everywhere you look, from Chinese steel to US college grads.
So let's have a real debate, not just argue how many angels are on the head of our current
money/credit pin.
washunate, June 19, 2015 at 3:33 pm
Yeah, we very much agree here. Banks can create bank IOUs. Just like I can create wash IOUs.
I, wash, do solemnly and seriously promise to give you a trillion dollars next week.
Now, gimme a trillion dollars today!
If the government backs my $1 trillion promise, then the government created the money, not
me. If the government doesn't back my promise, then it ain't worth jack squat in payments systems.
I couldn't even buy a coffee at Starbucks with it, nevermind a car or a house or something.
craazyman, June 19, 2015 at 4:32 pm
How does a dude driving a car with a gas gauge run out of gas?
hahahahah
If you fkk things up so bad you can't pay for your money making machine to make money then you
can't make money. But it's not cause you can't make money, it's because you can't pay for your
money making machine to crank it out1
How do all these boneheads get so rich if they can't make money? They could never get that
rich if they just loaned money that was already there. No way.
They don't get rich linearly. They get rich exponentially. that's inconsistent with Not making
money whenever they want. Loanable funds is linear. Making is exponential.
Where does the money come from if they dont make money? The first bank had to have money to start.
where did that come from? It might have come from the govermint. But the govermint had to borrow
it from people. They probably got it from a bank someplace that cooked it up. There was probably
a bank in the Garden of Eden. That's probably what the snake was. A Banker. hahahahahahah. The
apple was a loan. Then reality set it when Adam and Eve realized they had to hit the mall to buy
some clothes so they could look for jawbs to pay it off.
craazyboy
June 19, 2015 at 4:45 pm
You read that in David Graeber's book, didn't you?
susan the other, June 19, 2015 at 11:37 am
They can create money as long as there is someone to loan it to. Bec. they have to mind their
own assets and liabilities to be legit.
But the trick is that they don't have to pay attention to reality as long as their books balance.
It is such a clever fiction.
Theoretically it could work to smooth the bumps in an economy, except that it causes such precipitous
crashes nobody can recover. One small detail.
washunate, June 19, 2015 at 12:32 pm
How can an entity that can create money ever have unbalanced books?
todde, June 19, 2015 at 12:43 pm
When the economy starts to shrink, earning potential goes down as do asset prices.
This prevents banks from making new loans. Banks loans are a function of past and future earnings.
At the same time the ability of the debtor to repay loans on the books is also curtailed.
This leads to a bailout.
cripes, June 19, 2015 at 3:37 pm
@washunate:
Now you're being obtuse. Deliberately?
It's clear they can create asset-money by loaning asset-money to borrowers.
We're not talking about paper bills here, which are a very small part of circulating "money."
washunate, June 19, 2015 at 3:44 pm
No, this is very important. A currency issuer can issue unlimited amounts of currency.
An entity that is not a currency issuer cannot. They are constrained by the existing resources.
human, June 19, 2015 at 11:41 am
Of course banks don't _need_ bailouts. They get them because they are able to coerce the populace
through the great circle jerk of the Loanable Funds model!
washunate, June 19, 2015 at 12:30 pm
What do you mean banks don't need bailouts?
human, June 19, 2015 at 12:53 pm
Bailouts are used to bolster the publics' perception of the Feds' regulatory authority and
responsibility and spread some more wealth around. Look at what happened to AIG!
washunate, June 19, 2015 at 1:01 pm
Exactly, look at what happened. Goldman Sachs would have ceased to exist without government
support. The smartest bank on the planet was incapable of creating money.
human, June 19, 2015 at 1:39 pm
"ceased to exist" I find that very hard to believe. They might have had to cut bonuses…maybe.
washunate, June 19, 2015 at 3:40 pm
Well sure, we can't prove something that didn't happen. But we can point to how desperate actors
behaved at the time. For example:
In light of the unusual and exigent circumstances affecting the financial markets, and all
other facts and circumstances, the Board has determined that emergency conditions exist that
justify expeditious action on this proposal
Unusual, exigent, emergency, and expeditious. In just one sentence.
Desperate?! They were handed an opportunity to gorge at the Fed discount window by becoming
a bank holding company!!! They didn't hesitate and the rest is history.
Your comprehension seems to be so much neoliberal twaddle…meant for the proles. Of course they
had their avarice covered by so much high-sounding legalese.
If banks could create new money, they wouldn't need government bailouts.
Also, If banks could create new money, they wouldn't need to borrow depositors' money.
And, If banks could create new money, you wouldn't need depositors' insurance.
All of these speak to the "banks create money" idea as nonsense. Banks create credit.
However, the "loanable funds" idea is still nonsense. Loans are both made from and deposited to
loanable funds, for a net of zero. This is critical, because it completely nullifies the idea
that government borrowing affects interest rates by creating a shortage of funds.
Government spending does not slow other financial activity in the economy, which means
the entire conservative paradigm in macroeconomics is garbage.
washunate, June 19, 2015 at 3:59 pm
Well said, it's all nonsense.
Personally I would tweak "banks create credit" to more specifically say that banks convert
borrower credit into government credit. It's a transformation, an exchange, not an act of
creation.
It's the borrower, not the bank, that supplies the credit. Indeed, a bank that systematically
makes loans exceeding their borrower's ability to repay quite predictably goes out of business.
Vatch, June 19, 2015 at 4:08 pm
As Sardonic and Susan the Other have both pointed out, banks create money only when they issue
loans to others. They aren't able to create money in any other ways. If there aren't borrowers,
then the banks can't create money.
And when someone fully repays her or his bank loan, the money that was created by that bank
loan is destroyed.
But of course the bankers have a multitude of ways to game the system.
fledermaus, June 19, 2015 at 10:57 am
It's easy to make money when you can lend the same $100 to ten different people.
sardonic, June 19, 2015 at 11:14 am
Money is credit, so your statement does not make sense. What is happening in the scenario you
imagine is you are creating ten different loans. These dollars are no more "same" than are numbers
in different banks demand deposit accounts.
todde, June 19, 2015 at 11:02 am
Since we run massive trade deficits there are.always dollars.offshore that can be lent to banks
to meet any reserve requirements.
So banks ability to make.loans and create money would be a function of society's ability to repay.
Another point, banks don't create money out of thin air, they create money based on prior earnings
(secured loans) or future earnings (unsecured loans).
Ben Johannson, June 19, 2015 at 2:41 pm
Bank loans aren't derived from cash flow, they are entries on the balance sheet. They come
from nowhere and go back to nowhere when a loan is paid back.
Also, all dollar deposits exist within the computers of the Federal Reserve so there's nothing
"offshore" to bring back.
todde, June 19, 2015 at 2:51 pm
Not all dollar reserves are sitting in the federal reserve , although many are.
And cash flow of the borrower matters.
Ben Johannson, June 19, 2015 at 3:08 pm
All dollar deposits exist on computers at the Federal Reserve. Anyone at the Fed, Treasury
and CBO can tell you this.
Cash flow of the borrower is a matter of underwriting standards, not capacity to extend a loan.
Jesse, June 19, 2015 at 11:14 am
Are all 'banks' the same?
In a regime where the banking authority imposes a strict 50% reserves requirements and eliminates
the gimmickry of overnight sweeps to gimmick the base of assets and liabilities, and stresses
certain types of higher quality reserves and a conservative valuation, are the 'banks' the same
as a regime where reserve requirements are minimal and easily financialized?
Is an economy where loans are intimately tied to organic growth through 'real' economic activity
and a high velocity of money (sorry Austrians but it does mean something) different from one in
which the banks are largely preoccupied with speculating with their own trading books and money
supplied by the central banking authority monetizing debt?
A model that fits a particular circumstance which is itself is rather distorted from the historical
norm is just that. An example of a particular circumstance and not a general model for a range
of conditions.
susan the other, June 19, 2015 at 11:53 am
This post was killer. It left us all with the question, Well just how do we change our financial
behavior to fit the real model, the money creation model. Because we all went blithely on our
way for decades thinking things were balancing out when in fact they weren't.
It sounds a little Minsky, in that the good times always crash but nobody knows what to do
about it. So at least Minsky had an inkling of this. And there were plenty of crashes when banks
really did intermediate loans, but they were recoverable.
When did loan intermediation end? 1913 and with the creation of the Federal Reserve? If so
it is amazing it was mythologized for so long. One way to begin to get real would be to analyze
the value of money, and its creation, by what it accomplishes. So, that's after the fact and hard
to do in a "free market" but the FM is also another myth. MMT looks at this very clearly. We don't
need loans to run the sovereign business of the country. That takes care of a large chunk of the
mess right off the top.
susan the other , June 19, 2015 at 2:12 pm
yes. it's scary. Mistakes are easier to make than progress. But we have much better analytics
now… maybe we can estimate what will happen and actually maintain a steady course. I'd like to
think that.
Synoia, June 19, 2015 at 12:08 pm
Step 1. When did loan intermediation end? 1913 and with the creation of the Federal Reserve?
Step 2. Getting off the gold standard in 1972.
Min, June 19, 2015 at 12:26 pm
Back in the free banking era of the 19th century, there was a bank in Rhode Island that issued
$600,000 in bank notes backed by 7 bits ($0.875 in coins) in the vault. ;)
Source: A talk on CSPAN book TV a few years ago. Sorry I can't be more definite.
craazyboy, June 19, 2015 at 1:06 pm
That was back when we/Europe were still trying to decide if we should do fractional gold banking,
or if banking based on the banker's reputation was adequate. 'Course bankers found that cheating
on fractional gold banking was very profitable as well.
Adam1, June 19, 2015 at 1:12 pm
The basis of loans create deposits has been around since shortly after the creation of double-entry
bookkeeping. The FED's existence only stabilizes and standardizes the interbank clearing process
and has little to do with loans create deposits. The gold standard only fixed foreign exchange
rates and floated domestic rates, it had little impact on loans create deposits.
Larry Headlund, June 19, 2015 at 12:53 pm
When did loan intermediation end?
According to Lombard Street (1873) by Walter Bagehot lending as a function of 'banks' preceded
their accepting of deposits by some years.
Min, June 19, 2015 at 12:21 pm
Can't we all agree that banks create money? Fractional reserve banking makes no sense unless
banks create money. I learned that in high school, fer crissakes!
washunate, June 19, 2015 at 12:58 pm
No, we can't.
:)
But seriously, it's important to understand why there are differences of opinion. The monetarists
(of all stripes, this is not a left/right thing) want people to think that money (as in currency)
is created by banks because that obfuscates the real actor – the government.
When the government accepts the bank IOU as exchangeable 1:1 with the national currency, then
it is the government that has created more currency units, not the bank. But if people can be
convinced to ignore that little step, it looks like banks create the currency units themselves.
And once you accept those bank IOUs as legitimate currency units in the boom times, well, you've
committed to a policy of bailing out criminal and/or insolvent management teams during the bust
times.
Banks don't create money. You were taught wrong. The model used where banks create money does
not match the accounting a bank uses. There is no money multiplier.
[Note that several first world countries have reserve requirements of zero percent. They do not
suffer hyperinflation, as the money multiplier would suggest. Even Ben Bernanke said that the
reserve percentage only affected the cost of money, and that he would have preferred the US also
move to a zero percent reserve.]
craazyboy, June 19, 2015 at 4:21 pm
Banks create credit, but common usage sometimes interchanges money and credit when the distinction
isn't relevant to the narrow context of the discussion.
There is a money multiplier. No one made it up – if you have fractional banking it is there.
Math says it can happen. You could call it a credit multiplier if you prefer, but I try and limit
how many new words I make up.
The reserve ratio limits the money multiplier to a non-infinite number. The reason we have
bank reserves is so in theory banks have some cash on hand to satisfy deposit withdrawals.
Capital ratios are used by regulators to monitor bank solvency. Some counties have zero reserve
requirements. I guess the CBs there will FedEx your money to you. Who knows. I'll take the FDIC
insurance.
Canada has a 0 reserve requirement. Canada has a housing bubble. So does Oz. The EU has even
more lax capital ratio requirements than the US. The EU is now a basket case. The US has asset
bubbles.
Bernanke is an a-hole.
nothing but the truth, June 19, 2015 at 1:30 pm
when Y is talking about investment / saving, she is talking about the real side of the picture.
when you are talking about the loan-> deposit causality, this is from the technicality of the
financial system.
both are correct because they are talking about apples and oranges.
the money multiplier story is something that economists have spread and they are _so_ surprised
to find out that it is not the (complete) truth. partly this story comes from history because
that is how banks started. That is because gold is a real resource – you cannot just create it
fictionally and lend it. Now that money is nothing, there cannot be a shortage of nothing, unless
it is to keep the "people in their place". When the likes of Goldman have a shortage of money,
it is produced out of nothing.
The view of money multiplier is correct, except for the causality part. loans create deposits,
but those deposits belong to someone.
From the operational side of things, there is not much difference. Whether the bank creates loans
and then deposits, or deposits first and then loans, the fact remains that the bank is on the
hook for the loan (to its capital reserves) if it defaults, so the bank has to be careful whom
to lend to. Reckless lending can even lead to jail time for the lender (or it used to).
so long store short, there is not much to see in this technical view of things. Yes under the
hood the car is very complicated, has 80+ microprocessors and so on. The function of the car is
to be driven. To obsess about spark plugs is to forget the function of the car – transport.
This is the real question – what is the function of money in the real economy, who is benefiting
from the legalized frauds, and how to stop this and bring finance to serve the real economy, not
vice versa. This is political economy, not really finance. Yes to fix something you have to understand
it. But it should be understood that we diagnose in order to prescribe.
DolleyMadison, June 19, 2015 at 2:01 pm
Wow – A few days ago Maxine Waters wrote an op-ed about the 2-tier justice system when it comes
to bankers – surprisingly printed by American Banker. So I try to click on it and the link is
DEAD. So I search for the article and found it cross posted on 3 other sites – and on each one
the link was broken. WOW. And we wonder how the "2-tier justice system" became that way…
See dead links below:
Big Banks and America's Broken, Two- Tiered …
http://www.americanbanker.com/bankthink/big-banks-and-americas...
Jun 16, 2015 · In February, federal prosecutors began a 90-day examination to determine whether
to bring cases against individuals for their role in the 2008 financial …
Big Banks and America's Broken, Two- Tiered …
grabpage.info/t/www.americanbanker.c…/bankthink/big…Cached
America, American, Bank, Banker, Banks, Big, Bond, Broken, Buyer, Justice, Mortgage, National,
News, PaymentsSource, System, The, Think, Tiered, Two, and
Big Banks and America's Broken, Two- Tiered …
housingindustryforum.com/industry-newswire/american…Cached
Jun 16, 2015 · … Two-Tiered Justice System By American Banker | June 17, 2015. SHARE Read Article.
Comments.
Lambert Strether, June 19, 2015 at 3:07 pm
Adding epicycles to dynamic stochastic general equilibrium models, because markets (I would
argue) do not equilibriate (though they may be equilibriated, as with LIBOR).
Trying to make a "like a fish needs an epicycle" joke here, but gotta run….
pcle, June 19, 2015 at 3:23 pm
"Figure 2 shows impulse responses for a shock whereby, in a single quarter, the standard deviation
of borrower riskiness increases by 25%."
So it looks like in this model "shocks" just come from outer space. There is no sense in which
the system itself generates crisis as part of its very working ? And where's the fraud parameter
?
Jesper
June 19, 2015 at 4:00 pm
Some central bankers believe that banks create money.
Some central bankers believe that financial markets can self-regulate.
Given the above facts about central bankers, can we conclude if central bankers always know what
they are talking about (even when it comes to monetary policy)?
Reply ↓
horostam
June 19, 2015 at 4:05 pm
ok, so I understand that loans create deposits, but…im confused about the reverse.
I have this crazy exercise i try to do.
I try to visualize the thought experiment of all loans and govt deficits being paid back so that
there are 0 us dollars in existence. (kind of like an economic version of reimagining the big bang
in reverse)
Leaving aside for the moment the fact that there is not enough money in existence to make all interest
payments… (is this even true?)
how does the money get destroyed when a loan is paid back? You will say "the balance sheets are simply
adjusted, a deposit and a loan simply disappear."
i can visualize this, but i dont understand it.
So what is the difference, for the bank, between a paid back loan and a default on the loan?
and what happens to the interest payments (when they are made)? they move from deposits to reserves
(or equity or whatever)… how are they seperated from the deposits that simply "disappear?"
I would really like to understand this…
Reply ↓
Nathan Tankus, June 19, 2015 at 4:25 pm
"So what is the difference, for the bank, between a paid back loan and a default on the
loan?"
when a person makes a principal payment on a loan their account is debited and the value of
their debt (an asset to the bank) is decreased. when a person defaults on a loan the value of
their debt ( again an asset to the bank) becomes zero (well actually more like pennies on the
dollar since it will likely get sold to a debt collector). In other words, one shrinks the bank's
balance sheet while keeping it's net worth the same while the other decreases the bank's net worth
"and what happens to the interest payments (when they are made)? they move from deposits
to reserves (or equity or whatever)… how are they seperated from the deposits that simply "disappear?""
interest is paid in the same process ie debiting the borrower's account. the difference is
that interest payments increase the bank's net worth since they have less liabilities ( ie less
deposits) without decreasing the value of their asset (the borrower's debt).
In short, banks lend to increase their net worth.
horostam, June 19, 2015 at 4:49 pm
In other words, one shrinks the bank's balance sheet while keeping it's net worth the same
while the other decreases the bank's net worth
do you mean "the banking system's net worth?"
if (in both cases) the loan asset value goes down, the only way net worth stays the same is if
deposits decrease proportionately.
What if your deposit account is at another bank? What is the difference, to an individual bank,
if its a default or principal payment?
Their liability side doesnt change…
Clearly i am missing something…
craazyboy, June 19, 2015 at 4:27 pm
"So what is the difference, for the bank, between a paid back loan and a default on the
loan?"
In the case of default, the bank puts your house on it's balance sheet and it is then house
money.
Interest is tricky. It comes from future years 31 thru 33.
Nathan Tankus, June 19, 2015 at 4:31 pm
yes i abstracted from collateral to make the basic point.
if the loan is collateralized than the fall in the bank's net worth from a default is equal
to the value of the loan minus the value of the collateral.
This is part of why so many people were so cavalier about lending in the housing market because
people assumed that rising capital gains would keep these loans profitable even if the rate of
default increased.
Of course when housing prices fell and people started to take capital losses…. and here we
are.
The influence of the U.S. in financial flows extends far outside national
borders. A
study by Robert N.McCauley, Patrick McGuire and Vladyslav Sushko of the Bank for International Settlements
estimated that the amount of dollar-denominated credit received by non-financial borrowers outside
the U.S. totaled $9 trillion by mid-2014. Over two-thirds of the credit originated outside the U.S.,
with about $3.7 trillion coming from banks and $2.7 from bond investors. The report's authors found
that dollar credit extended to non-U.S. borrowers grew much more rapidly than did credit within the
U.S. during the post-global financial crisis period.
Almost half of this amount went to borrowers
in emerging markets, particularly China ($1.1 trillion), Brazil ($300 billion), and India ($125 billion).
In the case of Brazil, most of the funds were raised through the issuance of bonds, while bank lending
accounted for the largest proportion of credit received by borrowers in China. Much of this credit
was routed through the subsidiaries of firms outside their home countries, and balance of payments
data would not capture these flows.
The study's authors attributed the rise in borrowing in emerging markets to their higher interest
rates. Consequently, any rise in U.S. interest rates will have global repercussions. The growth in
dollar-denominated credit outside the U.S. should slow. But there may be other, less constructive
consequences. Borrowers will face higher funding costs, and loans or bonds that looked safe at one
interest rate may be less so at another. This situation is worsened by an appreciating dollar if
the earnings of the borrowers are not also denominated in dollars. The rise in the value of the dollar
has already prompted
reassessments of financial fragility outside the U.S.
All this puts U.S. monetary policymakers in a delicate position.
Ms. Yellen has made it clear that the Fed is in no hurry to raise interest rates. The Federal
Reserve wants to see what happens to prices and wages as well as unemployment before it moves. The
appreciation of the dollar pushes that date further into the future by keeping inflation rates depressed
while cutting into the profitability of U.S. firms. While the impact of higher rates on credit markets
outside the U.S. most likely has a relatively low place on the Fed's list of concerns, Fed policymakers
certainly are aware of the potential for collateral damage.
All this demonstrates the discrepancy between the diplomatic and financial power of the U.S. On
the one hand, the U.S. must deal with countries that are eager to claim their places in global governance.
The
dominance of the U.S. and other G7 nations in international institutions is a relic of a world
that came to an end with the global financial crisis. On the other hand, the dollar is still the
predominant international currency, and will hold that place for many years to come. The use of the
renminbi is slowly growing but it will be a long time before it can serve as an alternative to the
dollar. Consequently, the actions of the Federal Reserve may have more international repercussions
than those of U.S. policymakers unable to cope with the shifting landscape of financial diplomacy.
... Among her most influential work is the research she did with Gourinchas when she was at Princeton
on the role of the United States in a globalized financial system. Blanchard says it "changed
the discussion on the current account deficit in the United States."
Before the recent global financial crisis, when economists and politicians were concerned about
the ballooning U.S. current account deficit, Gourinchas and Rey showed that the U.S. position
was not as bad as it looked because of the country's role as the center of the international financial
system.
"Although the U.S. was running a big trade deficit, economists were not taking into account the
large amounts the U.S. was earning on the financial side from capital gains and changes in the
value of the dollar," Gourinchas told F&D.
"For example, almost all U.S. foreign liabilities are in dollars, whereas approximately 70 percent
of U.S. foreign assets are in other currencies. So a 10 percent depreciation of the dollar increases
the value of foreign assets and represents a transfer of about 5.9 percent of U.S. GDP from the
rest of the world to the United States. For comparison, the trade deficit on goods and services
in 2004 was 5.3 percent of GDP. So these capital gains can be very large."
As Gourinchas and Rey (2005) pointed out,
a depreciation of the U.S. dollar has two beneficial effects on the external position of the United
States. It helps boost net exports and increases the dollar value of U.S. assets.
Gourinchas and Rey said that the U.S. position at the center of the system gave it what they called
an "exorbitant privilege"... The exorbitant privilege, Rey and Gourinchas explained, came about
because the United States could borrow at a discount on world financial markets and get high yields
on its external assets. They tracked how the United States had gradually taken on riskier overseas
investments.
"Then we pushed these ideas further, by pointing out that the key role of the United States makes
it also look very much like an insurer for the rest of the world," Rey explains. ...
Gourinchas said Washington has become more like the world's venture capitalist since the 1990s.
"During the whole period, U.S. assets have shifted more and more out of long-term bank loans toward
foreign direct investment (FDI) and, since the 1990s, toward FDI and equity. At the same time,
its liabilities have remained dominated by bank loans, trade credit, and debt-that is, low-yield
safe assets.
"Hence, the U.S. balance sheet resembled increasingly one of a venture capitalist with high-return
risky investments on the asset side. Furthermore, its leverage ratio has increased sizably over
time."
Rey says they expanded on this research during the global financial crisis, finding that the United
States had reversed its role by channeling resources to the rest of the world through its external
portfolio-on a large scale. "Our estimate is 13 to 14 percent of U.S. GDP in 2008 alone. So that
was very significant."
The United States was providing "some sort of global insurance to the world economy and the rest
of the world-earning the equivalent of an insurance premium in good times and paying out in bad
times. And that's exactly what we see in the data."
"While the United States enjoys an exorbitant privilege on one side," says Rey, "it also, as global
insurer, has an exorbitant duty in time of crisis on the other."
George H. Blackford said...
"For example, almost all U.S. foreign liabilities are in dollars, whereas approximately
70 percent of U.S. foreign assets are in other currencies. So a 10 percent depreciation of the
dollar increases the value of foreign assets and represents a transfer of about 5.9 percent of
U.S. GDP from the rest of the world to the United States. For comparison, the trade deficit on
goods and services in 2004 was 5.3 percent of GDP. So these capital gains can be very large."
My problem is that, in the process, they closed all of the factory complexes in Flint, Michigan
except one, and I don't own any of the foreign assets that are going to appreciate if and when
the dollar depreciates.
Stock valuations are based not only on actual assets, but future growth
and earnings potential. If I buy company X, it's because I think company X has a good product,
business plan, and management and is going to be able to grow faster than inflation and faster
than their competitors. I certainly don't want them to liquidate their current assets and give
me my money back.
Precious metals are only worth something because other people want them. Because
they think the metals are worth something because other people want the metals because
they think they're worth something because... They're pretty, they're partly lasting
and they're rare. Until they're not: aluminum used to be a valuable metal. Now I coat
my armpits with it every morning, and half the metal objects I own are aluminum.
If you're expecting a big crash, you're better off purchasing items of utility or
improving your land for raising food.
Never mind that gold and silver were used as money for thousands of years
before the printing press made it possible to issue fiat currency.
Nonsense. Gold and silver can be "fiat" currency just as paper money can
be. Fiat currency just means that a currency derives part of its value from
the government's declaration that it shall function as a currency.
For example, the U.S. government says that the "dollar" must be used to pay
taxes. It could equally say that "gold" must be used to pay taxes, in which
case gold's price would probably go up, since it would be more useful to pay
for things with. That addition in value due to the government'
The volatility of precious metals is known since the Ancient times. Precious metals
have never been a good storage for monetary value, their main advantage was their
ability to be measured easily (either by weighing them or by counting minted coins),
and to be carried around easily - advantages you also have with paper money or with
the numbers on a banking account.
Compare for instance the prices for platinum and gold, two precious metals with
very similar properties: Same frequency of occurrence in the Earth crust, same properties
(density between 19-20 g per cubic centimeter, does not oxydate easily, can be cast
and cold formed), same usages (mainly jewelry, some industrial usage, some coined
or cast into bars to be stored as assets). Their prices have been so volatile recently,
that platinum was about twice the price of gold, and vice versa within just a decade.
Compared with that, the dollar/euro exchange rate is an example of long time stability.
All those things used to be "the conventional wisdom", but nowadays all of those
things have been proven to be quite volatile.
I never believed in "making money from money"... I guess that's called "financial
engineering" nowadays? That kinda insults me as an engineer, since we generally abide
by physical laws. With financial laws, you're pretty much playing games using other
people's rules.
Other people who profess to love money above all else, and play the game to generate
more money out of "nothing", and if you would just give them some of your money to
play with, they'll help you "grow" your money too for a cut of the "take".
But they don't add any value to the economy... they "multiply" it. And then they
can just take "a little bit off the top", because no one will notice.
I'd love to invest in actual production... you know, things that add value and
subtract costs instead of just "multiply" monopoly money. What options are there for
that kind of thing?
How is Q different than the usual Price-to-Book ratio, which formally has the same english
definition of the share price to the per-share Asset value of the company? The price-to-book
value doesn't go below 1 usually because a leveraged buyout of the company could fund it self
by selling off the pieces. The Q-value seems to define assets as replacement value which is
unclear. Is replacement value to be taken as what the assets would trade for in their used
shape, or what they would cost to buy new.
Stock valuations are based not only on actual assets, but future growth and earnings
potential. If I buy company X, it's because I think company X has a good product, business
plan, and management and is going to be able to grow faster than inflation and faster than
their competitors. I certainly don't want them to liquidate their current assets and give
me my money back.
You've missed an important detail. They're not comparing the stock valuation to the assets
alone. They're comparing the stock valuation to what the company would sell for if
purchased. When you sell a company, you're also selling the "good will" and other value inertia
things like brand familiarity, the value that will come from having the company in the future,
etc.
all of its own PCs. If that manufacturing asset is private, it won't show up in the totals. If it
is public it will show up in the totals, but may be valued lower due to location or other factors.
And finally, the efficiency of the asset to deliver more for less is not factored in. We should expect
the trend to continue as lo
Re: Does not understand the market, obviously. (Score:5, Insightful)
by DrLang21 (900992) on Monday May 18, 2015 @02:38PM (#49720425)
When you sell a company, you're also selling the "good will" and other value inertia
things like brand familiarity, the value that will come from having the company in the future,
etc.
These days it is often far dumber than that. Unless a company is paying a dividend, the only
value you have is what someone else is willing to pay for it. In the age of worshiping the Almighty
Growth, dividend payouts are more scarce than they once were and you can't expect a fledgling
company will ever pay out. Stocks like that are little more than trading cards. It's just a popularity
contest slightly regulated by supply. Actual earnings reports in these cases are only meaningful
in the sense that people make buying decisions based on them, but with them having no direct impact
on actual value.
Re:Does not understand the market, obviously. (Score:4, Insightful)
by Marginal Coward (3557951) on Monday May 18, 2015 @11:40AM (#49718719)
Right. It's been rare in recent decades for even individual companies to sell for less than
their asset value, for precisely the reason you mention: that nearly any functioning business
is worth more than the sum of its assets. The canonical example is Coca-Cola (KO), which Yahoo
Finance indicates is currently selling for a price-to-book ratio of 6.28 [yahoo.com]. Should we
expect something like the Coca-Cola company, which has had a strong business for over a hundred
years consisting of a brand name known worldwide, a worldwide distribution system, and of course
its famous "secret formuler" to sell for just the price of its property, plant, and equipment?
Of course, Coke is an extreme example, but it illustrates a point that could be made less emphatically
for nearly any successful business.
Although I don't disagree that the market is fully valued or even over-valued at the moment, this
single q statistic isn't any reason to panic. As indicated in TFS, it's attributable in large
part to near-zero interest rates. With nowhere else to go to earn money, investors flock to the
stock market. That certainly has some potential for inducing a bubble, but I don't think we're
there yet. These extremely low interest rates can't last forever, but since they're controlled
by policymakers who are keenly aware of the implication of raising them, no interest-hike-induced
stock market panic is likely to ensue. So, move along Citizens.
Re:Print some bucks (Score:4, Interesting)
by jfengel (409917) on Monday May 18, 2015 @12:23PM (#49719071) Homepage Journal
Effectively, they have been. The Federal Reserve has been keeping interest rates at levels
that should be causing significant inflation. The goal is to prevent a deflationary spiral by
pumping up the money supply: when you can borrow lower than inflation, people should borrow and
pay it back with tomorrow's less-valuable dollars.
They've been doing that for nearly a decade now, and it has successfully prevented the deflation,
but it's a little baffling that it hasn't touched off more inflation than it has. The consumer
confidence is hovering around 100, which should be a decent level for a stable economy. Unemployment
is still higher than we'd like but it's well off the bust years.
My hypothesis is that people have gotten too used to boom economies. If people aren't getting
triple-digit returns they don't want to invest. What we've got is a very stable economy, exactly
the kind that people should be able to take risks in, but without a real estate boom or dotcom
boom or other scheme to get people to dump their whole life savings and then borrow on margin,
they just don't bother.
Stability means that those who have been left behind continue to be left behind. That's the worst
thing that can be said about the economy. There just isn't an engine of growth.
There are a lot of other factors, I'm sure. Europe went mostly for less aggressive measures, and
their economies haven't come out as well, meaning fewer markets there. China's growth has ceased
to be ridiculous. Oil prices should have sparked some kind of boom, and I've got a nasty cynical
feeling that Wall Street is ideologically predisposed not to invest in the emerging energies as
much as they should.
But a lot of it is the catch-22 you mentioned. Consumers and investors each seem to be waiting
for the other to go first. We've been technically out of recession for more than five years, and
it's gotten past the point where the recovery could be called mere accounting. It's real. But
America just hasn't gotten its feet back under it in the way that it usually does.
The following is adapted from an
interview
by Dawn Bennett, host of the radio show "Financial Myth Busting," with the editor of The New
York Sun, Seth Lipsky. The broadcast aired March 8:
* * *
Ms. Bennett: Seth Lipsky is the author of a book titled "The
Floating Kilogram and Other Editorials on Money from The New York Sun." Before the Sun, he spent
20 years at the Wall Street Journal where he served on the editorial board and helped launch the
Asian Wall Street Journal as well as the Wall Street Journal Europe. Recently, Seth authored a column
in the New York Post titled "Why does the Federal Reserve Fear a Real Audit," which is a question
much on my mind. Seth, welcome.
Mr. Lipsky: Thanks, Dawn. It's nice to be with you.
Ms. Bennett: To put it charitably, Janet Yellen appears to be very alarmed that some members
of Congress want to conduct a comprehensive audit of the Federal Reserve for the first time since
it was created. If the Federal Reserve is doing everything correctly, why should Mrs. Yellen be alarmed
and what does she have to hide?
Mr. Lipsky: Well, that's a great question. The Federal Reserve is already audited, in the
sense that an accountant comes in and goes over its books. But what the Congress is talking about
is a much broader look by the Governmental Accountability Office of how the central bank forms our
monetary policy and what its relations are with foreign banks. The Fed has been fighting this tooth
and nail as an intrusion on its independence. What Congress knows is that the Constitution gave the
monetary power precisely to Congress.
Congress has a constitutional obligation and power to establish the American monetary system and
regulate it, to coin money, regulate its value and that of foreign coinage. This has become a big
issue where we have not taken a really systematic look at how the Fed operates in the hundred years
that it's been in existence. We're starting the second century, and there is growing sentiment in
the Congress to take a look at this. The audit of the Fed measure passed the House as recently as
of September by a vote of 333 to 92, with 109 Democrats joining the Republicans. So the Fed is certainly
growing concerned.
Ms. Bennett: The only reason Janet Yellen has the power to coin money is because Congress
delegated its own power to the Federal Reserve in 1913. Isn't congressional oversight of that power
something that should be considered commonsensical by the Federal Reserve?
Mr. Lipsky: The Fed was created in 1913. The Coinage power was first acted on in 1792,
and coinage was given not to any Federal Reserve but to the United States Mint. When the second central
bank came up to the Supreme Court it was really the tax and the borrowing power that the courts were
looking at when they okayed the authority of the central bank.
Ms. Bennett: We are all accountable to someone or something, so what is wrong about the
Federal Reserve being accountable to Congress?
Mr. Lipsky: Nothing whatsoever. Even Chairman Yellen acknowledges that Congress has the
power. She's just pleading and warning that it not interfere. Why is Congress growing concerned about
this in the first place? It's because the Great Recession has lasted six years and we still do not
feel like we've recovered. What is the Fed's role in this? Could the reason that the Great Recession
lasted so long be attributable to monetary policy? The value of the dollar has been allowed to collapse
below one 1,100th of an ounce of gold. It was a 265th of an ounce of gold when George W. Bush was
sworn in. These are huge questions, and somebody needs to ask them.
Ms. Bennett: It is quite clear to me that the Federal Reserve doesn't want the rest of
us to actually be able to see what they really up to. If we did know what they're doing, do you think
most Americans would just want it shut down? To your point, since 1913, the dollar has actually lost
over 97% of its purchasing power. And of course, the economy has been subjected to one painful depression
and a series of what I call Fed-created recessions. Despite the poor track record, we continue to
support them. At the end of the day, does it matter if we even have a Federal Reserve?
Mr. Lipsky: I think the monetary questions do matter to every American in all positions.
My favorite statistic is that between 1947 and 1971 the average unemployment rate was below 5%. From
1971 until today it was above 6%. What happened in 1971, when the unemployment rate began souring?
What happened is we abandoned the Bretton Woods Gold Exchange System, under which the dollar was
linked to gold, and the money began flowing not in the productive enterprises, but into the money
markets and hedge funds and all these sorts of things and not so much into the kind of investment
that created the great industrial base in America.
Ms. Bennett: Let's talk about that type of investment. According to a government report
I've read, the Federal Reserve made $16.1 trillion in loans to big banks during that financial crisis.
In my opinion, [it once] created the dotcom bubble and the housing bubble. Now, I think it has created
the financial bubble that our markets are experiencing.
Mr. Lipsky: Asset inflation. The debate over inflation is one of the most important debates
in the country. The left wing likes to say there is no inflation, but the dollar is worth only a
tiny amount of the constitutional specie, which is gold and silver, compared to what it used to be
worth. This is what people feel when they hear the government say there's no inflation but they try
to go to the grocery store and they spend $50 or $100 on a tiny plastic bag with a few items in it.
Ms. Bennett: Yes, I know shelf inflation is huge, but I want to talk about commodities
for a bit. The Department of Justice has recently said again that they're going after the big banks
that have been, on an ongoing and continuous basis, manipulating gold and silver. What are your thoughts
on that? Will it work this time? And, if so, is there a simple solution to stop them from doing this?
They seem to get their hands slapped, apologize, and then come back and do it again, and again.
Mr. Lipsky: The news that the Justice Department is looking at something like ten or twelve
major banks for possibly rigging the price of gold broke the same week that Mrs. Yellen was up on
Capitol Hill testifying against an audit of the Fed.
Ms. Bennett: That's right.
Mr. Lipsky: One of the questions that The New York Sun raised is what is she afraid of
then? Is it the danger that the Fed has been meddling in the gold market the way the Justice Department
is alleging commercial banks have been doing it? It's the Fed that regulates commercial banks after
all. I don't want to carry that argument too far. I asked it then in an editorial more in the nature
of a question. But there is a movement in Congress to open up what is called a Centennial Monetary
Commission that after the first hundred years of the Fed, would just take a look at how the whole
system is working.
We've been in a period of fiat money, meaning dollars that have no connection in law to any gold
or silver or other constitutional money. We've been in a fiat system since 1971. Previously, our
dollars were always defined in terms of gold and silver, suddenly they're not. The unemployment average
is much higher; the bankruptcy rate is much higher; the inequality rate has been much higher since
the mid 1970's. Could this be related to the fact that we abandoned sound money in the mid 1970s?
Ms. Bennett: De-dollarization has been going on now for the last few years, and I think
it's because the dollar is continuing to get weaker. Our political system and economic system aren't
what they used to be. Do you think it's possible that if China, for example, standardizes the renminbi
it will start taking power away from the U.S. dollar?
Mr. Lipsky: The abandonment of sound money by the U.S. has brought forth a whole chain
of foreign governments that are alarmed and wonder whether a new system should be set up. China.
There is talk of Russia going on a gold standard; the European Union is having its own catastrophe
with the Euro, and it's wondering whether the dollar ought to be replaced as the international reserve.
The United Nations, for crying out loud, has gotten involved in this.
One of my favorite moments happened in 1965, when the President of France, Charles de Gaulle,
called a thousand reporters into the presidential palace sat them down and addressed them on the
importance of restoring gold as the international standard. His argument was that it puts all countries
on the same basis: America, France, England, China, little countries, and it takes a lot of the partisanship
out of the monetary question internationally, or it takes the politics out of money. It's ironic
that Fed loves to talk about how we shouldn't politicize the monetary system. If one really wants
to de-politicize the monetary system, restoring a gold standard or something like it is exactly the
way to do it.
Ms. Bennett: Mrs. Yellen claims that opening the Fed to an outside audit would "politicize"
- her word - monetary policy.
Mr. Lipsky: Right.
Ms. Bennett: Isn't it political when Senator Schumer, for example, tells her to keep rates
low every time she testifies before the Senate Banking Committee? Isn't it already happening?
Mr. Lipsky: You're exactly right. Why is it always the conservatives that are doing the
politicizing and not the liberals? The big politicization of monetary policy happened in 1978 with
the passage of Humphrey-Hawkins, which said that the Fed has to have a second mandate of increasing
the employment rate or decreasing unemployment, in addition to affecting the value of our dollar.
That opened the door to an enormous political interference in monetary policy.
Ms. Bennett: I know you're not a gold trader or silver trader...
Mr. Lipsky: I'm a newspaperman.
Ms. Bennett: There you go. But I'm certain you follow the markets. What do you think would
be a simple solution to fix the ongoing and continuous manipulation of gold and silver so that we
can get more stability? It does seem, whether it's a Federal Reserve or some other central bank,
that they're interfering with it in order to make the fiat currency look stronger than it really
is.
Mr. Lipsky: I favor a definition by law, enacted by Congress under its constitutional powers
to coin money and regulate its value, and fix the standards of weights and measures - a law passed
by Congress defining the dollar as a fixed amount of gold or silver. Silver was the main specie used
in early years of our republic. The debate over whether gold or silver was better went on through
the 19th century, and we basically decided in 1900, with the passage of the Gold Standard Act, to
make gold the true national money. I think that would go a long way toward solving this problem.
There are a lot of questions as to exactly how to do it, whether there should be a system like Bretton
Woods, which said dollars had to be redeemed in gold if they were held by foreign governments.
Ms. Bennett: In physical gold, not paper gold. In physical gold.
Mr. Lipsky: Right.
Ms. Bennett: There's a big difference there.
Mr. Lipsky: Therefore the price at which one fixes the dollar, the value, the amount of
gold, has to be carefully worked out. But the gold standard is not some flaky thing. This was believed
in by George Washington, Thomas Jefferson, James Madison, Alexander Hamilton, and almost every president
since, up until Richard Nixon. John Kennedy, Woodrow Wilson, Grover Cleveland - they all believed
in it.
Mr. Lipsky: The New York Sun is an online newspaper that I edit. We published in print
until several years ago. It's a leading voice in journalism for a sound dollar. It supports a sound
dollar, limited government, and a restoration of constitutional dollar based on gold or silver. This
is the first radio interview about the book.
Ms. Bennett: Thank you.
Mr. Lipsky: This book contains on this issue 130 editorials that have been issued in the
Sun in recent years. Steve Forbes calls them "brilliant," "irrefutable," and "the Federalist Papers
for the gold standard." James Grant calls the book both "persuasive" and "unfailingly entertaining."
It's a book for every person, not just the experts, and it's available on Amazon.com, the online
bookstore, and you'll have a copy in a day or two if you place your order. "Pure gold" is the way
the economist Judy Shelton described this book. The title, Dawn, comes from the discovery that the
kilogram, which is the last metric weight measure based on a physical object, has been losing mass
- atom by atom. The Sun in one of its editorials said, "Why don't we float the kilogram just like
we float the dollar?" That's from where the title of the book comes.
Ms. Bennett: If President Obama, or our next president, were to become motivated to make
reforms, what do you think the takeaway from this book would to be? Definitely a gold standard?
Mr. Lipsky: So I think the takeaway is going to be that in our monetary system at some
point, the dollar has to be defined in terms of something real rather than just another dollar. At
the moment, if you take your dollar to the central bank to redeem it, they'll give you another dollar.
There's no reference to anything real and no classical measure of value. We have what Jim Grant likes
to call the Ph.D. standard, and I think we need to move away from that to the kind of standard that
sustained our country during its periods of greatest growth and strongest employment.
Ms. Bennett: We always seem to make changes in the United States when things break down,
but not beforehand. What is going to be the instigator to standardize our currency?
Mr. Lipsky: People say things could become a disaster. The last six years have been a disaster.
Ms. Bennett: Exactly.
Mr. Lipsky: Huge amounts of unemployment, not just for a short period, but for six years.
It's consumed almost the entire Obama presidency. People are still trying to figure out their homes,
still trying to figure out how the price of college got more than halfway to $100,000 a year - you
know, all these things. We've been living through this, and I think events have energized Congress
to start looking at this. The Sound Dollar Act, or Centennial Monetary Commission Act, or Audit the
Fed Act, or Free Competition in Currency Act. This is why Janet Yellen - to bring it back to where
we came in - is fighting so hard against the Congress doing this. We're in a constitutional moment
here where Congress is going to take a look at this, I predict.
Ms. Bennett: Do you think they're going to have the guts to do it?
Mr. Lipsky: I think the American people have a lot of guts.
Ms. Bennett: Me, too.
Mr. Lipsky: And at the end of the day, the Congress has to listen to the American people.
Below is an excerpt from a much longer article which you can read in its entirety
here.
It is an interpretation told from a certain perspective, but overall does a fairly decent job
of laying out the general boundaries for the currency war that has been brewing in the background
since 1971 with the collapse of Bretton Woods.
It is more visible to us now because it started manifesting more overtly in the 1990's and since
then has slowly been gaining momentum.
If an analyst does not understand this, even if they do not agree with this particular interpretation,
then they have a poor grasp of the major trends that are driving so much financial and political
activity in the world today.
And fortunately or unfortunately, gold and silver are deeply involved as the traditional supra-national
world currencies.
To put the entire thing in a nutshell, in 1971 the US arbitrarily ended the Bretton Woods Agreement
by closing the 'gold window,' and placed the world on an entirely fiat reserve currency which the
US controlled. Since the US is making monetary policy to suit its own domestic agenda, and increasingly
so over the past twenty years, the stresses that this creates in the world have become unacceptable
to many other countries, some of which are in a position to push back against this.
This tension between the dollar and the rest of the world is either going to end in an acceptable
and workable compromise, or will result in a split of the world into regions of power and financial
influence, most likely three or four. This will be accompanied by conflict on all the usual levels:
diplomatic, economic, and military. We are seeing this today.
Compromise is being thwarted by a neo-conservative, militaristic and nationalistic group in the
States, with clients in other countries, that view an American hegemony as the natural and highly
desirable outcome of the end of the Cold War. However, this is a patriotic cover story for
what is essentially a bid for more money and power for a privileged few who have no patriotism and
little decency, who serve only themselves and their patrons. To quote Edward Abbey, their motives
are 'old as Babylon and evil as hell.'
Whether you agree with this or not does not matter so much, because it is very obvious to those
in countries like the BRICs that this is the situation, and they are acting on this, and the US is
reacting in response. But from reading the literature of the neoliberal economists and neoconservative
politicians, it seems hard to come to any other conclusion based on facts and specific actions which
have been taken by the US, the UK, Canada, Germany and Japan.
I do not think it is too much to say that we are experiencing a type of 'world war.' This seems
to be the type of settling of differences and adjustments that follow major economics shifts, as
we had seen in the first half of the 20th century.
"The Fed effectively acts as the world's central bank, but sets monetary policy only in its own
interest. Under the pressure and the orders of financial oligopolies, it fixes interest rates
and prints money to suit itself, sending economies across the globe into tailspins...
These
policies aren't enacted with the express goal of kicking the global South in the stomach, but
this outcome is a necessary and predictable result of the domination of the global financial order
by a sole country whose interest is to keep its hegemonic status. Other measures are taken precisely
toward this end. This latest round of financial warfare has to be seen in the context of financial
imperialism in general. Countries struggling for sovereignty are also being hit by sanctions,
speculative currency attacks, commodity price manipulation, biased evaluations from US ratings
agencies, massive fines on some banks for what the US has deemed inappropriate practices, and
the prohibition of certain banks from participating in the international banking system...
Not only does the dollar enable the US empire, but also protecting the dollar's status is a
major reason for US imperial wars. American financial and military strength is based upon the
fact that the dollar is the world's reserve and international trade currency, creating a global
demand for dollars which allows the US to print as many greenbacks as it likes. It then pumps
them into the overbloated finance capital system and uses them to fund its criminal wars...
Without this international demand for dollars, the dollar would "correct," and US hegemony
would eventually, inevitably, come to an end. Therefore the US pressures and attacks countries
that attempt to free themselves from the dollar's yoke, not only because they're guilty of lese
majesty, but in order to force the world to maintain the status of the dollar and thus preserve
US domination...
Although it has so far been unsuccessful, the idea of rebalancing the world monetary system
is extremely threatening to the US, and goes a long way toward explaining recent US wars and warmongering,
which may otherwise seem irrational...
The dollar is rallying less because of any supposed US recovery than because of higher global
demand for dollars due to investors' risk aversion, in the wake of the Fed pulling the plug on
QE. Parenthetically, the US economy is definitely not recovering...
While a stronger dollar will not hurt the consumption-based US economy, the rising dollar and
US monetary tightening are about to give the developing world a severe blow..."
"Plunderers of the world, when nothing remains on the lands to which they have laid waste by
wanton thievery, they search out across the seas. The wealth of another region excites their
greed; and if it is weak, their lust for power as well.
Nothing from the rising to the setting of the sun is enough for them. Among all others only
they are compelled to attack the poor as well as the rich. Robbery, rape, and slaughter they
falsely call empire; and where they make a desert, they call it peace."
With the Fed's credibility terminally smeared across the windshield of
the Marriner Eccles-mobile, courtesy of the
latest "dots" projection which proved yet again - and beyond any
doubt - that the FOMC members are just a pack of chimps throwing darts,
and perhaps feces, at a fed funds dart board, we can now honestly say
that the one Fed (ex) member who was 100% accurate (if only in this
case), and who saw the writing on the wall early on and got the hell out
of Marriner Eccles while he could, is Ben Bernanke.
"At least one guest left a New York restaurant with the impression
Bernanke, 60, does not expect the federal funds rate, the
Fed's main benchmark interest rate, to rise back to its long-term
average of around 4 percent in Bernanke's lifetime. "Shocking
when he said this," the guest scribbled in his notes. "Is that
really true?" he scribbled at another point, according to the
notes reviewed by Reuters."
Today… the second of the speech about the end of the world we recently gave at Doug Casey's La Estancia
de Cafayate. (You can catch up on the first part here.) As Yogi Berra would say, America is going
to come to a fork in the road… and it's going to take it.
Right now, the Fed isn't as aggressive as the European Central Bank (which is set to pump €1.2 trillion
into the financial markets by way of its QE program) or as innovative as the Bank of Japan (which
is buying stock market funds as well as bonds by way of its QE).
Valuations are at extreme highs on Wall Street. Take Warren Buffett's favorite measure – market
cap to GDP. With an eight-month exception at the height of the dot-com boom (and you know what happened
next), the value of all outstanding S&P 500 shares is the highest it has been relative to US GDP
in the last 100 years.
Meanwhile, Deutsche Bank is warning that S&P 500 earnings per share will be flat this year when compared
with 2014. Retail sales are down about 9% on an annual basis over the past three months. And the
US GDP has slowed to an annual rate of just over 1%… with the possibility of a surprise recession
on the horizon. Besides, crashes and bear markets happen. This seems as good a time as any.
Buffett-Indicator
Market cap to GDP a.k.a. the "Buffett Indicator", via Doug Short/Advisor Perspectives. Yes, the market
does appear to be slightly overvalued … click to enlarge.
Deeper into the Heart of Darkness
When the next crisis comes, the fork in the road will be a choice. The Fed can either admit its policies
have not worked… chuck them out… let interest rates settle where the market wants them to settle
and let the free market do its work.
Or it can follow the Europeans and Japanese toward more aggressive intervention – including massive
QE and direct stock buying. I don't think there's any doubt about what it will do: It will go deeper
into that heart of darkness.
In fact, I believe central banks and central governments now have revealed the full madness of their
intentions. Well, maybe not the full madness. They haven't thrown money from helicopters yet … but
that will come.
Here's what's in the cards for central banks:
•They will set interest rates at preposterously low levels for years and years
•They will finance 100% of government deficits – forever, if it comes to that – with printing-press
money.
•They will also pump up the stock market with this same money-from-nowhere by directly buying equities
ETFs (as the Bank of Japan is already doing).
You'd have to be brain-dead (or a modern economist) not to be staggered by the audacity… the ballsy
mendacity … and the incredibly big lie that undergirds the entire charade: that you can create money
out of nothing and use it to pay for wars, schools, highways, and salaries for bureaucrats … and
also to acquire real businesses.
We're with Lenin …
I recall Lenin's quote: "The capitalists will sell us the rope with which we will hang them."
Today, of course, the capitalists don't even sell the rope; they give it away, for nothing. But what's
not to like? Stock investors are getting rich. Bondholders are making money. The government can spend
as much as it likes. And the voters are bamboozled by it; they think it helps make the economy work
better.
This is going to be a hard habit to break. So, here's the gist of my conclusion: Governments won't
break the habit of getting something for nothing. It will break them. But how?
It looks as though they've got the perfect hustle going. They create money to buy their own debt.
But this doesn't cause consumer prices to rise (at least how they're officially measured). Everybody's
happy.
Obviously, that won't work forever. I don't care how many knobs you turn or how many levers you pull.
It doesn't work that way. Ultimately, you're putting rusty nails on the ground… and you're going
to step on them How? When?
Nobody knows. But I'm going to take a guess …
got rope
Rope comes for free these days … or at least the money to pay for it does.
Photo via twitter.com, source unknown
The Weakest Link
And here I'm no longer using my powers of observation to tell you what is going on. I'm using my
intuition and guessing. The weakest link in the central bank chain, I believe, is credit. So
let's look at how this link might break.
In our modern economy, when we talk about "money" what we are really talking about is credit. Banks
create this credit ex nihilo (out of nothing) when they make a loan. It exists, for the most part,
as a digital record on a computer network somewhere…
And unlike even traditional paper money, this credit can vanish as quickly and easily as it got here
in the first place.
Because it is purely digital in nature, you can't hoard credit. You can't put it in your safe. You
can't take a wheelbarrow full of it to the grocery store for a loaf of bread. Credit depends on trust.
(The word "credit" comes from the Latin "credere" – to believe or trust.)
So, when our financial system implodes – which is what always happens when there is too much debt
– the machinery of borrowing and lending will seize up. No one will trust that he will get paid.
Credit will simply disappear – trillions of dollars of it – overnight.
This is, of course, not the end of the world. Nor even the beginning of the end. But it will be the
end of the beginning of the paper money world President Nixon unwittingly created in 1971. Then the
end can begin…
France and Germany join UK in Asia bank membership
France and Germany are to join the UK in becoming
members of a Chinese-led Asian development bank.
The finance ministries of both countries confirmed on Tuesday that they would be applying for membership
of the Asian Infrastructure Investment Bank (AIIB).
Last week, the US issued a rare rebuke to the UK over its decision to become a member of the AIIB.
The US considers the AIIB a rival to the Western-dominated World Bank.
The UK was the first Western economy to apply for membership of the bank.
But German finance minister Wolfgang Schaeuble confirmed on Tuesday that his country would also
be applying for membership.
France's finance ministry confirmed it would be joining the bank. It is believed Italy also intends
to join.
The US has questioned the governance standards at the new institution, which is seen as spreading
Chinese "soft power".
The AIIB, which was created in October by 21 countries, led by China, will fund Asian energy, transport
and infrastructure projects.
When asked about the US rebuke last week, a spokesman for Prime Minister David Cameron said: "There
will be times when we take a different approach."
The UK insisted it would insist on the bank's adherence to strict banking and oversight procedures.
"We think that it's in the UK's national interest," Mr Cameron's spokesperson added.
'Not normal'
Last week, Pippa Malmgren, a former economic adviser to US President George W Bush, told the BBC
that the public chastisement from the US indicates the move might have come as a surprise.
"It's not normal for the United States to be publicly scolding the British," she said, adding that
the US's focus on domestic affairs at the moment could have led to the oversight.
However, Mr Cameron's spokesperson said UK Chancellor George Osborne did discuss the measure with
his US counterpart before announcing the move.
Some 21 nations came together last year to sign a memorandum for the bank's establishment, including
Singapore, India and Thailand.
But in November last year, Australia's Prime Minister Tony Abbott offered lukewarm support to the
AIIB and said its actions must be transparent.
US President Barack Obama, who met Mr Abbott on the sidelines of a Beijing summit last year, agreed
the bank had to be transparent, accountable and truly multilateral.
"Those are the same rules by which the World Bank or IMF [International Monetary Fund] or Asian
Development Bank or any other international institution needs to abide by," Mr Obama said at the time.
The USA's grip on Europe, against all odds, is loosening. Who would have thought it would be over
money, considering it went meekly along hand-in-hand with Washington in imposing sanctions which had
an immediate and deleterious effect on its bottom line? I mean, isn't that money, too?
"The UK insisted
it would insist on the bank's adherence to strict banking and oversight procedures. 'We think that
it's in the UK's national interest,' Mr Cameron's spokesperson added." Hahahahahahahahahahahahahahah…Oh,
'pon my word, yes, m'lud. The UK would be everyone's first choice to monitor strict adherence to banking
and oversight procedures, after the
£2.7 Billion in fines handed the Bank of England for currency rigging – which also resulted in
the dismissal of its senior foreign exchange dealer – just a few months ago. Or the
Payment Protection Insurance (PPI)
scam, in which banks greedy for more profit conspired to rig the deck so that insurance which
cost more and more stood less and less chance of ever having a successful claim levied against it.
And let's not even mention Libor.
I don't think there's too much about crooked banking the Chinese will be able to teach the British.
there is a straight line that runs from the boe to the federal reserve… moon of alabama has a post
up discussing some of the changes afloat which can be read here –
My favorite Czech, Vlad Sobell, has an new article "The opportunity cost of America's disastrous foreign
policy", which most of us here would agree with:
He reminds us what could have been if Putin's vision for creating a huge harmonized economic area
stretching from Lisbon to Vladivostok had been realized. (George Friedman has already explained why
this could not be allowed.)
I don't think that anyone has mentioned an earlier article by Sobell that appeared as his contribution
on the experts' panel on us-russia.org, His is the last contribution.
Only problem is, this was written in February. And without regard for Poroshenko.
The weapons withdrawals
were more or less done. Nothing else was. The Special Status law proposal was based on September lines
and not discussed with the Republics so is unacceptable to them. Not only was there no improvement
of humanitarian access, but it has been tightened up, to the extent that virtually no medicines are
getting through, and no food at all. Travel to and from the Republics involves permits that take 3
weeks to get. The gas got cut off once. No social payments have been made and no wages back-paid.
All this is in Minsk2 and Kiev's actually gone backwards on these clauses.
The reality is, Minsk2 will not succeed, because Kiev (and their masters) don't want it to. Poroshenko
is carrying in like he can set conditions, as if HE HAD WON when in fact HE LOST.
From memory, I think that Sobell would agree with your penultimate sentence- I don't think that he
was very optimistic about Minsk2. (On the positive side, the gap between Europe and the US seems to
have hardened.)
"As a delaying tactic, U.S. foreign exchange operations were often successful. They raised the
potential costs of speculation and provided cover for unwanted, temporary, and ultimately reversible
dollar flows. They delayed the drain of the U.S. gold stock. But to the extent that these devises
substituted for more fundamental and necessary adjustments and postponed the inevitable collapse
of Bretton Woods, they were a failure."
When I said, and it already seems so long ago, that we had broken out with a higher high a
few weeks ago, I cautioned that the markets had not suddenly become honest and transparent. and
so caution was still advised.
And indeed, the breakout was stuffed, by the usual routine of dumping large amount of futures
contracts at the market in thin trading hours, often on the open of the NY trading.
This is the currency war. This is the struggle we are seeing for the nations of the world to find
a new way of arranging their international trading relationships. This is the fruit of Triffin's
Dilemma, which suggests that at some point if a single country manages the world's reserve currency,
eventually they will come to an impasse between their domestic interests and the interests of the
rest of the world.
And after the failure of Bretton Woods, and the slowly destabilization of Bretton
Woods II, we are now at a time of reckoning.
Some mistakenly think the dollar is rising now because of Triffin's dilemma. This is really
not the case, but rather a temporary policy choice by the US to allow the dollar to appreciate against
the euro and the yen. Remembering that the US Dollar DX index is weighted to a certain group
of currencies that reflects how things were earlier in the last century.
The US is fostering the myth that it is already past the worst of the financial crisis.
A crisis, I might add, which its Banks largely promoted through their frauds, and the abuse of the
dollar's reserve currency status with the cooperation of the Federal Reserve and acquiescence of
the regulators.
This transition is not going to be short, nor easy. And as for the precious metals,
I have rarely seen so many who are so discouraged. They hear and see so many conflicting things that
they do not know what to believe.
And losing money hurts, ESPECIALLY if you are using leverage and are overextended. Mining companies
are levered plays on the precious metals, and the smaller the cap, the greater the leverage.
Timeframes also matter. I have been in this metals trade for a long time, but not because I
like gold for itself. When I was looking seriously into international money issues and global
trade, which was related to the communications business I was in, I came to believe that we were
approaching a currency wars scenario.
It
seemed pretty clear that the Dollar regime could not be sustained without the establishment of a
very unipolar, de facto world governance, with perhaps two or three cooperating spheres of control.
I had written a paper about this in B-School in 1991 (ok I was a late bloomer but as an classically
educated engineering type pure business management course were not my thing). But my thinking
really did not become firm enough to take action until around 2001.
And there is clearly a movement in the direction of a unipolar world, from the neo-cons and
their associates. Money is power, and power is the new god of the marketplace in the West,
if not everywhere.
I remember, quite vividly, gold being at $280 and silver at $4.70 and the prevailing wisdom amongst
almost all the traders I knew was that the precious metals were 'dead money.' Seriously.
You could barely find a buyer less than 20 years ago.
The truly big changes catch people flat-footed, because they run against the grain of what we
knew yesterday. Most people are focused on the short term and the markets especially have come to
take a very short term speculative bias.
I do not know what will happen in the future, and do not think for a minute that I do. We
are all in God's hands. But I am looking for any signs, based on my understanding of how certain
things work, and over a 20 year timeframe it is pretty much on track.
Don't be overly worried about these things that are beyond your control, or
so fearful
that you become preoccupied and distracted from your responsibilities and a righteous path.
Rather, spend more of your time on things that you can control, and the things that will, in your
waning days, loom most heavily on your conscience.
the imf is a front for western banks giving loans to countries that typically can't pay the
money back! what is there for western, mostly wall st banks to not like about that! they especially
like the gaurantees that come with these imf rbber stamped loans! it is about lending mone, the
great ponzi scheme of the fiat system… don't pay it back, just keep these interest fees or usury
fees flowing endlessly!
"The Wall Street Journal and the New York Time's eurozone reporters, who share the same unshakable
devotion to TINA and austerity as the Murdochized WSJ news staff have been thrown into a panic
by Syriza's electoral successes in Greece.
Both papers are freaked out, as are the Germans, about the potential for Greece to spark a
wave of rejections of the troika's infliction of austerity in a manner similar to how the infliction
of self-destructive austerity programs pursuant to the Washington Consensus' demands led to the
"lost decade" and the democratic election of what is now over a dozen Latin American candidates
running on anti-austerity platforms. The Washington Consensus was drafted and named by an economist
at Pete Peterson's International Institute. Peterson is a Wall Street billionaire whose mission
is causing debt and deficit hysteria and plugging the joys of austerity and unraveling the safety
nets. His greatest goal is privatizing Social Security – producing hundreds of billions in additional
fees for Wall Street."
It's actually kind of funny. Everyone seriously engaged with the Eurozone crisis agrees that
austerity hasn't worked but the one thing that terrifies them most is ending it. All bow down
before that display of European deep thinking.
Where I'd disagree with you is this: I don't think that these are attributes of "fiat" money
per se. Within an individual economy fiat money has the enormous and – I think – key advantage
of allowing for counter-cyclical fiscal policy. It gets a little more complicated when you are
talking about a community of economies and trade, but the basic dynamic is the same: the hallmark
of a true capitalist economy is credit cycles creating booms and busts. The only practical monetary
system is one that can counteract the busts, lest they be (needlessly) fatal. And the only system
that meets that description is fiat currency.
FWIW under a fiat regime it's impossible to "pay" all the debt back. The reason is kind of
depressingly simple: because if we did there wouldn't be any money in circulation. Suggests to
me that we need some new word to describe government debt to indicate that there is NO effective
similarity between a household "budget" and the budget of a sovereign government that issues its
own currency.
I agree with Oddlots in that the problem is not the currency being a fiat one. The problem
is that the fiat currency is issued by private bankers who regulate the amount of the money supply
to their own advantage creating endless cycles of boom and bust.
The simple but seemingly impossible answer is a representative government that issues their
own fiat currency and regulates it for the benefit of the general population and thus ensuring
steadily growing living standards. Mind you, govts that have done just that, such as Libya, Syria,
Iran, China and to some extent Russia, have found themselves facing invasions or threats of invasions.
"Austerity" is never designed to work as advertised. It is designed to impoverish people to
make them more malleable and controllable. Austerity defies basic economic principles and even
common sense.
I don't hold out much hope for change with the new Greek govt. They have committed to remaining
in the EuroZone and will refinance the IMF loans which means more interest for nothing. This doesn't
sound at all radical to me.
More likely is that the Greek population has been conned again and the WSJ et al are playing
along with the faux opposition meme. We'll know soon enough.
One of the more significant things that I have seen so far this year is independent confirmation
from a credible source that there is price rigging in the silver markets, and that this knowledge
is being suppressed by the mainstream media in the US.
I think the fact, given all the rigging scandals from Madoff to LIBOR, that there are major mainstream
publications which will refuse to run an article showing evidence of rigging in the silver markets
from a credible source is probably as profound as the report itself might be. They know what
is happening, and they are afraid.
So what does this imply.
It implies that powerful financial interests are engaged in an attempt to manipulate the value
of certain precious metals to artificial targets. They frequently do this with certain things we
know.
Dollars and bonds are amenable to this sort of financial engineering, because the financiers are
able to create enormous amounts of money using their balance sheets, and with it buy bonds and other
financial paper. So they can raise and lower interest rates and other benchmarks at will provided
that they can do it in secret and with plausible deniability.
They can rig LIBOR, and the ISDAFix, and any number of benchmarks, because these are creatures
of their system, without a hard reference or a firm anchor to anything in the real world. LIBOR and
the amount of money they have in their vaults can be almost whatever they wish them to be, as long
as the people believe.
Their nemesis, however, is when they foolishly tie themselves to something external, something
that is beyond their system. Their error is when they overreach, and try to extend the mythology
of their price fixing to things that are not completely under their control for any longer period
of time.
Gold and silver are two such things. Yes, they can engage in all sort of gimmickry on their own
exchanges where they make the rules and keep the records. Paper and paper money can symbolically
represent precious metals both in quantity and value. Tonnes of imaginary and hypothecated
ounces of bullion may be traded all day long, but without requiring a single physical ounce of gold
or silver having to change hands. The pricing has been divorced from the constraints
of supply and demand. As always, the devil is in the leverage.
Longer term of course there will be effects, very powerful effects. The amount of actual
gold and silver that is represented by their paper continues to dwindle, increasing leverage.
Physical bullion will flee their system, as it is doing already. That which is
unmined will be left in the ground. This is Gresham's Law in action. The 'bad money' will drive out
the good.
And they are foolish! There is no real civic need for them to have done this. What does it matter
if gold and silver are priced at 1200$ or 3200$ as long as the price increase is orderly and not
a panic? All sound economic theory suggests that as the price of gold and silver increase, economic
activity will increase to make more supply available. People might choose it as a store of
value, or not. It has its advantages and disadvantages, depending on the context of its environment.
You can say that this would cast doubts on the value of the financiers paper, but again, not in
any practical sense as long as supply of metal was not constrained and the supply of money was not
expanded recklessly without reference to the productive economy. Even Greenspan admitted this.
By aggressively seeking to manage the price of the metals, by continuing to press their leverage
and their perceived successes, the Banks have created a façade and blindly run to the precipice of
an inevitable reckoning, as the
London Gold Pool
had done in the early 1970's.
The BRICS see this hubris, like the traders who saw the folly of attempting to hold the British
Pound to an untenable valuation. And they will continue to keep pounding the Banks' positions with
their trades, accumulating more and more of their physical metals, until the trade is unwound, or
a failure comes to stand and deliver.
This is what I think is happening. I do not think a serious market failure is inevitable. But
a better outcome would require a level of humility, wisdom, and self-awareness of which our ruling
class may longer capable.
Wall Street has become maddened with greed. And by stifling all criticism and dissent, their enablers
have only enabled them to go further and further, until the point of no return is reached.
We observers are almost like Harry Markopolos, who wrote of his frustration in Madoff:
No One Would Listen. We are like those who warned of the growing housing bubble, and took
steps to protect ourselves from it.
We only need to abide, and if we can abide, then we will prevail. Their schemes
will eventually fail And in that failure there is both risk, and opportunity.
To buy, or not to buy? Allocated, unallocated, or exchange-traded, derivative, or nothing? That
is the question.
"Simply, antifragility is defined as a convex response to a stressor or source of harm
(for some range of variation), leading to a positive sensitivity to increase in volatility (or
variability, stress, dispersion of outcomes, or uncertainty, what is grouped under the designation
"disorder cluster").
Likewise fragility is defined as a concave sensitivity to stressors, leading a negative
sensitivity to increase in volatility. The relation between fragility, convexity, and sensitivity
to disorder is mathematical, obtained by theorem, not derived from empirical data mining or some
historical narrative. It is a priori".
Yes, I know, there is a certain fiendish humour as Taleb introduces this quotation with 'simply'
and then goes on to use enough jargon to make the layperson's eye glaze over.
But what Taleb is describing here is a fundamental that many have forgotten. It is the corollary
to his more famous observation about 'black swans' and 'tail risks.'
What Taleb is basically saying is that a system or investment that is designed to accommodate infrequent
but outsized and somewhat unpredictable risks performs one way he calls anti-fragile. And other systems
and investments are designed so that they perform well under 'normal conditions' but tend to underperform,
and often badly, during the unexpected.
Here is my own picture of Taleb's concept of how investments react. It might not be exactly
what Taleb himself has in mind, but it something I had thought of for other types of information
systems in a prior occupation, and is how I remember it for my own purposes:
If you want to grossly oversimplify this principle, remember the saying, pick the right tool for
the right job, and remember that nothing comes for free. I used this in describing tradeoffs
in very complex products and networks, and while it may sound trite, it worked with a lot of upper
level executives.
But what is the job itself? Well, the application defines it of course. But one must also take performance
criteria into account, and with performance there are environmental conditions and variabilities.
Would you like to have a network that can function for your casual use in your home, or a high performance
network that can survive arctic cold and desert heat.
Don't laugh. I used to drop networks into some of the more out of the way and volatile places around
the world, put electronic equipment in explosive environments, and met application criteria that
had many other product managers running out of the room screaming for momma. It was my particular
competitive edge. It only comes with experience, confidence, and a fanatical understanding of the
odds and how they can mount against you.
But you don't want to waste money and over engineer something either. That is a good way to go broke.
But you need to understand expected performance, and the risk profiles for just about anything that
is not merely incidental.
And if there is anything that I wish you to remember from this blog, after all these years, it is
the deadly trap of undisclosed risks and the tendency of some to understate those risks for their
own short term advantages. And how other people will go along with them. In a nutshell, this is the
story of our last couple of financial crises.
It is far too complicated to get into this afternoon, but lets just say that a number of mathematicians
and industry analysts, among them Taleb, Mandelbrot, Tavakoli, William Black, Yves Smith et al.,
that there was significant undisclosed risk in the system because models (Black-Scholes for example)
greatly simplified the risks, and assumed distributions of variability that were not real world realistic.
If you wish to read more about this in more detail Benoit Mandelbrot's book, The (Mis)Behaviour
of Markets, is readable enough while containing enough substance to chew on. I enjoyed
it because of the way he demolishes the efficient markets theory and other vain imagining, as I cannot
resist a bit of schadenfreude now and then.
There was a movement in finance to force normal distributions onto data that did not really justify
it. In order to achieve this, the risk models made certain assumptions, and thereby 'flattened' reality
in order to fit the model. What one ended up with was a mis-estimation of the risk probabilities.
And so we saw 'once in a hundred year events' happening with alarming frequency, despite the best
efforts of the financial planners to smooth them over with piles of bailout money.
Here is a picture of what such a discrepancy might look like:
So the financial system designer likes the normal distribution and makes their operational plans
based on that. But why is this? Are they diabolical fiends? Do they enjoy screwing up?
No, they are ordinary people for the most part, but following orders. And the orders are sometimes
to take the faux normal approach because it costs less to implement, allows for greater
leverage, and fattens profits, at least in the short term. Many a compliance officer
and systems engineer has fallen into this trap.
Careerism's second law is if you are wrong with everyone else, no one can blame you. And so many
financial myths have thereby obtained extended lives, because they provided a fig leaf for someone's
self serving ends. This is in some ways the story behind the failure of our regulatory systems,
often staffed by good people but who are underpaid, overworked, and subject to extraordinary political
pressure to turn a blind eye to what otherwise might provoke their action. Especially where
there is a lack of complete certainty, which is all too often the case in real life.
So what is the punch line. If you are buying an investment as a safe haven, something
that will perform well in a difficult and somewhat unpredictable circumstance, you will wish to take
your money into something that is highly transparent, robust made to endure the unexpected, given
too few assumptions, and perhaps even strongly guaranteed.
And if you are not, if you wish to invest in something with a decent return, but in your own estimation
performs adequately for your own time horizons and expectations, then pick the product in which you
have confidence, provided it meets your needs and provides some advantages in features and price.
I am not going to talk around this much more, since I am obviously talking about the pros and cons
of certain types of gold and silver investments versus others. And those pros and cons
are ALWAYS going to be affected by how you perceive the risks, and how that investment fits into
your plans. This is a given. And this is why I would never give anyone advice, because
I am not a financial advisor and do not have the 'big picture' of what they own particular situation,
their goals and time horizons, might be.
I will use myself as an example. I tend to gravitate a portion of my portfolio into very
certain gold and silver investments, where I have a very high confidence in them based on audits,
ownerships, and so forth. There is not much about them I do not know and have to assume.
Yes there are the really wide outliers like a meteor hitting the earth and bringing on Mad Max and
cyclist cannibals, and I might drop a dime or two on arms and infrastructure just for grins, but
by and large I think I can ignore that for now.
But for the most part a failure in the financial system that could be adverse to my wealth seems
a little more likely. And so part of my portfolio is in highly secure investments that will
benefit from disorder and give me a premium on return that will cover losses elsewhere.
And other parts of my portfolio are in investments that are more fragile as Taleb would
say. But they provide a nicer short term return with less expense. And there is nothing
wrong with this. Not at all.
By the way, and I hate to even bring it up, but gold and silver themselves suit slightly different
purposes. Silver is less 'anti-fragile' than gold in dire circumstances, generally. But it
offers some juicy upside in certain circumstances in compensation. And there are always special situations
to consider, and for this I read guys like Ted Butler who track imbalances that could provide opportunities
or risks.
I do not consider one or the other better; they are different. And I own both,
and invest speculatively in both, at varying intensities depending on the changing context of the
markets.
I would certainly buy some other financial instrument or stock I consider less robust for a quick
flip or outsized return. The miners would fall into this sort of category. I am sure
some of my bank accounts would as well, depending on how high the risks, And physical property
is notoriously non-portable if you decide to take up roots and go to another place, which had been
in my longer term plans, which were thwarted by an act of God and other considerations.
So, as far as unallocated gold goes, there is nothing inherently wrong with it. It is
a very nice way to own gold with a reduction in expenses. I am sure not all providers of such
a service are equally reliable, and their representatives would do well to discuss their own advantages,
guarantees and superior performance as would any provider of products when faced with less reliable
competitors.
I will say that deriding critics as loons and charlatans, and referring to a portion of your prospective
clients and client influencer base in a generally derogatory manner with a pejorative nickname promulgated
by economists who hate precious metals on principle, is probably not a high profile technique in
the salesperson's handbook for success. Answer with facts. Once you descend to name calling
you have lost. Just a word to the wise, and enough said about that.
Know why you are buying what you are buying, and how it fits into your overall scheme, and what assumptions
you are using. And do not be afraid to have contingency plans and change them if new data comes
your way.
I know it is hard, especially in times of currency wars, because the first victim in all war is the
truth. But don't go off the deep end either, and waste your money on over complex plans
or put all your eggs in an improbable basket. It's your call, and perhaps you need a professional
to help sort out exactly what your priorities are.
I keep a spreadsheet, and on it there is a summary of all my assets, and it fits them into a simple
risk portfolio so I can see how they are distributed by risk and by total value. Since the
prices of things change, you have to be aware of how that affects your overall portfolio. I have
to say that physical bullion has taken a much larger place in my overall profile since 2000.
But that is fine, I just need to be aware of not letting it become a risk, and to balance it as required.
Would I buy GLD as 'insurance?' Hell no. Maybe as a flip investment on a technical trade.
Would I buy some physical trust with strong outside auditing and redemption features? Probably,
because it covers a bit of both insurance and investment. But it lacks the leverage of a small
cap miner just for example. But it does not nearly have the risk.
Yes it is 'that simple.' Which is to say, it can be simple to understand but hard to implement.
But you have to start somewhere, and if you start all wrong, it gets worse as you go. Some
parts of my portfolio are for insurance, and other parts are for investment. They serve different
purposes. I had the damnedest time trying to convince a broker at a white shoe firm who was
managing my stock options portfolio of this. He thought I was schizoid. He only thought
in terms of good stocks and great stocks. So I got rid of him, as he was too focused on his
own goals, even when he feigned altruistic concern for my money.
And sad to say, for most people, their major task is just getting by day to day. And so the
pros and cons of various investment techniques is so much hoohah because their most ambitious
aspiration is to stay out of debt, especially usurious and fee laden debts, while putting a little
bit aside. And this is why I spend quite a bit of time writing about these abuses, because
I am not only a caterer to the elite, but to our little community which has a range of wonderful
souls in it.
As always, the devil is in the details, but it helps if you know the lay of the land, and where you
think you are heading, and why. And of course, you adjust for changing circumstances as they
occur.
"Here in New Zealand the Reserve Bank is moving to add an Open Bank Resolution Policy (OBR) to
tools it could potentially use in the event of a bank failure.
The implementation of OBR would see all unsecured liabilities that rank equally among themselves,
including deposits, having a portion frozen. The Reserve Bank says the OBR policy could
save taxpayers' more than NZ$1 billion regardless of whether there is a bank failure or not.
However, Norman points out that if a bank fails under OBR, all depositors will have their savings
reduced overnight to help fund the bank's bail out."
"If their bank fails, depositors have always needed to understand that deposits are not guaranteed.
What OBR does is facilitate a rapid and orderly resolution of a bank failure – it does not change
the fact that depositors and other creditor funds are at risk...
The New Zealand Government has looked hard at deposit insurance schemes and concluded that they
blunt the incentives for investors and banks to properly manage risks, and may even increase the
chance of bank failure."
One understands that in the event of a bank failure, pain will be apportioned to the shareholders
and depositors in New Zealand banks. And it must certainly be an extraordinarily transparent
financial system indeed so that depositors can properly assess risk, on a par with insiders.
But one might ask, in the event of a failure, what is the penalty for the politicians, the banking
management, and their regulators?
Oh that's right, there are no banking failures permitted in New Zealand. So perhaps it is a moot
question. But it does seem that the people of New Zealand have some concerns and questions
about this and, dare it be said, an imperfect confidence in their central bank?
Confidence, gentlemen, is the key. Oui?
And so we pray for the best, but prepare for the worst.
"Those entrapped by the herd instinct are drowned in the deluges of history. But there are always
the few who observe, reason, and take precautions, and thus escape the flood. For these few gold
has been the asset of last resort."
In a gold-based monetary system, every asset is ultimately backed by gold. This does not mean
that every debtor (including banks) keeps the full amount of its liability in gold coin just lying
around. Why would one bother to borrow if one did not need the money? It means that every asset generates
a gold income and every asset could be liquidated for gold, if necessary. If a debtor declares bankruptcy,
the creditor may take losses. But he can rely on the gold income stream for each asset or if need
be he can sell the asset for gold. In a gold-based monetary system, money is gold and gold is money.
Money cannot disappear; it does not go "poof".
Bad credit can be defaulted and must be written off. But money merely changes hands
Ok, we all know that anyone who says "this time it is different" is to be treated at best as misinformed,
at worst as a fool. "They are the five most dangerous words in the English language" etc. etc. But,
to repeat my question: "Are things always the same?" Mostly, yes. Modern housing bubbles are not
unlike 17th century Holland's Tulipmania, government debt crises have not changed all that much since
Henry VIII reduced the gold in coinage, greed, profligacy, irresponsible plutocracies are always
with us.
But in global finance there are some things happening that are genuinely different. Dangerously
so. It is becoming a hall of mirrors, money referring to itself in an infinite regress. Little wonder
that people are attracted to gold, because gold seems to be a tangible, solid measure of value, something
we can rest on in an environment where everything seems relative. Yet this, too, is an illusion.
The yellow metal only has value because it has a history of being deemed to have value. It is no
more an objective measure of value than the pieces of coloured plastic, notes, that make up legal
tender.
To explain what I mean, let's start with a definition of what money is. It is rules. Rules about
value and obligation. Those rules are usually based on legally enforced structures, although that
need not be the case. In the case of cross border capital markets, the enforcement is informal because
there is no supranational government to impose penalties. Disputes are resolved by a handful of law
firms, the main penalty is to be prevented from participating for a period.
Now if money is rules, then what does it mean to "de-regulate financial markets" as was claimed
in the 1990s? Can you de-regulate rules? Obviously not. So what happened? The place where rules were
set shifted.
Instead of government for the most part making the rules, the traders started making the rules.
The logic was, as Alan Greenspan argued, that because everyone was acting in their self interest
then nothing could possibly go wrong. Pricing would be accurate, the less formal self organisation
of the market would be superior to the formal oversight of governments (what would governments, which
are always bad, know?) and everyone would win. Free lunches as far as the eye can see.
So the rules proliferated, especially after the advent of the Black and Scholes pricing of risk,
a clever piece of maths based on what is probably circular argument, but one that is sufficiently
concealed to give traders the impression that they are handing off risk accurately. This led to the
explosion of derivatives and securities markets, including such instruments as collateralised debt
obligations, credit default swaps and endless hedging games (my personl favourite is a derivative
on "volatility").
Now the point about rules is that they are based on agreement, and their creation can be without
any limit provided traders are prepared to agree, to trust each other enough to transact. They are
not finite in the way that, say, gold is. And so the rule making exploded. The global stock of derivatives
is $US600 trillion, about twice the capital stock of the world (all the shares, property, equities,
bonds and bank deposits). Far from deregulation making the rules of finance more more streamlined
and more efficient - as if the efficiency of money could be measured anyway, given that it would
mean measuring money with itself - the rule making expanded wildly. And we all know what happened
when the trust that underlies those rules collapsed. The Global Financial Crisis. We are lucky to
have a financial system left.
This era of meta-money, I submit, is different. It is "different this time". Some versions of
it have appeared on the margin before. Hedging has a long history, for instance. But meta-money has
never been the centre of the action before. In the past it has always been, for want of a better
phrase, "normal" money: bank debt, equities, bonds, property and so on.
The massive volume of meta money, the ever expanding hall of mirrors,
now dominates and distorts more conventional forms of money. For instance, the $3.8
trillion that is transacted every day in the US dollar makes the annual budget deficit of over $1
trillion look like chump change. About 8 hours trading. There will not be a crisis in demand for
US debt, causing an economic collapse, while there is such intense demand for US dollars in the foreign
exchange markets.
What is happening instead is that the logics of "normal" money are being used by the meta traders
as a game (a game mainly of signs, semiotics) to try to make profits out of their exploitation of
the rules of meta money. If the US government looks like it will reduce its government debt, then
traders can make a play in the foreign exchange markets that the US dollar will rise. So the US dollar
rises. Not because an imbalance is being corrected, changing the dynamics
of supply and demand, but because a signal has been sent that an imbalance has been corrected, giving
the traders something they can exploit. The rules of normal money are being overridden by the rules
of meta money.
That is the world we are now in. It is why such huge distortions are appearing in areas like quantitative
easing, extremely low interest rates, an ailing cost of capital, the hankering after something solid
in precious metals like gold and silver, equity markets whose pricing seems strange. Governments
have given up oversight of the financial markets, handing it over to the traders. We must now
suffer the consequences as the traders try to outdo each other in an infinite game of pass the parcel.
Or, more accurately, taking out bets on who will pass the parcel to whom.
Eventually, I suspect, GFC version 2 will come along, and the rules will finally collapse. Governments
will have to come in and re-set them. There will be a huge re-regulation
backlash. But how is it that governments allowed it to get to this stage? What ever happened to governing?
ambrit :
Friends; "How is it that governments allowed it to get to this stage?" May I suggest that,
as your post points out, an inversion of values has occured. Money used to be a symbol, a proxy
if you will, for power in the society. Now the symbol is mistaken for the object it previously
represented. To be blunt, greed has overtaken the critical falcuties of the "elites." It is the
same old story, as people like Galbraith and Bacevitch have so amply demonstrated. I'm beginning
to understand a bit how the Stoics felt.
Bill:
Yves is quite a ways ahead of other economic thinkers in her critique of Wall St. banksters
and their success in destroying this country, but whoever wrote this is dead wrong about gold.
The precise reason why gold is valuable and will continue to increase in value as all paper converges
into a singularity is BECAUSE it has had worth for millenia. Admittedly, its worth has waxed during
times of economic uncertainty (Fall of Rome, French Revolution, Weimar hyperinflation, 1970's
stagflation, etc.) and waned during times of economic certainty (1980-2000 most recently). But
given our current trajectory, which scenario do you think is the most likely in the coming decade?
I feel that the reason that so many people have trouble accepting gold's imminent eminence
over all things paper is because they were born into a world overflowing with technological, financial,
fiscal upside potential. Like the fat tails which were found to be present in centuries of cotton
price data, proving that markets do have memory and that the efficient market hypothesis is a
load of BS, these financial and economic types are afflicted by thinking which has been addled
by decades of Greenspan puts, $20/bbl oil, and Moore's law. Their synapses are fundamentally incapable
of processing a world of scarcity and stagflation/default, where the oft-ridiculed Malthusian
catastrophe hangs over us like the sword of damocles. I hate to sound like someone at the top
of a bubble, but this truly is a new paradigm. Is anyone developing a new iphone app to squeeze
more oil out of the depleting Ghawar field? If we close our eyes and click our heels together,
can we make all oil abiotic in nature and ensure a limitless supply in perpetuity. There are thermodynamic
limits on technology which, let me assure you, form a very hard wall. We as a society throw ourselves
against it at our own risk.
ScottW:
One thing I can never get my mind around when it comes to gold is that the value is always
expressed in terms of dollars–the currency that will become worthless over time. So, if you own
lots of gold that is tied to worthless dollars what do you really have? Is the supposed end game
that some day dollars will become worthless and gold will take over as an independent currency?
And if that occurs, how do you value the current worth of gold? Seems to me gold is just another
commodity that makes a few people rich in dollars on the trade. But what do I know, the only gold
I own is in my teeth.
Susan Truxes:
It seems to me that it is precisely a scarcity of resources that
now makes gold untenable as a store of value. Government will step up and take
some action before it will pay 5k for a barrel of oil. For millenia gold has been accepted as
the most valuable medium of exchange. Sometimes irrationally so. But
never more irrationally than today. There isn't enough gold to help us let alone
save us. This is a new paradigm. Time was when time was money. Before we ran out of resources.
Is this the underlying cause for meta money? We've run out of things to buy and sell at a rational
pace so we are buying and selling time, better known as derivatives, and trying to profit by split
seconds. Can critical mass be far behind?
ambrit :
Gee Whizz Folks; If I didn't know better I'd think that I've fallen into a meeting of the "Renaissance
Faire Organizing Committee!" As the late lamented Dick Nixon so amply demonstrated, a government
can coopt any medium of exchange with ease in this modern world. Yes, Gold does have value; some
industrial processes and a huge amount of symbolic heft. Consider though, most ordinary people
don't have the resources to own gold, or the sequestration of productivity that entails. For the
'rest of us' the precious metal within reach is Silver. And look how far over the place it's been
lately. Alas, I'm afraid that Gold, with all its lustre, will remain a tool and symbol of the
elites. And, notice, due to its scarcity, one of its primary functions in the bad old 'good old
days' was to limit and channel economic activity. The precise beauty of fiat money is its 'magical'
ability to expand the horizons of economic activity, with an attendant rise in the general standards
of living. Gold has its place, after we've been fed, housed and clothed.
g kaiser :
I find the thinking in this piece refreshing, to a point, but the writer has not drawn the
conclusion, as the logic bites itself in the tail. Everything in here is the essence of why gold
is the only place of refuge. Gold is not somebody's liability, it is value without someone having
to make good on a promise. It is a parcel that does not have to be passed on, it cannot be created
at will, multiplicated ad infinitum. What might be left after this financial crisis has run its
course will be barter and gold. Many fiat currency will cease to exist. Gold won't. Any idiot
can see that deranged individuals paying themselves untold fortunes at the expense of countless
poor is not a tenable long term strategy.
John Emerson:
The only time gold is more valuable than fiat currency is when
you have complete political collapse. In that case, our gold has value but you
have to have it in your physical possession (not in a vault someone else controls), and you have
to be able to protect it from bandits and tax collectors.
A lot of gold still remains buried in the ground for safety by someone who didn't live to come
back and dig it up again.
Gold and silver are speculation commodities, and around 1980 goldbugs
who believed the myth lost billions of dollars.
We're all pretty much at the mercy of the national and world economy.
The gold standard might give people an illusion of security, but it doesn't protect against
economic decline, and gold hoarding slows economic growth.
bookit:
Food and shelter are what's valuable in a complete political collapse.
nonclassical:
Circa 1974, one of Bruce Lee's student-instructors asked his students, "Where would you get
food without Safeway?"..
It doesn't take much leap of imagination to comprehend what such a rapid transformation as
valueless "money" would bring this society..
IdahoSpud:
Agreed. In an anarchic society, what do you think has greater value: a roll of Krugerrands,
or a grass-fed feeder cow?
Yves Smith:
The faulty logic is that gold does not work at all well in economic collapse. Nothing does.
Women in Vietnam used gold much as Indian women do, as a store of wealth, often in necklaces of
gold beads. When Vietnam was war-torn, they'd trade their gold for far far less that it "ought"
to have been worth to obtain food and medicine. The idea that gold will have some sort of
stable, reliable value when an economy is reduced to barter is nuts.
The best protection against that outcome is to be a doctor, the general practitioner type.
Seriously.
George H. W. Bosch:
And as an additional bonus, the 1/4 million in student loans you take out won't be owed after
the collapse.
g kaiser:
No doubt about that. However, how did they do with the folding type of money? Lit their fires,
stuffed their mattresses? because it had NO value, having seized to have any way before. Most
likely some food coupon or a tin of sardines could be more valuable.! If a drought, water is most
valuable, in a famine food is, in a case of governmental international fraud, gold is.
Let's compare apples with apples.
Lurker:
"There will be a huge re-regulation backlash."
Only in your dreams kemosabe. The current rules are there to cause the transition from republic
to empire, from capitalism to feudalism, from freedom to slavery, and to funnel all accumulated
wealth into the hands of the financiers.
nonclassical :
only if the money grubbers can keep the whole thing from crashing-history shows us they can't..perhaps
especially in nano-second computerized transactions…
frances snoot :
"That is the world we are now in. It is why such huge distortions are appearing in areas like
quantitative easing, extremely low interest rates, an ailing cost of capital, the hankering after
something solid in precious metals like gold and silver, equity markets whose pricing seems strange.
Governments have given up oversight of the financial markets, handing it over to the traders.
We must now suffer the consequences as the traders try to outdo each other in an infinite game
of pass the parcel. Or, more accurately, taking out bets on who will pass the parcel to whom."
What is taking so long is the G20 expansion of sdr. A different world in October when banks
deleverage?
Every once in a while I begin to think that maybe, just maybe, the price of gold can't go any
higher after ten straight years of gains during which it has more than quadrupled. But, then I read
an article like
this one in Money Magazine that, once again, makes clear that, in the West, the metal is still
reviled by most writers in the mainstream financial media and it is loathed by most investment professionals
(even more so as the price goes higher each year).
Gold is a bubble – resist its charms
Can you tell when a boom has turned into a bubble? One clue: When pop culture starts paying
attention. The housing bubble, for example, brought both the TV show Flip This House and a rival
on another network, Flip That House.
So if you own a lot of gold, you might regard a recent episode of Saturday Night Live as your
first warning. In the opening skit, Bill Hader as China's President Hu Jintao declares that Glenn
Beck was right and that "my government should have bought gold. Unfortunately, all our assets
were tied up in U.S. Treasury bills."
Back in the real world, gold is trading at about $1,400 an ounce,
up from less than $500 five years ago. That's a 23% annualized return, far outstripping the gains
on stocks (1.1%) or bonds (6.1%). Fear is driving a lot of the rise.
…
You may be wondering whether you should be getting a piece of this action. This time last year,
MONEY argued that although gold prices could continue to climb in the short run, the case for
gold as an investment no longer made sense.
And that leads to another truth about bubbles: You'll almost never look smart trying to call
them, at least at the outset. The real estate bubble was six years in the making; the dotcom bubble
lasted five years before bursting.
The gold bubble could stay pumped up for a while. But that doesn't make gold less speculative
and risky than it was a year ago.
They go on to cite three reasons why you should be fearful of any investment in gold – none of
which were very convincing to me. The entire piece is worth reading as it provides the clearest indication
in weeks that the gold bull market still has a long way to go.
The fund, SPDR Gold Trust (pronounced Spider), now holds 1,299 metric tons of gold valued at about
$57 billion, more than the Swiss central bank. Investors include the University of Notre Dame, the
Texas teachers' pension fund and a who's who of hedge fund titans and money managers such as John
Paulson's Paulson & Co., Laurence Fink's BlackRock Inc. and George Soros's Soros Fund Management
LLC.
Soros, who made $1 billion betting against the British pound in 1992,
called gold the "ultimate asset bubble" at the World Economic Forum's January
meeting in Davos, Switzerland, when the price of gold was at $1,087.10 an ounce. His fund held $664.8
million in gold-backed exchange-traded funds as of Sept. 30.
Gold's rise resembles moves reached before the three big crashes of
the last decade: the Nasdaq tech-stock bubble of 2000, the U.S. housing market bubble of 2005-2006,
and the crude oil-price spike of 2008, according to data compiled by Bloomberg.
History shows that when the price of an asset takes a parabolic climb like gold's has, it's eventually
bound to crash, according to Mark Williams, an executive-in-residence and master lecturer at Boston
University's finance and economics department. And when it does it's
almost always the smaller, individual investors that get out too late, he said.
As much as half of the gold in exchange-traded funds may be held by individual investors, according
to BlackRock, the world's largest money manager.
"Your little guy is going to get hit by the doorknob on the way out,"
Williams said.
The council declined to comment on the painful dividends.
When it worked to create the fund, one concern was that the exchange-traded
product might contribute to a bubble. Burton and his investment team worried that too much success
would shoot gold prices up too fast, resulting in a crash like the one that occurred in January 1980,
he said. Back then the bubble burst in one day and took two decades to recover.
Ultimately those engineering what would become SPDR Gold decided it wasn't their job to worry
about it.
"Our primary mission was to find every button we could push to stimulate
demand," Burton, 59, said in an interview in London. "We
also knew that we had launched something that we could not control."
Their timing was impeccable. They opened investment in a reputed safe asset to potentially millions
of new investors just before the financial crisis of 2007 and 2008 and the ensuing global economic
slowdown. Until then, bullion was viewed by many as a fringe holding for the rich with Swiss bank
vaults or gold bugs who hoarded the metal beside canned food to hedge against Apocalypse.
"They were very patient and they tapped a real deep need in the ordinary
investor to be able to buy and sell gold like a stock," says Jeremy Siegel, a finance
professor at the University of Pennsylvania's Wharton School in Philadelphia.
'Pivotal Moment'
The creation of the fund was a "pivotal moment," said Scott Malpass, chief investment officer
for Notre Dame in South Bend, Indiana. It provided a vehicle for investors
that made gold readily available and cheap and easy to trade, he said.
He managed about $5.5 billion, as of the end of fiscal year 2009, in endowments and other funds
for the school.
A gold skeptic, he began buying into SPDR Gold after Lehman Brothers Holdings Inc.'s collapse
in 2008, acquiring about $111 million by July 1, 2009. The school held about $65.8 million in the
fund as of Sept. 30, according to SEC records.
While the World Gold Council was not first in the world to develop an exchange-traded product
backed by gold, bringing it to the U.S. market was crucial, Burton and Thompson say.
The fund, now called SPDR Gold, started trading in 2004 and led the way for exchange-traded products
backed by commodities in the U.S. Of the $1.4 trillion in exchange-traded products worldwide at the
end of November, $171.7 billion were backed by or linked to commodities, according to BlackRock.
Atomic number 79 on the periodic table, gold has captivated humans for at least 6,000 years, since
goldsmiths fashioned it into decorative objects and jewelry on the coast of the Black Sea in what
is today Bulgaria.
Malleable Metal
A malleable metal, gold isn't really consumed. Virtually every ounce of gold that's ever been
mined is still around: an estimated 165,000 metric tons. Peter Bernstein, the late economic historian,
cited a calculation that all of the world's gold could be melted to fit into a single oil tanker
in his 2000 best-selling history of the precious metal, The Power of Gold.
King Croesus first minted gold coins as money in the 6th century B.C. in what is now Turkey. By
the 20th century, the U.S. and most nations had formally adopted a gold standard.
The price was effectively set at $35 an ounce until U.S. President Richard Nixon dropped the gold
standard in August 1971, paving the way for a price explosion. Investors flocked to gold in the ensuing
decade of financial and political turmoil. By January 21, 1980, they
drove the price to a then-record $850 per ounce, equal to an inflation-adjusted $2,266 today. Gold
crashed the next day.
By 2000, the mining industry faced the prospect of entering a third straight decade of a bear
market for gold. SPDR Gold was born of that crisis.
Turkish Game Show
From its inception in 1987, the World Gold Council had concentrated on promoting gold jewelry,
the industry's traditional anchor. Very little was done to push gold as an investment, according
to Kelvin Williams, executive director of marketing for AngloGold Ashanti Ltd. until 2006.
One of the council's highest-profile investment campaigns involved a Turkish television game show
aired in 2000. Contestants competed to win their weight in gold as two women paraded in skirts and
bikini tops covered in coins.
Other promotions encouraged Muslims to use gold as a way to save for their once-in-a-lifetime
pilgrimage to Mecca. The council also lobbied India and Italy to sell gold over the counter at post
offices and banks.
The World Gold Council hired consulting firm Bain & Co. to review its operations. The mission
grew by early 2002 to include a plan that would be dubbed "Project Sun" to study how to create an
ETF, according to Thompson.
Wildest Dreams
The council would achieve its wildest dreams if a tradable security created demand for 900 tons
of gold or $20 billion, Burton and Thompson say Bain told them. Bain declined to comment for this
article.
Separately, Jeffrey M. Christian, the managing director of New York-based researcher CPM Group
and adviser to several gold producers, wrote an open letter in January 2001 to the industry's executives
urging them to realize that "increases in investment demand for physical gold can have immediate
and dramatic effects on gold prices."
His research showed gold prices rose significantly only when investors purchased more than 529
metric tons in a year. He says mining executives were frustrated that their companies were wasting
time and money on promoting jewelry sales.
"Mining companies were starving," Christian says now. The major gold mining indexes, FTSE Gold
Mines Index in London and the Philadelphia Gold & Silver Index, reached all-time lows in late 2000
and early 2001.
Fortune Cookie
Christopher Thompson was already a believer in the need to open up gold to investors when he joined
the World Gold Council.
Unlike most of his mining counterparts, Thompson, who was born in Johannesburg, had a background
in finance: in the U.S. he managed three closely-held funds that invested in gold-mining ventures.
In 1998 during dinner with his wife and children at a Chinese restaurant in Denver he cracked
open a fortune cookie. The small slip of paper inside read: "You'll go to Africa and take over the
greatest gold mine there."
A few months later he accepted a job as chairman and CEO of the newly created Gold Fields mining
company, gaining a seat on the World Gold Council's executive committee. Thompson framed the fortune
and propped it on his desk in Johannesburg. He arrived with firm ideas about how to jump-start gold
prices.
Bars and Coins
For starters, he says he understood that markets are made in the margin
and the marginal players in the gold market were always investors. Getting them to buy gold was the
challenge.
Two ways U.S. investors bought gold were inconvenient, Thompson says. Buying bullion bars meant
paying commissions, storage costs and insurance, as well as exit fees to sell. Although less expensive,
gold coins had higher fees for buying and selling, Thompson says.
Thompson says he resolved to get the World Gold Council to find a way to make buying gold easy.
'Perfect Storm Scenario'
What if the funds were so successful that gold went into a bubble?
"There was a potential perfect storm scenario where suddenly gold would fall into the clutches
of hedge funds and momentum traders in very, very aggressive, leveraged plays, which could spike
the price and then drop the floor out from underneath it," Burton recalls of the talks.
"Our biggest concern was it would burn another generation of investors and you'd start the whole
goddamned tale of tears over again," he says.
At the SEC in Washington, the core concern was trying to understand an unregulated asset they
knew very little about, says Robert Colby, then the agency's deputy director of the Division of Trading
and Markets.
They were conscious that approving the first commodities- based exchange-traded fund would open
the floodgates to a wide range of similar investment vehicles, Colby says.
Chocolate Bars
The SEC would not approve new forms of securities until it was convinced they were not readily
subject to manipulation, Colby says. Even though no one regulated trading in gold, the fact that
many nations still held a significant portion of their reserves in gold helped the council win this
point, he says.
On Nov. 18, 2004, Burton strode across the NYSE floor and tossed brokers chocolate bars wrapped
in gold foil to resemble bullion. He and Thompson rang the opening bell together as the World Gold
Council launched its exchange-traded fund under the name StreetTracks Gold Trust and the ticker symbol
GLD. Bank of New York Co. acted as the trustee, while a unit of State Street Corp. marketed the fund.
When the trading stopped, the champagne flowed. The frenzy for gold among investors was instant.
In the eight days it traded that November, the new ETF attracted more investment for the month
than all but two other funds offered on the NYSE, including mutual funds, according to data compiled
at the time by the Financial Research Corp.
Fastest-Growing ETF
By the 30-day mark, the fund's $1.29 billion made it the fastest growing exchange-traded fund
in history, according to data published at the time by TrimTabs Investment Research of Santa Rosa,
California, an independent research firm.
That was more than double the $610 million raised by the previous record holder, iShares Lehman
bond fund, TrimTabs said.
"We were jubilant," Pulvermacher says.
Thompson retired the next year. His successor, Pierre Lassonde, then president of Greenwood Village,
Colorado-based Newmont, declared ETFs "our biggest success in 25 years, the biggest since the South
African Krugerrand in the 1970s."
The coins containing one troy ounce of gold gave millions of individual investors access to the
gold market during its last significant run. The world anti-apartheid movement and the global gold
slump combined to quash their sales in the 1980s.
Speaking at a private investment conference Sept. 27, 2005, at the Westin Hotel in Denver, Lassonde
linked the rising investment demand from the fund to the rising price of gold and looked to a future
in which his group used such funds to spur demand all over the world.
'Enormous' Impact
SPDR Gold is now listed in Japan, Hong Kong, Singapore and Mexico City. Gold prices took off,
especially as more funds joined in the fray. Gold rose more than 58 percent in the 18 months after
SPDR Gold started trading to more than $700 in May 2006, reaching a 25-year high, without adjusting
for inflation.
"Big, enormous, large and ongoing" is how Dennis Gartman, an economist and editor of the Gartman
Letter in Suffolk, Virginia, characterized the exchange-traded products' impact on gold prices. Widespread
concerns about the dollar, other currencies and monetary policy will continue channeling investor
demand to gold for the foreseeable future, Gartman said.
Gold's popularity shows how investors are snapping up hard assets as governments and central banks
led by the Federal Reserve pump more than $2 trillion into the world financial system.
Goldman Forecast
Goldman Sachs analysts including Allison Nathan and Jeffrey Currie forecast in a Dec. 13 report
that gold will rise to $1,690 in 12 months. Last year, investment overtook jewelry as the biggest
source of demand for the first time in three decades and will retain the top spot this year, according
to GFMS Ltd., a London-based research firm.
To meet the demand, mining companies pushed global gold production to a seven-year high in the
first half of the year, according to GFMS. The industry's total average cash cost to produce an ounce
of gold rose 17 percent in that period as companies pushed to extract ore that would otherwise not
make economic sense, GFMS said in a September report.
New York-based BlackRock runs one of the fastest growing bullion funds today. It carves roughly
100 shares from every ounce of gold, versus the 10 shares per ounce created by the World Gold Council
ETF.
In so doing, iShares Gold Trust makes it possible for day traders or college students to play
the gold market for about $13.44. That's less than the cost of a 16-inch pepperoni pizza delivered
to a dormitory in Chicago.
Day Trader
One such day trader is James "Pat" King, a 25-year-old Boston University finance graduate who
started working out of the basement in his parents' home in Lincroft, New Jersey, after he lost his
job on Wall Street in August 2009.
King had invested in the SPDR Gold fund in April of that year on the advice of his father who
was "very leery of the federal government and their ability to make money appear out of thin air,"
he says. He's holding that investment while he trades shares in BlackRock's iShares Gold Trust more
often, hoping to capitalize on the metal's news-driven price swings.
He's unsure how he'll know when to sell his main gold holdings.
"There's so much uncertainty in the underlying state of the macro economy," he said. That translates
into "a massive pouring into gold of money from the sidelines, even moms-and- pops and high net-worth
individuals want a piece of it."
'Yellow Elephant'
World Bank President Robert Zoellick has suggested that Group of 20 nations should consider using
gold as an international reference point of market expectations about inflation, deflation and future
currency values as they reform the global monetary system.
"Gold is the yellow elephant in the room," Zoellick said on Nov. 10. "Markets are already using
gold as an alternative monetary asset because confidence is low."
Byron Wien, vice chairman of Blackstone Advisory Partners LP, says
he's recommending institutional portfolios put 5 percent of assets in gold. That's come as a shock
to some clients. He says he's been run out of conference rooms.
"People think it's just another bubble or it isn't real," he said.
Wien says he sees gold reaching $1,500 within two years, although any potential price gain
is less important than having a safety net. "I'm recommending gold as a kind of insurance policy
against calamity in financial assets," Wien, 77, said.
While Soros has called gold a bubble, he hasn't gotten out of the
market.
SPDR Gold was the Soros Fund's largest single holding as of Sept.
30, according to a filing with the SEC. The fund acquired 5 million shares in the iShares Gold Trust,
the filing shows.
'Where Are You'
"It's all a question of where are you in that bubble," Soros, 80, said in a speech at a meeting
organized by the Canadian International Council in Toronto on Nov. 15. "The current conditions of actual deflationary pressures and fear of inflation is pretty ideal
for gold to rise."
"The big negative is that too many people know this and a lot of hedge
funds are very heavily exposed," Soros continued. He declined an interview request for this article.
Siegel, the Wharton finance professor, says he's skeptical about the metal over the long term,
especially for retail investors. He believes they will have a harder time judging when to buy and
sell.
His research shows gold has underperformed stocks, bonds, bills and even real estate over the
long run. It has total real returns of just 0.6 percent per year since 1802, compared with 6.6 percent
for stocks, 3.6 percent for bonds and 2.8 percent for bills. One of the only things gold has beaten
is the dollar, said Siegel.
Unlike assets such as oil or wheat that are consumed based on economic
factors, gold's true value is difficult for ordinary investors to judge, Siegel said. Its worth is
often determined by fears of inflation or financial collapse, he said.
"If you can judge how these investors will evaluate those fears, you will do well," he said.
With assistance from Asjylyn Loder in New York and Nicholas Larkin in London. Editors: Marcia
Myers, Melissa Pozsgay
EFT create risk of bubble. As investors have easy buy, Wall Street
can sell much faster then anybody. 60% drop is not unfeasible. ETF allows to jump in quickly but
it allow to jump out even quicker.
Some traveling gold buyers offer only pennies on the dollar for jewelry… (Gary Friedman, Los Angeles
Times)Gold buyers and sellers should beware of shady dealers
As the price of the precious metal soars, many investors are discovering the dark side of gold
sales.
October 31, 2010|Kathy M. Kristof | Personal FinanceHoward Wolfe watched gold prices soar for several
years before he finally decided to jump.
Last year, the Mississippi retiree answered an advertisement for a company selling gold bullion.
He wired $20,000 when the metal was retailing for $1,100. As of last week, gold was selling for more
than $1,300.
"I liked the company because they seemed kind of low-key," Wolfe said. "They're still low-key.
Really low-key. I'm trying to find the rock they're hiding under."
As the price of gold surpassed one record after another over the last two years, all too many
investors discovered the dark underbelly of gold sales. Scams proliferated as unsophisticated buyers
poured into the market to take advantage of rising prices.
The phones at Wolfe's gold dealer, Superior Gold Group in Santa Monica,
have been disconnected. The company has an "F" rating with the Better Business Bureau,
largely as the result of 44 unanswered complaints. A precious metals trade group said it received
complaints from individuals who invested more than $170,000 in bullion that Superior never delivered.
The chance of getting the investors' money back? Negligible.
Gold buyers are not the only ones who should beware. Those seeking to sell their gold are also
at risk.
Jerry Jordan, managing editor of the Examiner, a weekly newspaper
in Beaumont, Texas, spent the last eight months conducting sting operations on traveling gold buyers.
These itinerant pitchmen and -women, who set up shop in local hotel ballrooms, advertise
that they'll pay "top dollar" for jewelry and coins.
Jordan noticed that the traveling purchasers often targeted areas hit hardest by the sour economy.
It was where consumers were likely to be the most desperate.
He borrowed a pocketful of rare coins when one of these road shows passed through town and went
to see what he'd be offered. Jordan was told that a coin worth $13,000 would fetch $250. Another
worth $10,000 got a bid of $60 - not exactly the "top dollar" that was promised.
Jordan has since attended traveling gold-buying shows in four states and written a series of award-winning
exposes. The short version:
"They routinely offer pennies on the dollar," he said. "They have an internal motto: If the customer
is not educated, do not educate them."
Bloomberg TV is running an interesting special on gold today titled "The Dark Side of Gold."
As one might expect it contains the usual claims that gold is in a bubble and poses a danger to
the public in a variety of dimensions.
What I thought was a bit unique is that they are now blaming the entire gold rally on the creation
of the GLD ETF.
Indeed, Carol Massar said today that before the gold ETF "gold was trading at $400 and the only
people buying gold were conspiracy theorists who were hiding it in their pantries."
In her defense Carol, along with a number of the talking heads on financial TV, are just news
readers, and one might as well blame the weatherman for reading the Weather Service forecasts.
But I don't suppose it might have occurred to whoever wrote this 'special report' to mention that
the central banks, who had been steadily selling their gold reserves for the last twenty years, led
by the US and England, had started to become net buyers of gold led by the BRIC countries, an event
of tremendous significance among many others of a general change in the markets and the beginnings
of a largely unreported 'currency war.'
And it is my experience that when a writer or analyst starts reaching for ad hominem remarks of
a non-satirical nature that they are just plain out of facts and faltering in a desire to win an
argument that is running against them.
This reminds me of what the dean of financial letters recently said about a similar performance
on Bloomberg:
"I listened to Kitco's Nadler on the Bloomberg channel this morning. He's been bearish on gold
for months, and I thought he sounded like a know-nothing fool today. Why didn't Bloomberg interview
someone who's been bullish and right about gold?" Richard Russell The big changes are almost never
caught by those close to the action, or with a vested interest in some aspect of the status quo that
blinds them to change. It is the nature of the big changes, what makes them 'big.' This reminds me
so much of early November 2009 when economist Willem Buiter launced into some irrational rants about
gold bullion in the Financial Times, a few weeks before shed his Maverecon status to join the ranks
of Citigroup.
Buiter Still Fitfully Obsessing About Gold
When 'news outlets' or 'analyst/economists' with ties to Wall Street start coming out with such
outlandish statements, gold may likely be going another leg higher in the following months.
And a bit of a mystery is why there is almost never any mention of silver, which is making gold
look like a bit of a slacker by comparison as an emerging store of value for wealth that fears the
arbitrariness of the Wall Street dominated global financial system.
Posted by Jesse at 4:15 PM Email This BlogThis! Share to Twitter Share to Facebook Share to Google
Buzz Category: gold daily chart, silver weekly chart 19 December 2010 Greed Is Not Good
With regards to the global financial crisis, imposing austerity is not the answer. That is like
starving the slaves to improve their condition by making the plantation more profitable. Looting
the 'great house' and the barns to feed the slaves, at least temporarily, is not the answer either.
The problem is obviously in the system itself.
But either expedient solution suits the external monied interests promoting the system who seek
only to plunder and drain the assets and labor of others who are all their common prey, whether they
feel their kinship or not. An unjust and unsustainable system tarnishes all participants and leaves
them vulnerable to exploitation and decay.
It is the root causes of the debt and the imbalances in the system that must be addressed to make
any reform sustainable. And this obviously includes addressing abuses such as the promotion of a
global trade regime that is inherently unjust and imbalanced to the favor of the oligarchs of whatever
political wrappings around the world who hold the greater profit to themselves and leave their people
relatively impoverished and exploited. And it also includes the waging of unfunded wars to protect
and promote privileged commerical interests, and a political funding system that is little more than
soft graft and an open invitation to corruption by special interests.
It begins with a debilitating system of taxation by the monied interests on every commercial transaction
in the form of fees and commissions, and the abuse of a money system that is little more than a fraud
perpetrated by private interests for the benefit of a few at the expense of the many. If you wish
a simple measure of this, then look to the median wage.
Greed is not good. Greed is a disease, an abberation of simple honest ambition and necessary provision
taken to excess. This simple distinction may be lost on a people no longer able to distinguish between
virtue and sin, honor and expediency, appetite and gluttony, the means and the ends. Every great
religion, every school of philosophy has cautioned throughout history on the perils of unbridled
and unregulated greed. And yet this generation would make a god of it, although in fairness most
really do not understand what it is that they do and how and whom they serve.
Greed, often in company with hubris, is a handmaiden of the corrupting influence of power and
triumph of the will. Greed is contagious, and attacks the very contentment of society at its heart,
turning it towards anarchy and oppression.
"Greed is a bottomless pit which exhausts the person in an endless effort to satisfy the need
without ever reaching satisfaction." Erich Fromm Any system that promotes greed, gluttony, and insatiability
as its highest goods and fundamental ideals is a cult of perversion and addiction on a scale with
ancient Rome, an imbalanced insult to the natural law, with a fatal attraction to overreach, failure
and self-destruction. What the US has today is not market capitalism that rewards the merits and
work of individuals, but rather is the product of dishonest and disordered minds, a system of fraud
and plunder by privileged oligarchs masquerading as fair and honest markets of legitimate valuation
and price discovery.
"Because the free market system is so weak politically, the forms of capitalism that are experienced
in many countries are very far from the ideal. They are a corrupted version, in which powerful interests
prevent competition from playing its natural, healthy role." Raghuram G. Rajan The Banks must be
restrained, and the financial system reformed, with balance restored to the economy, before there
can be any sustained recovery.
Financial Interests Dictate Sovereign Policy By Michael Hudson December 18, 2010
"...The economic problem is not caused by sovereign debt but by bad bank loans, deceptive financial
practice and neoliberal bank deregulation. Iceland's Viking raiders, Ireland's Anglo-Irish bank and
other foreign banks are trying to avoid taking losses on financial claims that are largely fictitious,
inasmuch as they exceed the ability of indebted economies to pay. The 'crisis' can be solved by making
the banks write down their debt claims to realistic 'junk' valuations. There is no need to wreck
economies by subjecting them to financial asset-stripping.
In such cases there's a basic principle at work: Debts that can't be paid, won't be. The question
is, just how won't they be paid? As matters stand, countries are being told to subject themselves
to massive foreclosure – not only a forfeiture of homes, but of national policy.
In this respect the sovereign crisis is a crisis of sovereignty itself: Who shall be in charge
of the economy, its tax philosophy and public spending: elected officials acting in the public interest,
or an intrusive financial oligarchy? The EU was wrong to tell governments to pay for following its
advice – and pressure – to trust financial crooks and deregulate bank oversight. The European Central
Bank should reimburse victimized governments for the bailouts that have been paid. This reimbursement
can be done by levying a progressive tax policy and creating a central bank to help finance governments.
The proper aim of a national economy is to promote capital formation and rising living standards
for the population as a whole. not a narrowing financial class at the top of the pyramid. So I see
two major policies to lead the way out of this mess:
First, shift taxes back onto land and resource rent, and onto financial and capital gains. This
will prevent another real estate bubble from being inflated by debt leveraging. By holding down housing
prices, it will save labor from having to pay an equivalent amount in income tax. Low real estate
taxes (under 1% until just recently) have not saved homeowners money in Latvia. Low property taxes
merely have left more rental income to be pledged to banks, to capitalize into large mortgage loans.
Second, de-privatize basic utilities and natural monopolies to save Europe from rentiers turning
it into a tollbooth economy. Europe needs a central bank that can do what central banks are supposed
to do: create money to finance government deficits. But the European Central Bank and article 123
of the European Constitution as amended by the Lisbon Treaty prevents the central bank from lending
to governments. This forces governments to levy taxes to pay interest to banks – for creating electronic
credit that a real central bank could just as well create on its own computer keyboards.
Government banking is not necessarily inflationary. It finances what is necessary for economies
to grow: investment in infrastructure and capital formation to raise productivity and minimize the
cost of doing business.
What turns out to be inflationary is commercial bank lending. It inflates asset prices – unproductively.
Banks lend mainly against real estate and other assets already in place, and stocks and bonds already
issued. This is unproductive credit, not real wealth creation. The only way to keep this unproductive
debt overhead solvent is to inflate asset prices more – by untaxing assets to leave more revenue
to pay bankers on exponentially growing debts.
It doesn't have to be this way. The recent 30 years of financial polarization is reversible. The
alternative is to succumb to neoliberal austerity."
I think that most people know what needs to be done in their conscience, but their hearts have
become so hardened over the past twenty years that the message will be ignored until after they undergo
a period of suffering on the scale of the worst of the twentieth century. May God have mercy on us
all.
Unless the Lord builds the house, the builders labor in vain. Unless the Lord watches over the
city, the guards stand watch in vain. In vain you rise early and stay up late, toiling for food to
eat- for he grants sleep only to those he loves.
In 2001 retail investors were given the opportunity to own gold in a format that meant they didn't
have to hide it under the bed called Exchange Traded Funds (ETF),
of which the most prominent was GLD.
It looks like in 2009 ETF gold purchases will account for as much as 18% of total gold purchases;
it looks as if the ETF market could well be an incremental, i.e. new source of demand, which might
therefore change the dynamic of the gold market.
Interesting that they dynamics of ETF gold purchases sort of track the explosion of the price
of gold; perhaps there is a new dynamic emerging?
This is a chart comparing the price of oil over the past few years with the "price" worked out
for the formula on the first slide (i.e. the dark black line is a proxy for the price of gold).
My take on that chart is that the oil-gold relationship held up pretty
well until early 2008 until "someone" started to mess with the price of oil. Note
the "under pricing" of gold in 2005, possibly thanks to the work of COMEX.
This chart shows my estimate of mis-pricing of both oil and gold shown quarterly with purchases
of gold by ETF superimposed (gold line). By the way, the "gold mispricing" is calculated from the
OTMV for oil, not the actual oil price.
Comments:
1: The "mis-pricing" of gold (according to me) starting in 2007 looks like it was driven mainly
by an increase in ETF purchases, that started before the oil bubble, so a possible explanation might
well be that the increasing importance of ETFs in the gold market might have precipitated that.
2: The same thing appears to be happening now.
3: My immediate reaction looking at the blue line (gold mis-pricing) is/was that it looks like
a bubble about to pop, although perhaps the dynamic has been changed by the "new" ETF market?
What remains to be seen is whether that demand is somehow altering the fundamental (i.e. pulling
the price away from the "traditional" Oil/Gold relationship), in which case expect prices to stay
high and also expect a new dynamic to unfold in the future.
Or whether there is a long-term fundamental price for gold which is somehow related to the price
of oil, in which case expect prices to go down to about $750 over the next year, with perhaps a temporary
overshoot.
Or, of course, what's driving the market could be something else entirely, as everyone keeps telling
me. It could for example be the final "death throes of fiat currencies and the corruption of the
incompetent Central Bankers".
That's a possibility, although those have been around for ages; my guess is they will be around
for quite a few more ages to come.
More likely what's driving things is good-old supply and demand in the marketplace, and just because
no one can agree on how the market works or what the drivers are, doesn't mean there isn't one.
If that's so, then potentially, now that ordinary retail investors can participate in the market
the dynamic might be changing.
Published: October 12 2010 14:01 | Last updated: October 12 2010 14:01
Gold is back in the news. Its
price is soaring in what some analysts say is a reflection of a weak economy and a lack of confidence
in government policies. Naturally, investors are looking at a new sure thing in the expectation that
prices will continue upward. My advice to the US government, however, is that this may be the best
time – to sell. Doing so would help President Barack Obama and Congress reduce indebtedness, at little
cost.
It is an article of faith in bullion markets that the US will be the last country to dispose of
its gold stock. For 30 years it has had a no-net-sales policy for reasons ranging from resistance
by US gold-producing interests to concerns about the international monetary system. That assumption
may remain plausible. Yet the administration has an obligation to re-examine its policy.
The market price of gold has
risen for more than a decade propelled by low interest rates, the hype of the bullion dealers
(holding large inventories) and no doubt the normal amount of fraud and misinformation accompanying
asset price bubbles. The Financial Times has reported that the precious metals industry expects the
price to
increase by a further 11 per cent over the next year.
Meanwhile, the US Treasury holds 261.5m fine troy ounces of gold. The government has been sitting
on it since the Great Depression, receiving no return. At the current market price of $1,300 per
ounce, the US gold stock is worth $340bn. The Treasury secretary, with the approval of the president,
has the power to sell (and buy) gold on terms that the secretary considers most beneficial to the
public interest. Revenues from sales must be used to reduce the national debt.
If the US were to sell its entire gold stock at the current market price, it would reduce the
gross government debt by 2¼ per cent of gross domestic product. (US net government debt would decline
by essentially the same amount because the US gold stock, listed as an asset on the balance sheet,
is valued at only $42.22 an ounce.) Based on the average interest cost from 2005 to 2008, this reduction
in debt would trim the budget deficit by $15bn annually. Thus, the Obama administration would be
doing something about the US fiscal debt and deficit without reducing near-term support for the ailing
economy.
This proposal has other benefits too. First, the US would be obeying the maxim to buy low and
sell high. Second, it would be performing a socially useful function. Demand for gold exceeds normal
production, driving up the price. To the extent that the gold craze is being fed by concern (rational
or irrational) about government policies, public welfare would be enhanced by giving citizens something
tangible to hang around their necks or place in safe deposit boxes. Third, if the price is a bubble,
as seems likely, the sooner it is burst the better for the average investor.
Some people point to possible costs. Aside from political pressures from those who want to protect
the value of their holdings, above or below ground, two principal arguments are made against US gold
sales. The first is that they would disrupt the market. But the US can be cautious in its sales,
avoiding disruption of the sales programmes of other countries, as it has in the past. There is little
risk. In recent years, sales under the Central Bank Gold Agreement have dwindled, and some other
central banks are buying gold. (The US is not a party to the agreement.) Also the International Monetary
Fund has completed more than three-quarters of its own planned sales of 403.3 metric tons.
Another counter argument is that the US should hold on to its stock in anticipation of a return
– by itself alone or with other nations – to a monetary system based on gold. But returning to the
gold standard would reinstate a system associated with unstable prices, wages, output and employment.
It has not existed for a century; and will not make a comeback. Official discussions of the reform
of the international monetary system do not include any advocates of a return to gold, and the IMF
articles of agreement prohibit it. The sooner thoughts of such a return are laid to rest, the better.
A related argument is to keep tthe prospect of misery for several more years, how much more rain
must pour before the US acts?
The writer is a senior fellow at the Peterson Institute for International Economics in Washington
The Trends Are Extended, Start Thinking Consolidation and Reversals, But Wait For It
The trends are extended on quite a few charts. The action in the US markets is being artificially
inflated and supported by monetization and liquidity so it *could* continue on for some time, even
until the election. It is being fueled by the expectation of a large quantitative easing by the Fed
shortly thereafter. That QE, when it arrives, is likely to be sold if it is not significant enough
to meet expectations.
I am more cautious on short term positions here, and have had some short hedges on in the overnight,
but deftly. It is important not to exhaust yourself expecting a trend change before it is ready to
happen, and one cannot anticipate exogenous events by definition. Still, the time is ripe for one
to have a significant effect should it occur.
The long term trends are all intact, but we have reached a position where we might be looking
for intermediate tops and consolidations. The Fed is not infallible or omnipotent, but rather determined
and capable within its limits. The combination of government and the monied interests is powerful
and ruthless. Manage your money tightly and wait for it if you are trading.
Posted by Jesse at 10:33 PM Email This BlogThis! Share to Twitter Share to Facebook Share to Google
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Category: reversal patterns Gold and Silver, SP 500 and NDX December Futures Daily Charts
Gold met the intermediate measuring objective of 1375 today. The slope of this rally is a bit
strenuous and a consolidation would not be out of order, and might even be welcome for traders to
catch their breath and square up positions. However gold may not oblige as this breakout is particularly
violent having built such a long and broad handle in its base formation.
Silver is taking out $24 oz. in what is an extraordinary rally following JPM's closing of Blythe
Master's proprietary trading group.
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Category: gold daily chart, NDX Daily Chart, Silver daily chart, SP Daily Chart Financiers Offer
Terms to the Rest of World in the Currency Wars
Anglo-American financiers to the Rest of World: We've a Gun to Our Heads, Better Surrender.
"To put it crudely, the US wants to inflate the rest of the world, while the latter is trying
to deflate the US. The US must win, since it has infinite ammunition: there is no limit to the dollars
the Federal Reserve can create. What needs to be discussed is the terms of the world's surrender:
the needed changes in nominal exchange rates and domestic policies around the world." Destroy the
world economy by trashing the global reserve currency? Yes we can.
I hate to make light of this because it does offer a useful vignette of the deployment of opposing
lines and basic strategies in the currency war, at least from one perspective. Several years ago
I forecast that the Bankers would make the world an 'offer they cannot refuse,' or at least that
the Bankers think that they cannot refuse. Hank Paulson made such an offer to the US Congress, and
now it appears that the financiers are extending a similar type of offer to the rest of the world.
And quiet flows the Don.
Financial Times Why America is going to win the global currency battle By Martin Wolf October
12 2010 22:30
Currencies dominated this year's annual meetings of the International Monetary Fund. More precisely,
two currencies did: the dollar and the renminbi, the former because it was deemed too weak and the
latter because it was deemed too inflexible. But, behind the squabbles, lies a huge challenge: how
best to manage the global economic adjustment.
In his foreword to the new World Economic Outlook, Olivier Blanchard, the IMF's economic counsellor,
states: "Achieving a 'strong, balanced and sustained world recovery' – to quote from the goal set
in Pittsburgh by the G20 – was never going to be easy ... It requires two fundamental and difficult
economic rebalancing acts."
The first is internal rebalancing – a return to reliance on private demand in advanced countries
and retrenchment of the fiscal deficits that opened in the crisis. The second is external rebalancing
– greater reliance on net exports by the US and some other advanced countries and on domestic demand
by some emerging countries, notably China. Unfortunately, concludes, Professor Blanchard, "these
two rebalancing acts are taking place too slowly".
We can consider this rebalancing on two dimensions. First, the erstwhile high-spending, high-deficit
advanced countries need to de-leverage their private sectors on the journey to what Mohamed El-Erian
of Pimco, the investment company, called "the new normal", in his Per Jacobsson lecture. Second,
the real exchange rates of economies with robust external positions, strong investment opportunities,
or both, need to appreciate, while expansion of domestic demand offsets the consequent drag from
net exports.
Aggressive monetary policy by reserve-issuing advanced countries, particularly the US, is an element
in both processes. The cries of pain now heard around the world, as markets push currencies up against
the dollar, partly reflect the uneven impact of US policy. Still more, they reflect the stubborn
unwillingness to accept the needed changes, with each capital recipient trying to deflect the unwanted
adjustment elsewhere.
To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to
deflate the US. The US must win, since it has infinite ammunition: there is no limit to the dollars
the Federal Reserve can create. What needs to be discussed is the terms of the world's surrender:
the needed changes in nominal exchange rates and domestic policies around the world.
If you wish to understand how aggressive US policy might become, read a recent speech by William
Dudley, president of the Federal Reserve Bank of New York. He notes that "in recent quarters the
pace of growth has been disappointing even relative to our modest expectations at the start of the
year". Behind this lies deleveraging by US households, in particular. So what can monetary policy
do about it? His answer is that "very low interest rates can help smooth the adjustment process by
supporting asset valuations, including making housing more affordable and by allowing some borrowers
to reduce debt interest payments. Beyond this ... to the extent that monetary policy can 'cut off
the tail' of the distribution of potential adverse economic outcomes ... it can help encourage those
households and businesses with money to spend to do so".
Above all, today's low and falling inflation is potentially calamitous. At worst, the economy
might succumb to debt-deflation. US yields and inflation are already following the path of Japan's
in the 1990s (see chart). The Fed wants to stop this trend. That is why another round of quantitative
easing seems imminent.
In short, US policymakers will do whatever is required to avoid deflation. Indeed, the Fed will
keep going until the US is satisfactorily reflated. What that effort does to the rest of the world
is not its concern.
The global consequences are evident: the policy will raise prices of long-term assets and encourage
capital to flow into countries with less expansionary monetary policies (such as Switzerland) or
higher returns (such as emerging economies). This is what is happening. The Washington-based Institute
for International Finance forecasts net inflows of capital from abroad into emerging economies of
more than $800bn in 2010 and 2011. It also forecasts massive intervention by recipients of this capital,
albeit at a falling rate (see chart).
Recipients of the capital inflow, be they advanced or emerging countries, face uncomfortable choices:
let the exchange rate appreciate, so impairing external competitiveness; intervene in currency markets,
so accumulating unwanted dollars, threatening domestic monetary stability and impairing external
competitiveness; or curb the capital inflow, via taxes and controls. Historically, governments have
chosen combinations of all three. That will be the case this time, too.
Naturally, one could imagine an opposite course. Indeed, China objects to the huge US fiscal deficits
and unconventional monetary policies. China is also determined to keep inflation down at home and
limit the appreciation of its currency. The implication of this policy is clear: adjustments in real
exchange rates should occur via falling US domestic prices. China wants to impose a deflationary
adjustment on the US, just as Germany is doing to Greece. This is not going to happen. Nor would
it be in China's interest if it did. As a creditor, it would enjoy an increase in the real value
of its claims on the US. But US deflation would threaten a world slump.
Prof Blanchard is clearly right: the adjustments ahead are going to be very difficult; and they
have also hardly begun. Instead of co-operation on adjustment of exchange rates and the external
account, the US is seeking to impose its will, via the printing press. The US is going to win this
war, one way or the other: it will either inflate the rest of the world or force their nominal exchange
rates up against the dollar. Unfortunately, the impact will also be higgledy piggledy, with the less
protected economies (such as Brazil or South Africa) forced to adjust and others, protected by exchange
controls (such as China), able to manage the adjustment better.
It would be far better for everybody to seek a co-operative outcome. (Co-operative outomce is
code for 'obey our will and give obesiance to the financiers' - Jesse). Maybe the leaders of the
group of 20 will even be able to use their "mutual assessment process" to achieve just that. Their
November summit in Seoul is the opportunity. Of the need there can be no doubt. Of the will, the
doubts are many. In the worst of the crisis, leaders hung together. Now, the Fed is about to hang
them all separately.... The theme for the next ten years is self-sufficiency.
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Category: currency wars, financial engineering 12 October 2010 Gold and Silver, and SP 500 and
NDX December Futures Daily Charts
"As a dog returns to its vomit, so the Fed returns to its folly." Prov 26:11
Financial Times Fed tilts to more monetary easing By James Politi in Washington and Robin Harding
in St Louis October 12 2010 19:15
The likelihood that the US will soon launch a fresh burst of "quantitative easing" has increased,
as minutes from the Federal Reserve's latest meeting revealed that officials were nearing an agreement
on the need for additional monetary stimulus. The official record from the September 21 gathering
of the federal open market committee, which sets interest rates, showed that "many" officials thought
a new round of monetary easing might be necessary to breathe life into the sluggish US recovery...
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Category: gold daily chart, NDX Daily Chart, Silver daily chart, SP Daily Chart Net Asset Value
of Certain Precious Metal Trusts and Funds
The gold premiums are highly contracted.
This could be the result of arbitrage hedging which we have discussed in the past. Essentially
one could buy the futures and sell short PHYS and pocket any premium differential.
Traditionally it had been a sign of a lack of 'exuberance' in the specs over the future price
moves.
The premiums tended to expand during speculative public buying AND short squeezes in the unit
trusts.
AEIR Triffin's Dilemma, Reserve Currencies, and Gold By Walker Todd
Nearly 50 years ago, Yale University economist Robert Triffin identified
the inevitable future deterioration of the dollar in his book, Gold and the Dollar Crisis: The Future
of Convertibility (1960). Essentially, Triffin argued, under the Bretton Woods system
in which the U.S. dollar was the world's principal reserve currency (instead of gold, for example),
the United States had to incur large trade deficits in order to provide
the rest of the world with the liquidity required for functioning of the global trading system.
Unfortunately, Triffin wrote, U.S. trade deficits eventually would undermine the foreign exchange
value of the dollar because foreign accounts would hold an increasing quantity of dollars. Restating
Triffin's argument in contemporary terms, as the proportion of dollar claims held abroad versus U.S.
gross domestic product (GDP) increases, the foreign exchange value of the dollar must decline if
dollar interest rates do not increase at about the same rate as the foreign dollar claims.
Issuing the reserve currency gives domestic policy makers an advantage by making it easier to
finance either domestic budget deficits or foreign trade deficits because there always is a ready
bidders' market for any financing instruments from that issuer. Issuing the reserve currency enables
the domestic population to consume more goods and services from whatever source than otherwise would
be feasible. And issuing the reserve currency gives foreign policy officials of that nation the upper
hand in determining multilateral approaches to either diplomacy or military action.
This last reason probably is why U.S. policy makers clung to the original Bretton Woods format
for about 10 years beyond the point at which it still was viable, with the whole apparatus finally
collapsing in August 1971.
Let us reconsider the effect of reserve currency issuance on domestic and foreign trade for a
moment. Unless the issuing authorities can discover a way to allow their currency to depreciate more
or less in proportion to the growing foreign trade deficits-by reducing interest rates or otherwise
stimulating domestic inflation, for example-then a sustainable equilibrium becomes impossible.
Either the currency remains overvalued (good for the reserve currency status) and the trade deficits
continue to increase, or the currency maintains fair external value (implicitly, a proportional devaluation,
which is bad for the reserve currency status) and the trade deficits either stabilize or shrink.
This latter proposition is what Professor Triffin was writing about in 1960, and it has been called
Triffin's dilemma ever since.
Lewis Lehrman and John Mueller revived the discussion of Triffin's dilemma, without calling it
that, in an article that appeared on December 15, 2008, in National Review Online. They suggested
that the proper international reserve currency should be gold. I agree and wrote as much in a commentary,
in the Christian Science Monitor, November 17, 2008.
Lehrman and Mueller argue correctly that no country willingly should volunteer for the reserve
currency role. Such an endeavor necessarily leads to the same pattern of persistent overvaluation
and trade deficits that plagued the United States since European currencies became generally convertible
in 1959. Our abandonment of the international gold exchange standard in August 1971 accelerated and
intensified our external deficits and the volatility of exchange rates.
Among advanced economies that were key members of the old Bretton Woods system, tolerating large
amounts of external claims in their currencies always was a sore point because they wanted to avoid
de facto reserve currency status and the curse (Triffin's dilemma) that accompanies it.
In the last two decades, roughly since the fall of the Berlin Wall in 1989, European countries
have adopted the euro and allowed large external claims in euros to arise. The Japanese bubble of
the 1980s finally burst and relieved the reserve currency pressure of large external claims there
until the last couple of years. Recently prosperous nations like China, India, and Brazil linked
their currencies to the dollar and managed exchange rates so as to avoid the accumulation of large
external claims. Thus, none of the most likely candidates is volunteering for reserve currency status...
There is a tide in the affairs of men.
Which, taken at the flood, leads on to fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.
On such a full sea are we now afloat,
And we must take the current when it serves,
Or lose our ventures.
Julius Caesar: Act 4, scene 3, 218–224
China and Russia and some of the other developing nations have been proposing a reformulated SDR,
with less US dollar content, a broader representation of currencies, and the inclusion of gold and
silver, as a suitable replacement for the US dollar as the global reserve currency.
The US and
UK are opposing the SDR as replacement to the US dollar as the new global reserve currency. They
prefer to delay and postpone the discussions, and to maintain the status quo for as long as is possible
to support their primacy in the financial markets. Control of the money supply is a huge hand on
the levers of financial and political power.
It will be most interesting to see where the European Union comes out on this issue, especially
in light of the recent drubbing that their banks have taken via dodgy dollar assets and a vicious
dollar short squeeze, alleviated by a rescue from the Federal Reserve. It could have gone otherwise,
and that provides things to think about. No one wishes to be at the mercy of a small group of unelected
financial engineers who are closely aligned with an equally small set of Anglo-American banks operating
with a somewhat opaque discretion. Or the goodwill of totalitarian governments who are acting aggressively
from their own mercantilist self-interest for that matter.
One hears things. A deal being offered to Germany by the financial interests, for example, as
a counterbalance to sentiment for greater latitude and independence in the EU. The lines of discussion
move, and sometimes blur. Currency wars are the continuation of diplomacy, and possibly a revival
of the cold war, by other means, to paraphrase Clausewitz. And a chilling fog is rolling over the
landscape. This is what the timeless metal has been telling us, as it sounds an historic warning.
This is just the latest episode in a long unfolding macro change I have been calling
Currency
Wars after the Chinese best seller authored by Song Hongbing in 2007. I viewed it as the definitive
spike in the theory of
The End of History by Fukuyama.
It will continue to proceed slowly, at least for now, but such events tend to accelerate and sometimes
dramatically as they progress. However the longer term implications for a change to the de facto
Bretton Woods arrangement in place since Nixon closed the gold window in 1971, are enormous and yet
little remarked yet by conventional economists, who too often prefer to glare at photons, gaping
in the light. It has all the hallmarks of a classic conflict yet unfolding.
Rather than standing fast on an unsustainable status quo, as noted
in Triffin's Dilemma,
that serves the special interests of a wealthy few, the US might be well served to reform its banks,
and balance its economy between service and industry, and stand once again for independent freedom
and the common good, rather than narrow power and greed of the monied interests, and their willing
tools and frivolous assistants. That is to trust in the wisdom and altruism of a people
and their leaders who have of late shown a greater propensity to greed, deceit, and self-destruction.
And so I say we must be in God's hands, because I recoil from Caesar's deathly grasp.
Some worry about deflation and inflation. Those outcomes are both
hedged easily enough. I am more concerned about the next global holocaust of human destruction, and
the bonfire of the vanities yet to come. That is history.
Financial Times
Germany asks US to give up its IMF veto By Alan Beattie in Washington
September 14 2010 22:31
The US should give up its veto over important decisions in the International
Monetary Fund in return for Europe accepting a smaller say, Germany has proposed.
The suggestion, which experts say will be strongly opposed by the US, addresses a politically
highly symbolic dispute about voting power and seats on the fund's executive board. Shifting power
towards emerging market countries is one of the central elements in the Group of 20 nations' drive
to make the fund and other international institutions more representative...
Reuters Lagarde says French G20 to discuss wider use of SDR
2010-09-01 18:06 (UTC)
JOUY-EN-JOSAS, France, Sept 1 (Reuters) - France will use its presidency
of the G20 next year to discuss proposals for the wider use of IMF special drawing rights (SDRs)
as a reserve currency as proposed by China, Economy Minister Christine said...
A Report From The Front Lines Of The Gold Bubble Submitted by Tyler Durden on 10/02/2010 10:44 -0500
Central BanksExchange Traded FundFloridaHousing BubbleJumbo MortgagesNew York CityPrecious MetalsPrice
ActionReal estateRolex
A very illuminating report out of BNY's Nicholas Colas and Beth Reed describing the front lines
of the so-called gold bubble. A must read for everyone who would rather listen to third-hand anecdotes
and speculation instead of actually doing their homework. As Beth summarizes: "Bubbles are clearly
punctuated – and driven to their final demise – by bad behavior on the part of market participants.
My short, but colorful, excursion to the heart of the physical precious metals market revealed no
such excess. Is that enough proof to eliminate the possibility of a gold bubble? Of course not. But
I think it is enough to characterize recent calls for the demise of the gold/silver rally as very
much premature."
@#$% My Boss Makes Me Do – A Trip to the Center of the Gold "Bubble", from BNY ConvergEx
Summary: We recently did some firsthand investigation into the likelihood of a gold/silver bubble
by heading straight to a source of the would-be bubble – the precious metals mecca that is New York
City's 47th Street Diamond District. Surprisingly, absent from our findings was any sort of bubble-like
human behavior. Yes, the booming asset prices are there, but just as critical to any bubble is the
bad behavior that launches it into the stratosphere. Think subprime jumbo mortgages sold to part
time hairdressers or 10x oversubscribed IPOs for profitless dot com companies. We tried every way
possible to get salespeople to lure us into unwise, non-economic precious metals investments, but
with no luck. Yes, we know this is "anecdote" rather than "data." But the utter absence of heavy-duty
hustling and cajoling in what precious metal bears call a bubble leads to a common-sense conclusion:
this is no bubble. Not yet, anyway.
(Note from Nick: Nearby our office in New York is 47th Street – the toughest, most aggressive
retail/wholesale marketplace for jewelry, gemstones, and precious metals in the world. A logical
place to find proof of a retail-driven gold bubble, but too daunting for me. I hate pushy salespeople.
So I sent Beth. This is her report from the front lines of the precious metals market.)
A typical day at the office entails about 10 hours at my desk staring at computer screens backed
by a blank white wall. I have my own window view of sorts – about a 1" x 2" opening that gives a
48th floor perspective of lower Manhattan, and if I lean over a bit I can even see New Jersey. Nonetheless,
it does occasionally feel like I sit in one of those sensory deprivation tanks, just one that is
equipped with a keyboard and screens.
Wednesday, however, was quite a different story. I spent my afternoon trapped in a non-air-conditioned
Midtown pawn shop with a Swiss tourist who wasn't permitted to leave after politely declining the
owner's offering price for a used Rolex. Yes, not only do they buzz you in the door (for security
purposes), they must buzz you out as well. Apparently the shop girls are instructed not to let customers
leave if they haven't purchased anything. That way the owner has more time to cajole, haggle and
even harass.
Eventually the girl allowed the tourist to leave, at which point she was berated by the owner
while I stood awkwardly in silence.
Ahh, the things I do in the name of research… And why isn't Nick here? This was his idea originally…
However, there was a purpose behind this field trip to the only pawn shop in Midtown. With all
the commotion surrounding gold and silver these days and speculation we may be in the midst of a
precious metals bubble, it made sense to do a little firsthand investigation.
Every bubble has a "home" – Wall Street for the dot com bubble, literally "homes" in Arizona and
Florida for the housing bubble, and so on. Naturally, one home for any potential gold/silver bubble
must be jewelry and coin dealers, long known as a bastion of high-pressure sales and don't-let-a-prospect-leave-empty-handed
intensity. Hence the point in visiting New York City's (in)famous 47th Street Diamond District: to
scope out the source of the bubble in retail demand for precious metals.
Yes, we know that central banks and ETF buyers are also sources of gold demand. But when one of
the global hubs for the jewelry trade is about 500 yards from your desk, there's just no excuse for
not taking the pulse of one key part of the market – small buyers purchasing physical gold and silver
– with some site visits.
What I was looking for, in two words, was bad behavior. Yes, everyone thinks they can spot a bubble
just by looking at a price chart. But there is a lot more to a bubble than price action. There are
all the greedy, unscrupulous, sordid actions that humans engage in when greed takes over. Stupid
negative amortization mortgages sold to senior citizens. Initial public offerings of online retailers
whose only real asset was a well-known sock-puppet spokesperson. A jumbo loan issued to a part-time
hairdresser with no working knowledge of English or basic math.
So it came as quite a surprise that my trip to 47th Street was, in this sense, uneventful.
Before I tell you the details of my visits, however, a little background on this slice of jewelry
heaven/hell: An estimate popular with the press places the value of a single day's trade on the block
at a cool $400 million, and other reports say as much as 90% of diamonds in the U.S. first stop on
this 150 meter stretch of real estate. And as home to more than 2,600 independent businesses (most
of them simply one-man-operations who have set up booths within the various jewelry exchanges), it
is in theory a jewelry hustler's dream.
As someone who can't even stand being approached by a Bloomingdale's salesgirl, believe me when
I say there was a complete absence of sketchy con-man types, high-pressure salesmen, and any other
shady characters trying to rip me off. I've spent 3 years of my career working in close enough proximity
to this block that I've aimlessly ventured down it on my way to 5th Avenue more than a few times.
As often as I've been unwillingly harassed by unabashedly intense salesmen, I was shocked at the
low pressure atmosphere that awaited me when I willingly approached them.
The idea once inside was to get a feel for what average, non-financial people in the precious
metals trade think about the direction these assets are headed. I simply told them I had $500 that
I wanted to invest in a precious metals portfolio of sorts and that I would like their opinion on
what I should purchase, whether it be gold or silver, coins or jewelry. And then I let them talk.
The six vendors I spoke with fell into one of two camps – those who love gold and those who champion
silver. Though they didn't agree on which specific precious metal should highlight my $500 portfolio
(one even suggested platinum), they all quite emphatically discouraged me from purchasing jewelry
as an investment. I unintentionally approached two vendors who only dealt in jewelry (no coins, etc.),
and even they reluctantly told me they couldn't recommend jewelry as an investment. The reasoning
behind this revolves around the labor and design costs associated with "wearable" precious metals.
Though everyone was in agreement that coins are the way to go, surprisingly gold coins were not
the overwhelming favorites. Half of the dealers suggested that with my $500 I purchase one ¼ ounce
gold coin (cost = approximately $350) and use the remaining $150 to buy seven 1-ounce silver coins
at about $21 each. One vendor with supposedly 20+ year of experience reasoned that gold will always
gain in value. While it may not go up as rapidly as we've become accustomed to lately, his belief
was that it will never experience another significant, lasting drop in value.
On the other side of the spectrum, three of the six retailers recommended without hesitation that
I invest all of my $500 in silver coins. That would equate to about 23 silver coins at roughly $21
each. Reasoning varied from the simple (although not necessarily inaccurate) to the complex. For
example, one retailer hypothesized that since silver is the poor man's gold, and there are more poor
people than rich people, obviously silver is a better investment. He asked what I did for a living,
so I replied for the sake of simplicity that I worked for a bank. His response? "And they don't tell
you that there? You have to come to me?"
A more complex argument for silver over gold involved the ratio of the price of gold to the price
of silver. Currently it stands at 60:1 while in previous peak times it has been closer to 20:1. Currently,
silver is proportionately undervalued in comparison to gold, by this logic, and hence it theoretically
has more room to grow. The price of gold is also rapidly approaching the price of platinum, and some
of my contacts questioned how high it can actually go from here. I've attached a chart showing the
gold/silver price relationship over time so you can reach your own conclusions on this point.
The main takeaway here is that there was no bubble-like bad behavior. I expected something out
of the high-pressure school of sales. Men dangling gold chains with "Beth" in fake diamonds and telling
me it was a better investment than a prosaic gold coin. Or perhaps a creative soul pushing some crappy
¼ carat uncut diamond as a "superior" choice to precious metals. But none of this happened, despite
my repeated attempts and encouragements to all who would listen. As a final note, keep in mind that
recent or current issue gold coins have some of the thinnest margins in the business. Maybe you buy
some as a dealer and the price of the metal rises, but generally the bid/ask spread is no better
than 10-15%.
To me, this experience was somewhat like walking into a mortgage broker in Florida in 2006, asking
for a $750,000 loan with no income verification, and being laughed out of the office. Which is what
should have happened, but obviously rarely did. I am not trying to portray every jewelry and precious
metals dealer as the paragon of virtue; that's obviously not true. If you keep up on this space,
you know the criticisms of organizations like Goldline International.
But perhaps what my visits highlighted most clearly is that the precious metals business, at least
at high volume locations like 47th Street, does not feel the urgency to "make hay while the sun shines."
Maybe my non-hustling salespeople have confidence that underlying demand is robust (so why push?)
Perhaps the family/small business nature of their enterprise gives them a longer term perspective
on the precious metals cycle.
Bubbles are clearly punctuated – and driven to their final demise – by bad behavior on the part
of market participants. My short, but colorful, excursion to the heart of the physical precious metals
market revealed no such excess. Is that enough proof to eliminate the possibility of a gold bubble?
Of course not. But I think it is enough to characterize recent calls for the demise of the gold/silver
rally as very much premature.
JW :
Future Uses of Gold
Gold is too expensive to use by chance. Instead it is used deliberately and only when less
expensive substitutes can not be identified. As a result, once a use is found for gold it is rarely
abandoned for another metal. This means that the number of uses for gold have been increasing
over time.
Most of the ways that gold is used today have been developed only during the last two or three
decades. This trend will likely continue. As our society requires more sophisticated and reliable
materials our uses for gold will increase. This combination of growing demand, few substitutes
and limited supply will cause the value and importance of gold to increase steadily over time.
It is truly a metal of the future.
". . .we shall urge the greatest of caution upon everyone, everywhere regarding gold. It is
not just over-extended to the upside; it is hyper-extended. It is not just overbought; it is hyper-overbought.
We cannot strongly enough urge everyone to avoid buying gold here and we shall go so far as to
suggest that those who are long begin the process of quietly heading for the exits and to reduce
their positions to the most minimal 'insurance' positions possible. Everyone should have perhaps
5% of their liquid assets in gold, but at this point anything beyond that level is excessive."
–Dennis Gartman, September 29 2010
Dennis is an astute trader, and new goldbugs may want to tread cautiously here .
V
October 1st, 2010 at 5:25 am I think Marc Faber has the most honest answer on gold – to paraphrase
"First lets ask Mr Bernanke how much he will print".
holulu
October 1st, 2010 at 6:22 am What evidence this guy has to prove that gold is overbought ?
show me emperical data.
JasRas
October 1st, 2010 at 6:53 am These are hyper-exagerated words. Yes, it is over-bought, but
there is nothing "hyper" about it. on Dorsey Wright P-n-F it *just* overbought on the short term.
It is not on other sized charts. There is nothing technical that shows "hyper-overbought"…this
is fear mongering. The price isn't even hyper-bolic yet…wake me when it is moving $40-60/day and
I will start worrying about being close to the "pop" phase of the bubble. Yawn.
Fundamentally, well, over and over people say Gold has no fundies–so 'nuff said on that. Gold's
driven on anticipation of monetary base expansion, debasedment, fiat fear, inflation, its pretty,
whatever…
schnurmy
October 1st, 2010 at 8:13 am Sounds like Dennis is just pissed he isn't long!
carrottop
October 1st, 2010 at 8:38 am easy question: which would you rather short: bonds or gold ?
b_thunder Says:
October 1st, 2010 at 8:42 am agree with trading advise, disagree with the comment "Dennis is
an astute trader" – AFAIK Dennis is not just a trader, he's a hyper-trader. He changes his opinion
almost every day (at least on his TV apearances.)
KidDynamite
October 1st, 2010 at 8:45 am Barry – It's essential to note that this is not the first time
Gartman has called (prematurely) the Gold top:
" "We shall surprise a lot of people this morning with this statement, but we wish to rush
to the exits entirely with our long positions in gold versus the foreign currencies," he said
in his daily Gartman Letter. Gartman said that the trade to buy gold in euro terms XAUEUR= had
gone "parabolic" on Monday when it soared above 1,000 euros an ounce."
ronin
October 1st, 2010 at 9:31 am How, Mr. Gartman, is it overbought? Because some useless technical
indicator says so?
How many people in small town America own gold? How many of them even know what gold is trading
at? I'd guess 1/10 could answer these questions positively. Even in Japan where I reside, normal
people still have not hopped on the bandwagon. Even the "gaijin" bankers here, haven't really
bothered to put their personal money in gold yet.
A buddy of mine is a financial adviser here and he's been trying to get people buy gold for
years, so I asked him about his client base the other day and he says to me, "Gold is at 1300
and now they are calling me… I was telling them to buy when it was at 250!!!"
So, this is my indicator and it's telling me we are just at the beginning of this thing….
~~~
BR: Actually, that would confirm the crowded, overbought nature of the gold trade - and our
upside target has been $1350 for years
Arequipa01 Says:
October 1st, 2010 at 9:35 am It is always useful to contemplate contrary theses/assertions/opinions,
however, one bit of information that I think would help in weighing the wisdom of Gartman's assertion
has to do with Barrick. Anyone inclined to do a data dig can go find the most recent production
numbers. Is depletion an issue?
Investradamus
October 1st, 2010 at 9:43 am On the other hand,
"THROW THOSE OCSILLATORS AWAY "
http://smartmoneytracker.blogspot.com/2010/10/throw-those-ocsillators-away.html "Most
people have a lot of trouble buying anything when it's in an overbought condition (they have trouble
buying when it's oversold too). Unfortunately virtually every breakout occurs from overbought
levels. This is especially true during a powerful C-wave advance. Take a look at the last two
C-waves and the first leg up in the current C-wave.
You can see that each one of these powerful rallies when it broke out of the trading range
had already reached overbought levels. Then it stayed overbought for most of the rest of the rally…."
louiswi
October 1st, 2010 at 9:53 am Okay, so I was talking to my dog the other day about gold prices.
He said, " if you can't eat it or f#ck it, piss on it". At least that's what I thought he said.
I said, "really? He said, "really, what's the point of gold especially at these prices?"
tinbox
October 1st, 2010 at 9:54 am Astute trader? Gartman has a track record as manager of an ETF:
HAG on the TSE. It's not pretty.
Other than being unintentionally funny (his newsletter reads like an Onion parody of pre-WWI
pundits), I don't think he adds any value.
Onlooker from Troy Says:
October 1st, 2010 at 10:03 am Indeed a look at Gartman's record is in order. He is prone to
making all kinds of public pronouncements that don't quite pan out. And he's often a bit hyper-bolic.
The steady rise of gold without the normal retracements is indeed a bit unsettling to most
traders. But in terms of many of the oft-used indicators of overbought-ness it's really not overextended
(e.g. % above 20, 50, 200 DMA for instance). There is apparently an urgent bid being kept under
this market and as long as the dollar continues to dive it will stay just so. And yes, I know
that it is not perfectly inversely correlated to the dollar, but in times of extremes it most
often is.
And with all the skepticism that has been expressed about gold over the last number of months,
and the many erstwhile gold bulls who trimmed their positions hoping for/expecting a deeper pullback
in the normally weaker summer months (and lost their positions), there are plenty of folks remaining
to chase this market up for a while, I think.
ronin
October 1st, 2010 at 10:06 am BR – Crowded how? Maybe in the paper world but the smart folks
who buy and physically hold it aren't going anywhere for a long time. Gold is going higher and
it will stay that way until we come up with a better solution then the counterfeiting Fed!
Long term Says:
October 1st, 2010 at 10:10 am Gold is likely to come down as public fear subsides. One could
sell now to maximize returns. But gold prices are not going to crash by any stretch. I would certainly
hesistate to invest heavily in gold at this juncture since it is high.
tt
October 1st, 2010 at 10:16 am 2 summers ago i heard gartmann live say he was bearish on gold.
barry, this post was a waste. gartmann changes his views like i change my socks. but he has
a great stage presence in our amerikan idol country.
does gartmann use teleprompters?
How the Common Man Sees It Says:
October 1st, 2010 at 10:37 am Read between the lines and you get:
We are approaching the seasonal peak
Pool Shark Says:
October 1st, 2010 at 10:38 am Overbought, huh?
Wake me up when gold is at record highs in currencies other than just US$.
What a maroon…..
dead hobo Says:
October 1st, 2010 at 10:42 am Looks like a contrary indicator to me.
But, since I noticed it and wrote about it, then it would make me a contrary indicator.
But, now I noticed my contrary indicator status. Therefore, my observation of my observation
is a contrary indicator for gold prices. But wait … I just noticed that I noticed what I earlier
noticed. That changes everything.
Personally, I like V's answer best. Fed printing press money has to go somewhere. The bond
market is the first stop. Then stocks almost immediately after. Then I bet it ends up in gold
and attracts greater fools along for the ride. Since nobody gives a shit about asset bubbles in
gold, it's all free money.
Gatsby
October 1st, 2010 at 10:49 am George Soros would agree. However Soros also knows that "bubbles"
tend to run longer than people expect. SO what if Gold is over-bought, what event is going to
drive it down? How many times have venerable sources said that stocks were overbought since March
2009. Remember Doug Kass' call in September of 2009 or Art Cashin's missing half of the dot-com
boom?
For my money, topping signals (whatever they may be to you) only tell me to tighten up my stop
losses, and be more cautious if I am not already in.
Booms are more an exercise in crow psychology that anything "quantitative".
Niskyboy
October 1st, 2010 at 10:51 am @ dead hobo
You're being very contrary today. . .
farfetched
October 1st, 2010 at 10:54 am Hmmmmm…..who you gonna believe, Rosie or Gartman? I'm gonna go
with Rosie. Got corporate bonds? Gold? Dividends? So far Rosie is right. Remember, we are now
talking TRILLIONS with a "T". Also, SOMEONE posted SIX good looking charts of gold in six currencies
that show a strong trend…… This is from todays Breakfast.
"Gold still shining: We may not have a whole lot of conviction over the corporate profit outlook,
but we do have conviction over the looming growth rate of fiat currency; gold, and silver, are
likely going much higher still
benovic
October 1st, 2010 at 11:04 am If everybody had 5% gold like he suggests one should have,gold
would be much higher!
The PolyCapitalist Says:
October 1st, 2010 at 11:05 am Sounds like Dennis is still smarting from telling people to sell
gold in May. Thankfully my subscription to his news letter expired prior to his making that ill-timed
call.
October 1st, 2010 at 11:06 am There are election type signs stuck on roadsides offering to
buy gold, you can't turn on the TV without seeing at least one commercial wanting to buy your
gold or to sell you gold, jewelers are advertising to buy your gold. It seems to me that even
in my small town, the gold trade is crowded by both professionals and novices. Too, I'm sure all
of you realize that just because an asset price keeps going up doesn't mean the disbelievers are
wrong, just like the skeptics had it right in 99 and 07, they very well could be right again.
Then again, what are we worried about? Didn't the government say they would monitor and control
all assets bubbles from now on?
Robespierre
October 1st, 2010 at 11:17 am It sounds like sour grapes to me. As long as the FED is bent
over-backwards trying to debase the dollar gold will continue to shine. Also strong demand comes
from other countries were debasement is more overt.
contrabandista13 Says:
October 1st, 2010 at 11:17 am I don't know about the hyper side of it, however it has had very
nice run and should have a correction soon…. I have been long of gold since August of 2005, established
my initial positions in the futures and have added coins and bullion with the equity generated
from the initial position, what started off as an overweight 15% allocation to the asset, now
represents (due to variation) almost 80%. Due to the physical inventory, I'm not too concerned.
However, I agree that we're due for a shakeout with a possible correction to aprox. $1,100.00.
I would not use the term "hyper" to define such a move, although, I'm quite certain that we will
hear a great deal of hyper BS from the likes of CNBC…..
Best regards,
Econolicious
ronin
October 1st, 2010 at 11:19 am The thing I love about gold, it was disrespected, laughed at,
used as teeth by pimps, and was definitely ugly in the 80′s and 90′s, but now all the hotshot
traders don't know what to make of it. All they can do now is scream bubble! and try to bully
it just like they've always done. But believe me, this time gold is going to flex its muscles
for at least another couple years and it's going to put all these Wall Street bullies to shame.
That's secular not cyclical….
Mbuna
October 1st, 2010 at 11:19 am Barry, your comment is confusing because in my mind if you're
a goldbug you're not going to be trading it short term and you won't really care what the indicators
are. Furthermore I have a hard time imagining anyone getting the goldbug conversion experience
at $1300+/oz because there simply isn't enough panic around to make it happen.
somejerk69 Says:
October 1st, 2010 at 11:23 am Two days old and already refuted in yesterdays Gartman letter…
are you drinking the Kool-aid B? Most of the peeps I read say gold is a technically overbought
and due for a pull back… as it did in July… hmmm Dec to bottom in Feb?… and…
schnurmy
October 1st, 2010 at 11:38 am Funny that CNBC is always poo poo'ing Gold…if a large portion
of their veiwers/audience was involved or owned it in their 401k's & IRA's, I think it would be
getting much more "positive" & bullish attention. The guage for when Gold is a bubble will be
that. Currently, gold gets mostly 'negative' coverage & most guests they have on are cautiously
optimistic at best. We need a $100-200 super spike blow off before we get hyper-overbought.
taylorhr
October 1st, 2010 at 11:42 am Also, gold is fiat. It's just a rock with nothing backing it
up but the faith of those that believe in it's value.
You're welcome.
Lugnut
October 1st, 2010 at 11:43 am I would be curious to find out about how much of the ramp up
over the past 9 months was done via 'buyers' purchasing physical versus 'investors' purchasing
ETF or other virtual positions, and how that compares to historical ratios.
Robespierre
October 1st, 2010 at 11:45 am @taylorhr
"Also, gold is fiat. It's just a rock with nothing backing it up but the faith of those that
believe in it's value."
True but I don't think they can "print" any of it whenever they feel like it….
Hal
October 1st, 2010 at 12:04 pm not overbought until:
1) physical inventories are building and mints bring premiums back down
2) US balance sheet suddenly improves–meaning we do not run 2 trilion deficits
3) health care bill is rescinded becasue it is going to add deficits faster than the prescription
plan did 5-6 years ago.
gold and silver prices might correct but if you sell and it goes parabolic when you sell, you
wil have blown it.
Actaully gartman as a trader would still be holding until the trend changes. He has a stop
loss in mind–ask him how he learned about the need for stop loss point on treasuries many years
ago when he has his head handed to him due to his leverage. Maybe he forgot many do not use leverage.
inessence
October 1st, 2010 at 12:07 pm As long as Iran is willing to sacrifice Tehran for Tel Aviv in
a nuclear exchange (jihadists go to meet Allah, while the infidel Jews go to hell), this will
be another reason for gold to find a bid.
Thor
October 1st, 2010 at 12:17 pm TROY!!!!! Where in hell have you been mister?!?!?!?
4horsemen Says:
October 1st, 2010 at 12:37 pm From what I can see, there are not too many commodities that
AREN"T overbought right now. Even crude has caught a bid up to its daily RSI high. Copper is ridiculous.
The raw CRB is at all time highs.
Why single out gold. These commodities are telling us something. I don't think it is broad-based
inflation (yet), since there are still deflationary drivers (housing, capacity, etc.) – but there
is quite definately selective asset inflation in some very key commodities. Speculative longs
above the 2007/8 highs again in many cases – so this is not fundamentally driven. It is USD driven.
While it makes sense given the Fed's Keynesian rampage, I think the contrarian trade is clearly
LONG the USD. Seems counterintuitive, but FX is always a relative game, and Europe has been quietly
sucking balls again (even Germany) and sovereign debt is a lingering issue. Busy with our own
markets, many have ignored this and the Euro has in fact rallied (overbought). Could this swing
the teeter-totter back the other way? Emerging Market flows are now in 18th consecutive week of
inflows, and all-time highs. Something has to give.
One final point: commodities are a great hard asset inflation hedge, true. However, do not
forget the weak position in which global consumers of these goods remain. I truly believe demand
can not withstand substantial price spikes. Stagflation is a nasty, nasty place.
philipat
October 1st, 2010 at 12:52 pm Not Goldman Sachs but still a pretty good indicator to get lonegr
Gold? Does anyone still blieve Gartman's predictions?
Let's make a note and re-visit at year end.
jdow
October 1st, 2010 at 1:03 pm I find it funny how Gartman is listed as a "legendary trader"
when he has no audited track record and does not manage money professionally- what he does have
going for him is he makes a lot of predictions and he is bound to be right eventually on something-
he is in the commentary business not the money management business. In my book, his opinion is
just that- an opinion…….
Mike C Says:
October 1st, 2010 at 1:07 pm Firstly, OVERBOUGHT and OVEREXTENDED are technical terms, not
valuation terms or sentiment related. So every comment directed at gold's value or sentiment is
meaningless in the context of this statement.
So where is gold technically?
The last 3 major upleg peaks are 730 (06), 1034 (March 2008), and 1226 (Dec 2009). At each
of the 3 peaks, gold was 38%, 30%, and 27% above its 200 DMA.
Gold is currently 11% above its 200 DMA. Hyper-overbought? Hyper-extended? Not even close.
And Gartman is a crank IMO. He is another one of these guys that for some bizarre reason garners
credibility and respect despite generally being wrong although it is hard to track his calls because
he does change his mind more frequently then our old commenter Peter North changes sex partners.
Alternatively, one could note the major upleg peaks tend to be about $200-$250 apart which
would get you to around $1500 in this current move. I do think we need to correct/go sideways
for a few weeks, maybe a dip here in October before the seasonal strength resumes.
taylorhr
October 1st, 2010 at 1:08 pm @Robespierre
Lots of things periodic table and elsewhere can't be "printed", but they're not end of times
investments…
fubsy_cooter Says:
October 1st, 2010 at 1:35 pm I have been watching Gartman's calls on Gold as of late. Tweo
main themes. In July, with Gold heading into its intermediate low, Gartman was "agnostic", that
is to say that he held some gold "in euros", but was not bullish. He flet Gold needed to correct
to the area of 1000. In the meantime, he continually repeats that he holds gold in euros, not
in dollars. He has really been wrong in the gold market for months now. I'm not saying he won;t
be right eventually, but my metrics show gold to be 13% strectched above the 200 dma. It appears
to be entering a thrust type move, which has typically ended with gold closer to 25 to 30% stretched.
The commentary I'm hearing repetitively isn't "buy gold", but gold needs to correct. My take is
that gold is climbing a wall of worry/disbelief.
Gartman appears much more in tune with ag and industrial metals.
pseudboy
October 1st, 2010 at 1:47 pm I don't understand how anyone can predict gold prices purely on
technical bases, other than very short-term fluctuations. Gartman said mid-May "rush to the exits"
for gold. He was right precisely for a week probably as a result of other traders reacting to
his letter.
There are too many macro, political and sentiment factors that will drive the gold price up
or down in the next several months. These factors are very tough to predict even for fundamental-oriented
investors. In my opinion, Gartman's analysis has no use in predicting gold prices other than possibly
a very short term impact (and it seems like the markets have ignored him this time around).
Also, I do not understand BR how you can predict a target of $1,350 unless you have a formula
for intrinsic value of gold (which could imply some sort of mean reversion), or you know precisely
what central banks and politicians around the world are going to do in the future, which will
have a significant impact on currencies and sentiments.
fubsy_cooter Says:
October 1st, 2010 at 1:48 pm When CNBC's commentary sounds like the resonses to your post,
Barry, I will be selling. Right now, I know no one in the masses who owns gold, and very few who
own silver. So, as far as I'm concerned, a correction will be a buying oppty. As Old Turkey would
say, "Icouldn't lose my position, it is a bull market, after all". Long and strong since Feb 2009,
with additonal allocation increased along the way.
This bull will have sharp and volatile corrections, but those who really run money, and I mean
big money, know that fiat currencies are vulnerable and they will increase their holdings in tangible
assets for years. Eventually the public will panic on board. At that point, we have appx 12 to
18 mnths to enjoy a parabolic move and then jump ship. Don't hold too long though, b/c gold will
lose years of value in weeks when it finally bursts…anywhere from 3 to 7 years from now.
Friday links: drop in the bucket Abnormal Returns Says:
October 1st, 2010 at 1:48 pm [...] Voices of caution on the rise in gold. (Money Game, Big
Picture) [...]
ItalicBold
October 1st, 2010 at 1:52 pm Marc Faber said it best: "Gold Is Never Going Below $1000 An Ounce"
– Nov. 23, 2009.
Mark E Hoffer Says:
October 1st, 2010 at 1:55 pm schnurmy Says: October 1st, 2010 at 8:13 am
Sounds like Dennis is just pissed he isn't long! ~~ tt Says:
October 1st, 2010 at 10:16 am 2 summers ago i heard gartmann live say he was bearish on gold.
barry, this post was a waste. gartmann changes his views like i change my socks. but he has
a great stage presence in our amerikan idol country.
does gartmann use teleprompters? ~~
and, really, for those young Grasshoppers who may be about, "Puts" act as an 'Insurance policy'
for the, underlying, Asset that you holding..
so many get the *Idea of Auto-/Home-/Life- Insurance, "Puts" are, actually, very similar..
remember, if you can't afford the Insurance, you can't afford the Asset..
fubsy_cooter Says:
October 1st, 2010 at 1:56 pm Barry, I would like to offer you praise, though. In two and a
half years reading your blog, this was the first post in which I though, Really Barry? Gartman
gives reason for pause?" Perhaps that's a contrary indicator, and you may be right. All I know
is its a bull market. A secular bull market.
Pocket QQ Says:
October 1st, 2010 at 2:00 pm Looking at the Wall Street Cheat Sheet on Psychology of a Market
Cycle in respect to Gold. It looks to me like it is somewhere between Belief and Thrill, with
obvious hints of Euphoria. It seems like a few pivots points need to be met in order to confirm
a trend reversal. Nice though, engaging Zh and posting Gold is "Hyper-Overbought" soon after.
lol
TripleSigma
October 1st, 2010 at 2:26 pm Having been a goldbug for as long as I have been trading I have
to say…after reading these comments…I am trimming my position.
No offense to Barry Ritholtz blog readers, but NOW all of a sudden you all say gold is going
up forever. Im reducing position…. Where were you all, all this time…
Yes it is overbought. It will pullback. Yes in the end it will go higher, but nothing goes
in a straight line. I'll start loading back up at $1267/oz and add from there.
mbelardes
October 1st, 2010 at 3:00 pm Gold is going to go higher.
Why? Because it is overbought.
Look at all these people getting sucked into gold. It's amazing.
Oh, stay away from equities right? Yeah, total crash and oblivion there, right?
Oh but not gold. Gold is going to $2000!
I have my 5% gold/precious metals position for diversification purposes. Sure it's up 30% on
the year for me.
But it's a bubble and bubbles pop.
Get your stops in for when the party is over. Chastise the guy issuing the warning, but heed
his words and the moment they really start making a lot of sense and the other gold bugs are either
irrationally denying it or starting to see the light, GTFO!
ashpelham2 Says:
October 1st, 2010 at 3:09 pm It's all very simple to me…We've exhausted all the other usual
suspects for bubble creation. Gold is the latest and the greatest. Copper was popping for a while,
then it was crude oil. Crude's climbed a good bit in the past week, in case you hadn't noticed.
Right now, gold is where the trade is at. When it pops, you won't be able to give it away. Another
fantastic American sham is well underway, and it's extended around the world, as a proper inflated
bubble should do.
The mere fact that people are screaming about the bubble that currently "exists" in gold, tells
me that we aren't near the top yet. When people start talking about it going to $2000/oz, or more,
and I know there are a few voices, then it's time to think about the sell. really, gold moves
in large amounts sometimes, but you buy it in increments, right? Every time you have a small pull
back, you buy. You hold till you're in the green to your GOAL (10% in my case, pooled by purchase
date), then you sell. Don't get greedy.
When I think of gold, I use the two other words in conjunction: Gold= GOAL, Gold=Fools.
nofoulsontheplayground
October 1st, 2010 at 3:22 pm Barry,
I assume you calculated that $1,350 target for Gold from the monthly cup/handle formation.
That's reasonable.
However, if you look at a monthly chart, you'll notice the RSI-14 at 71, well below previous
peaks in 2006 and 2008, which were above 85.
There are three things I am following right now. One is the post 2003 recovery pattern on the
Nasdaq. We're in fall 2004 right now on that pattern, and it suggests October will be a consolidating
month for the various indexes. It suggests a top around December, and a correction in the 1st
quarter of 2011, matching the first quarter drop of 2005.
Another is the Dow:Gold ratio. This ratio bottomed in 1942 and 1980 at 2.5 or below, and it
seems like the natural level for this ratio is 2.5 to 5.0, as that was the range prior to the
creation of the Fed in 1900-1913. We can't be certain of this, but it would make sense considering
the economy was not distorted by Fed induced swings and out of control leverage back then.
If the Dow/Gold ratio returns to the area where we saw it bottom in 1942 and 1980-1982, we
should get a ratio of 2.5 for Dow/Gold. If the cycle plays out as long as other prior cycles,
it will likely be 13-16 years from the March 2000 highs before we see that ratio.
Here's a chart showing this historic ratio from 1900-2004:
Granted, we only have a couple of cycle examples, but the time frame for the bottoming in the
Dow/Gold ratio and the topping of the ratio closely follows other more familiar 17.6 year cycles.
The last thing I'm following is the SPX:GLD ratio on the monthly chart from 1980-present. There's
a "mirror" pattern that has been working very nicely for the past decade. Take the chart, draw
a vertical line at March 2000, and work out left and right. We are somewhere in 1989 on that chart.
Now, look where the ratio bottoms in 1988. It bottoms at 4.55. That should happen sometime
in 2012 as the mirror progresses. Why is this important? Well, it's because smart traders should
be playing that ratio.
If the SPX and NDX follow the post 2003 recovery patterns and the Dow/GLD ratio follows its
pattern, we could have a situation in 2012 or 2013 when the market "bottoms" with the SPX at 1576
and GLD at 346 ($3,460 /oz for Gold).
This works for everyone. It helps makes the 8% pension plan assumptions work even if the real
value is eroding day by day. It gives the illusion of positive returns to portfolios while things
revert to the historic ranges where bottoms happen.
Now, if the SPX does test the 666 bottom in 2012 instead of following the post 2003 pattern,
the SPX/GLD ratio suggests Gold will be around $1,460 at that time.
This is what most people have not been seeing. I am not a Gold bug. Many of those people are
ranting lunatics. However, I am a realist, and I can read a chart and understand historic correlations
and cycles.
From my point of view, anyone who wants to hold on to their wealth should have a substantial
portion of it in Gold for the next 2-7 years (7-years if you're not a timer). After that, it should
be mostly lanced from portfolios until the year 2036, as cycles suggest equities will be repeating
the familiar ramps we saw going into the 1929, 1966, and 2000 peaks at that time.
Clinton and Carville said in 1992 "It's the economy, stupid!" Well, right now with all the
distortions from the Fed and Congress, it's the Dow/Gold ratio that continues to provide clarity
and a clear path to the future.
ChrisH
October 1st, 2010 at 4:12 pm I was amused by the Google ad attached to this post from my reader:
"Invest in Gold: Learn How"
hartrich4 Says:
October 1st, 2010 at 5:20 pm maybe over bought in the short term but as long as the fed keeps
printing money it's the place to be. The time to exit is when you see that interest rates are
going to go sky high. The fed will keep that from happening for as long as they possibly can though.
investorinpa
October 1st, 2010 at 5:22 pm Shame, shame, Barry. Dennis Gartman + Astute? Really? He's a hack
like Jim Cramer. I would like to see a chart of Gartman's performance over a 10 year period. Just
because "Gartman says so" doesn't mean it to be. I get that he's a decent guy and fellow newsletter/blogger,
but he's a blowhard who wants to just make CNBC appearances.
JimRino
October 1st, 2010 at 5:32 pm - When the stock market takes off gold will collapse. - Limbaugh
has started the gold sucker play with his listeners, so it may have some more upside. But after
3-6 months there's no more alzheimer republicans to market to, that means the downside will start.
- M3 doesn't seem to be moving up, so there's no fundamental reason for gold.
changja
October 1st, 2010 at 6:37 pm Considering how many people here are either:
1) disbelieving gold is overbought and will buy 2) know its overbought and yet still buying
Thats a big bubble warning. Problem is that markets can be irrational longer than you can be
solvent… just how lucky do you feel in your timing?
VennData
October 1st, 2010 at 6:56 pm The commenters above and herein Just ubiquitous goldbugger spin
Head up their heinie Lust for the shiny… Slag about to be a has-been
comet52 Says:
October 1st, 2010 at 10:12 pm I know what you're thinking. "Is the gold bubble about to burst
or not?" Well, to tell you the truth, in all this excitement I kind of lost track myself. But
being as the price has crossed 1300 bucks, the most expensive it's ever been, and any crash would
blow your portfolio clean away, you've got to ask yourself one question: Do I feel lucky? Well,
do ya, punk?
Captain Jack Says:
October 2nd, 2010 at 12:40 am The statement says a lot more about Dennis Gartman than it does
about gold.
Consider, for one, the nature in which gold achieved its historic high in 1980 - a high which,
adjusted for inflation by the way, still remains above $2,000 per ounce.
In 1980, the true insanity in gold came in a matter of WEEKS - and it came AFTER a period of
runaway extension that looked to be "hyper-overbought" to borrow Gartman's term.
In other words, if Gartman had been giving the same advice circa December 1979, he would have
advised you to get the hell out circa $550 an ounce… just BEFORE two runaway gaps and an exhaustion
gap took the gold price within intraday spitting distance of $900 an ounce. He could have cost
you 30 or 40% of the move!!!
Could gold do the same thing here? I have no idea, but neither does Gartman. The final blowoff
period of a move is often the most spectacular, the most gut-wrenching, and the most lucrative
to experience if you are already in. You don't have to "know" that a spectacular blowoff is going
to occur to understand that, if you have a position, you want to maintain good odds of still being
in when it happens!!!
I don't understand why commentators like to make these gaudy predictions. Trades are like poker
hands. It is an odds game. No one knows with any kind of certainty what is going to happen.
But the good news is, you don't HAVE to know what is going to happen. Trading, like poker,
is a game of incomplete and imperfect information in which money is made via experience and repeated
trials over time. You only have to be flexible and maintain a good sense of the reward to risk
distributions, as I explain here:
As for "everyone" having 5% of their liquid assets in gold, but no more, this is more silliness.
I have a lot more than 5% of my portfolios in gold stocks at the moment - and have for a while
- but I am also intimately familiar with the concept of 1) trade management, and 2) stop losses!
The idea that there is a blanket allocation - that there is ANY "one size fits all" percentage
that is appropriate for "everyone" - is more silliness.
What is the point of this stuff? And why is it coming from a supposed "trader," who above all
should understand these things, PARTICULARLY the point that planned risk and historic volatility
matter MUCH more to traders than the absolute portfolio allocation size of the trade? If it were
an investor talking to other investors I would be more sympathetic…
Review of Stephen Zarlenga's The Lost Science of Money [Written for publication on the
website of the Banneker Center for Economic Justice, 2003]I cannot remember with any certainty
when I first encountered Stephen Zarlenga's perspectives on the global monetary system. At some point
in my own internet-based research on the subject I came across the website for his American Monetary
Institute. Mr. Zarlenga and I differ significantly in our views of what constitutes a just - and sound
- monetary system. As conveyed in a May 2000 interview by a reporter with the Gold Newsletter,
his explains that the most important issue to be resolved is "whether money is a power, embodied in
a commodity like gold; or a creation of the law. That is does its value come from its 'intrinsic' (commodity)
value or from sponsorship or legal requirements of government? Or a combination?" To answer this question
to his own satisfaction, Stephen Zarlenga embarked on a long journal of research and analysis. He argues:
"History shows money is an abstract institution of society and government. As far back as 340 BC
Aristotle wrote: 'Money exists not by nature but by law.' He's saying true money is a fiat (decree)
of the law."
"Panics are caused by fractional reserve banking, where banks create money in the form of bank
credits. But these credits aren't the same as money because they depend on the bank's staying liquid.
Paper money in hand is more secure. In a crisis this leads to cash runs on banks. [The solution was
proposed during] the 1930's when Henry Simon created the 100% Reserve Solution. It avoids collapse
by changing outstanding bank credit into actual cash. First, banks (including the Federal Reserve
Banks) are required to establish 100% reserve backing for all deposits. To do this, the US Treasury
loans them (at interest) freshly printed US currency to bring their cash reserves up to 100 %. Treasury
paper held by banks, gets credited against these borrowings; canceling an equal amount. Banks are
then confined to lending existing funds."
"This elegant reform transforms the private bank credit money created out of thin air for decades,
into US legal tender -- real money. All US debt held by the banking system is canceled out by the
banks borrowings from the Treasury. Banks become panic proof, with cash to pay all claims."
"This reform wouldn't be inflationary or deflationary - it simply makes tangible what had been
thought to be the existing money supply. This reform removes the money issuing power from private
banks and places it in the US Treasury. Its not paper money that's immoral; its the private issuing
of it."
Mr. Zarlenga brings together the results of his penetrating research in a new book, The Lost Science
of Money[1]. He provides evidence to show that even the most common items exchanged in barter did
not evolve into money. Rather, "the original development of money may have arisen out of the need for
uniform sacrifices or dues to the gods, and fees to the priests." My own investigation of the organization
of the priestcraft confirms that those who served as the knowledge-keepers and seemed to have the means
of communicating with the gods were increasingly able to accumulate wealth without having to produce
it themselves. Priests could not survive by accumulating precious metals, but the problems of storing
grains and other commodities were greatly reduced by introducing symbolic items to represent a future
claim on production. The widespread discoveries of large gold deposits resulted in a steady accumulation
of gold by the priestcraft, who, as observed by Zarlenga, began to accept gold for their priestly services.
By the time of Alexander the Great (and surely long before) the priests effectively controlled the supply
of gold taken from the land. They determined how much was held in storage and how much was put into
circulation. By keeping the amount of gold in circulation stable, they were able to effect a relative
stability of the price of goods and services in terms of gold.
Metal coins were in general circulation in various parts of the Old World somewhere between 1200
and 700 BC - minted by those who held power, with a fixed exchange value in terms of goods and services.
This, Stephen Zarlenga looks upon as not only desirable but the highest level of practical application
of monetary theory. "Coinage was a big improvement over the ancient Oriental money systems because it
was legally valued and its quantity could be controlled by law," he writes. "But it was still vulnerable
to manipulation and other defects mainly because its metallic content could interfere with its monetary
function, since the metal was considered valuable apart form the coin form."[2] The next advance was
to issue coins minted out of the increasingly more available silver metal, then the circulation of silver
coins small enough for everyday commerce. Fixed prices in terms of gold or silver coins also slowed
the loss of farms to creditors, who during the era of floating monetary values loaned the farmers money
when commodity prices in terms of money were high but more often than not had to repay the loan when
commodity prices in terms of money had fallen.
The story told by Stephen Zarlenga is one of ongoing monetary chicanery interrupted by a precious
few periods of honest attempts by those governing to establish fiat currency on a stable basis. So long
as gold and silver coins were relied upon to serve this purpose, money changers engaged in hoarding,
smuggling and speculation. Rome temporarily evaded these problems by minting and declaring coins made
of bronze as the republic's legal tender.
"Under this bronze [coinage], republican Rome grew powerful, staying independent from Eastern power
and blocking the easy establishment of Eastern financial beachheads on Roman soil. Under this bronze
money, Rome developed and gave the world a system of law that is still consulted after 2300 years
- a legal system separated from religion to a higher degree than seen before in antiquity."[3]
Roman monetary independence did not last, however. The conquests by its legions brought enormous quantities
of silver and gold into the empire. Gradually, many Roman citizens became propertyless as control over
land became increasingly concentrated. As would occur later in northern Europe, peasant farmers were
displaced by sheep and cattle. The production of foodcrops for the general population was supplanted
by cash crops for export and consumption by the wealthy. Zarlenga makes a convincing case that the move
away from fiat (bronze) to commodity (gold and silver) coinage was a primary cause for the gradual decline
of the Roman republic. The lesson is clear:
"If the cause of Rome's decline has remained mysterious, perhaps it's not so much from a lack of
knowledge of what took place, but to shield from closer scrutiny similarly destructive attitudes
and institutions operating on present day Western society."[4]
The eventual re-emergence of Mediterranean societies as centers of commerce and culture and military
power is taught as the Renaissance of Western civilization. Zarlenga adds his voice to historians
who point to the Crusades as an important series of trigger events in the rise of the European - and
Christian -- nation-states. Zarlenga points to the organization of the Knights Templar early in the
12th century as a major institutional change that had an enormous effect on the future of northern Europe,
accumulated landed wealth and gaining power. Constantinople - the center of Christendom in the East
- fell to Europe's armies in 1204. Silver and gold in undreamed of quantities was carried off. Armed
with this enormous infusion of (largely) silver coinage the Renaissance began. The returning
Knights Templar became the continent's bankers until their network was broken up early in the 14th century
by the French monarch. Zarlenga repeats what several historians surmise - that their treasure was moved
to Scotland under the protection of Robert the Bruce. The Knights continued, as proponents of freemasonry,
to have a continuing influence over world events. Once again, the priestcraft took over as the principal
monetary authority. Merchant bankers also began to appear across Europe.
What Zarlenga next tells the reader is that the absence of a truly fiat coinage set the stage for
another series era of economic upheavals. The exchange value of silver in terms of gold was much greater
in the Middle East and Asia than in Europe. The result was the gradual transfer eastward of most of
the silver confiscated from Constantinople - as well as Europe's production - and the accumulation of
gold by the merchants of Europe. European princes tapped this commodity money to finance their expansionist
ambitions. At the same time, the merchant bankers began to extend credit well beyond the value of commodity
coinage held. Catholicism's moral leaders fought against the charging of interest but lost. Discovery
of the ocean route to Asia around the African continent, followed by the discovery and exploitation
of the New World then combined to dramatically alter the balance of power between core and periphery
powers. Spanish treasure ships (those that escaped English privateers) were making their way back from
the New World, funding the empire-building and luxury-consumption of a Spanish aristocracy as well as
new manufacturing enterprises in the north. Added to all of these dynamics came the quasi-religious
wars that were to initiate great migrations of people to unsettled lands in the New World. Noble factions
aligned with the new Protestant sects engaged in open warfare against their Catholic-aligned nobles,
Europe's huge landed estates the main prize. After two centuries of these civil wars, the modern nation-states
of Europe were largely formed, along with the pattern of shifting alliances in pursuit of temporary
advantage over one another. While Spain emerged as the first global empire, "the democratization and
wider distribution of wealth in the north led to increased industry and prosperity, while the increased
concentration of wealth in Spain lead to stagnation and relative decline,"[5] observes Zarlenga. The
dynamic role of gold and silver commodity coins certainly played a role far more significant than most
historians have recognized. However, the other extremely important ingredient for the rise of the northern
nation-states (and of England, most particularly) was the migration of people forced off the land by
enclosures to the coastal cities and then to the growing list of colonial possessions. The effectiveness
of this pattern of empire-building is evidenced today by the widespread use of the English language
around the globe.[6]
In reading this book, I was eager to reach the point where Mr. Zarlenga discussed the creation of
the Bank of Amsterdam and the impact this unique "deposit bank" had on the global economy during its
relatively brief period of operation as a bank of deposit. Our author quotes Jonathan Israel's assertion
that the "Bank's most vital feature was that it was a civic and not a privately owned or managed institution"[7]
rather than the manner in which the bank operated. As a bank of deposit, the Bank of Amsterdam "made
profits on money changing and gold and silver purchases, charging up to 2.5%," writes Zarlenga, as well
as "supplying the city mint with gold and silver bullion."[8] The fact that the City of Amsterdam owned
the bank and employed its managers is not, in my view, its essential advantage. The key issue is whether
monetary systems are inherently monopolistic and, therefore, best operated under the auspices
of government. Zarlenga then notes that the Bank's appointed managers allowed the City of Amsterdam
and the Dutch East India Company (a government-chartered monopoly) to withdraw money left on deposit
by others, but states the "overdrafts … caused no difficulty for over a century."[9] Clearly, the story
of the Bank of Amsterdam is one more piece of evidence that the short-run interests of political decision-makers
have a tendency to result in corruption of sound economic institutions. Stephen Zarlenga's conclusions
are rather different:
"The overall record of the Bank of Amsterdam stands out as one of the best run banking institutions
in history. It became a mythical model for how a banking system should function. Those who held it
up as the ideal gold and silver banking system were generally unaware that the Bank had issued new
money in the form of overdrafts to the City and the Dutch East India Company."
If ever there was a time when a real gold and silver system might have worked, it was then, with
the vast metallic plunder coming from America. Yet the Bank considered it necessary to begin issuing
abstract money within six years of starting operations. That it felt compelled to keep it a secret
indicates the retardation of monetary thought in the merchant's mindset."
Its great success was that it was a public institution owned and run by the City for the benefit
of the country and its merchants, and not run by private parties for special interests. This enabled
it to raise the credit to make good on all of its deposits when it got into trouble. …"[10]
Dishonesty is dishonesty. The managers of the Bank were guilty of fraud - by their self-creation of
credit - and should have been prosecuted and removed from their positions. Of course, they were essentially
ordered to commit this fraud by their employer, the officials governing the City of Amsterdam. Where,
I might ask, was the City Controller when all this was happening? Well, of course, the City Controller
(if there was one) was either in on the fraud or was prohibited from auditing the Bank's activities.
I am not foolish enough to argue to private sector fraud is any less frequent. I do argue that one important
lesson of history is that the potential for despotism increases the broader is the scope of governmental
functions.
One of the most dangerous powers government can be allowed to possess is the self-creation of credit.
By this power, governments issue promises to pay (i.e., government bonds) to investors or the central
bank the legal tender the government printing presses issue upon request of the central bank in order
to "purchase" government bonds.
Perhaps if we (and other societies) lived under systems of real participatory democracy not controlled
by powerful vested interests I would be more trusting in societal institutions. As things stand, I believe
the practical answer is to enact legislation permitting investors to create a private sector network
of deposit banks, the operations of which would be regularly audited (the auditing firm selected based
on very stringent criteria that prevents the kind of collusion between auditors and corporate management
that has come to the surface recently). Criminal penalties, vigorously enforced by government regulatory
agencies, need to be adopted. An additional market response comes from insurance companies, which are
in business to protect investors from losses associated with these and other types of risk. The enabling
legislation should require that deposit banks maintain adequate insurance to protect investors and the
public from losses associated with criminal wrongdoing on the part of bank management. I am reminded
of the wise advise of Max Hirsch, writing at the turn of the last century in Democracy versus Socialism:
"Democracies have produced men of great ability and of conspicuous honour to deal with great questions
of State. But where democratic governments have undertaken the conduct of industrial functions, the
task has generally fallen into unreliable and incompetent hands. Universal experience proves that
the more detailed governmental functions become, the more they deal with industrial matters, the
less lofty is the type of politician. Abuse of power, neglect of duty, favouritism and jobbery have
been the almost universal accompaniment of industrial politics."[11]
One can argue, I am sure Stephen Zarlenga would, that government today - at least in the world's more
responsible social-democracies - has many more safeguards in place to prevent the kinds of systemic
corruptions identified by Marx Hirsch and others who wrote during the era of the robber barons. Ironically,
protecting citizens from monetary inflation is one of the areas where governments have demonstrated
the least self-control. The culmination of Mr. Zarlenga's historical analysis arrives at the beginning
of the sixteenth chapter:
"Our review of Greek, Roman, Byzantine, Venetian, Dutch, and English money, until the formation of
the Bank of England, showed that monetary control was generally either in government or religious
hands and was inseparable from ultimate sovereignty in the society. Yet in America today, the idea
that government should control the issuance of money is guaranteed to arouse ridicule among most
economists. The government's monetary role is under attack by diverse elements from the paid apologists
for privately controlled central banks, to free banking advocates, to gold standard enthusiasts."[12]
He then asks, "are their views well grounds in historical or modern experience, or merely a bias they
picked up in economics class or from re-reading Ayn Rand novels once too often?"[13] This last comment
may be directed toward Alan Greenspan, I suspect, who is known to have been a strong admirer of Ayn
Rand as a young man. However, I do agree with him that insufficient skepticism toward modern monetary
theory (or, perhaps more accurately, monetary conventional wisdom) has been exhibited among economics
professors. Mr. Zarlenga attempts to make the case that by comparison, government issuance of currency
throughout the history of the United States was done with greater care and responsibility than by private
banks. Insofar as the comparison goes, I agree with his conclusion. However, after the brief period
during which the Bank of Amsterdam operated consistently as a bank of deposit there is nowhere in history
to turn for guidance. John Wood, writing for the American Institute for Economic Research, also reminds
us that "[g]overnments have imposed severe penalties - the cutting-off of hands is a favorite - for
using foreign currencies in attempts to compel their citizens to hold their own depreciating currencies."[14]
These are worst cases, of course, and not the practice (nor within the current legal authority) of market-oriented
social-democracies. What keeps governments and their central banker partners from an unrestricted expansion
of paper currency is the political and economic risk of what one might call a run to quality (i.e.,
a large-scale sale of the nation's currency in the international currency markets). This, more than
anything else, is what today prevents governments from balancing budgets on the backs of those who hold
liquid assets denominated in the nation's paper currency.
Stephen Zarlenga's means of protecting the general public from potential corrupting actions of government
officials charged with managing the monetary system is to, first, provide a clear legal definition of
money; and, second, clearly delineate how "new money" is to be added to the money supply. "The attempt
to disconnect the money system from politics reflects a distrust to the citizenry in such matters,"
he writes, continuing: "Of course it should have independence, like the Judiciary. But it must be accountable,
and it is through politics that the citizens express (indirectly) whether the money system is functioning
well or not. …The raison d'etre of the money system is to serve the community, and history gives
us little reason to place more trust in money systems controlled by elites, rather than by the citizens."[15]
Looking at history and our ongoing everyday experience with as objective eye as I can muster, I remain
a skeptic. If what Henry George meant when he wrote "it is the business of government to issue money"[16]
was that commodity money coinage of a consistent and known gold/silver content, the U.S. Mint is already
entrusted with this task in a limited sense - by the issuance of gold and silver coins to be held for
investment purposes rather than circulation in exchange for goods or services. The U.S. Mint also possesses
the capabilities and controls to issue paper currency that cannot be easily counterfeited. What is at
issue is the method of putting paper currency into circulation. The bottom line for Stephen Zarlinga
is ending privilege, an objective with which I am in full agreement:
"A society such as the U.S., depending on private bank credits in place of government-created money,
is operating in moral quicksand. It has established a special privilege of power for those private
parties issuing the credit - the bankers. …"[17]
The problem is that the commercial banks are not beneficiaries of the current system. Even the Federal
Reserve Banks have restrictions imposed by law of their distribution of profits to member bank shareholders.
The primary beneficiary is the United State government, which, as I have explained earlier, along enjoys
the power to self-create credit. Neither government nor privately-owned banks ought to have this destructive
power. Purchases up to some relatively low value level can be adequately handled by fiat coins of nominal
intrinsic value without risking the integrity of the system. However, paper currency must be denominated
in quantities of specific goods and services over which the issuing deposit bank has control (and its
delivery thereof upon demand is appropriately guaranteed by governmental regulation, independent auditing
and required insurance coverage).
This debate is far from over, of course. Although Stephen Zarlenga is more comfortable with government
in full control of money issuance and circulation than I am, the introduction of a long list of other
reforms might persuade me that government had reached a point of sufficient public trust to trust government
to introduce and maintain sound money.
Edward J. Dodson / January 6, 2003
FOOTNOTES AND REFERENCES
1. Stephen A. Zarlenga. The Lost Science of Money (Valatie, NY:
American Monetary Institute, 2002), p. 11.
2. Ibid., p.26.
3. Ibid., pp. 53-54.
4. Ibid., p. 92.
5. Ibid., p.217
6. From the 17th century on, English became the language of commerce. Even today, when the number of
Spanish-speakers in the American hemisphere exceeds English-speakers, English predominates in the commercial
sphere and is the second language of individuals who aspire to participate in the global economic, academic
and political arenas.
7. Ibid., p. 229. Quoted from Jonathan Israel, Dutch Primacy In World Trade (NY: Oxford
Univ. Press, 1989), p. 77.
8. Ibid.
9. Ibid., p.231.
10. Ibid ., p.232.
11. Max Hirsch. Democracy versus Socialism (NY: Robert Schalkenbach Foundation edition, 1966.
Originally published 1901), p.287.
12. Stephen Zarlenga, The Lost Science of Money, p. 433.
13. Ibid., p. 434.
14. John H. Wood. Money, Its Origins, Development, Debasement, and Prospects (Great Barrington,
MA: American Institute for Economic Research, and Economic Education Bulletin, Vol. XXXIX, No.8, August
1999), p 59.
15. Ibid., p. 645.
16. Henry George. Social Problems (NY: Robert Schalkenbach Foundation edition, 1966. Originally
published 1883), p. 178.
17. Stephen Zarlenga. The Lost Science of Money, p. 661.
Dennis Gartman, author of the Gartman Letter and the frequent target of attacks by gold bugs (though
not too much lately), thinks that gold is in a bubble but has no idea how big the bubble might get,
growing ever larger "until it stops"./p>
That part at the end about "dancing while the music is
playing" spurs memories of similar comments by hedge fund managers in early-2008. Hmmm...
"It is a gold bubble," Gartman told CNBC. He called the trade on gold "mind boggling," but
also said he is currently long - or betting gold will go higher.
Gold hit a fresh record high above $1,130 an ounce early Monday as the dollar fell against
other Western currencies.
Gold's Friday low of $1,102 an ounce is the floor, according to Gartman. If it falls
below that mark, he suggests investors should "head to the sidelines."
The trend for the dollar is "still down" and will continue, Gartman said. It's an "unbelievably
crowded trade," he added.
Gartman is famous for saying "buy what's going up, sell what's going down" (or something to that
effect) and that helps to explain why everyone is selling the dollar these days - it's about the
only thing that's going down.
Over 120 banks went bust since 2008 and this is only 8% of all what's to come. 99% of this banks
went bust on Saturdays and Sundays ( look at the dates here:
www.fdic.gov/bank/indi... ) when markets were closed, because FDIC don't want you to know about
it's biggest secret: your bank will be next to go bust.
The problem is that most US banks are dead
and FDIC tries to close the smallest banks first, leaving big crème de la crème for the desert.
The more banks will go bust the less your deposits will be insured, that's why check our RUN ON
A BANK list if your bank is there.
Gold is a cyclical investment. It can never earn, it is only ever a hedge. What goes up must
eventually come down, and then go back up again. Gold is ridding high at the moment, but the risk
is that Bernanke will get his monetary policy straightened out to everyone's satisfaction. Pretty
much zero risk for now.
Study what Bernanke said in his latest statement. :
"We are attentive to the implications of changes in the value of the dollar and will continue
to formulate policy to guard against risks to our dual mandate to foster both maximum employment
and price stability. Our commitment to our dual objectives, together with the underlying strengths
of the U.S. economy, will help ensure that the dollar is strong and a source of global financial
stability."
Paraphrasing this a little, it means that he is happy for the dollar to slide to try to boost
unemployment at long it does start to destabilize the market or signal a rapid upturn in inflation.
Frankly, I don't think he could spot inflation if came with red flashing beacons, so I don't think
there is any chance that he is going to do any to prevent a further decline on the dollar.
Of course you have the option to divest into other currency and more markets where returns are
likely to be much higher but it is understandable that some are shifting to Gold. The only thing
with the Gold play is that you have to know when to get out, because at some point people will start
selling and the decline can be fairly swift once that happens, however, it will only occur in two
events. The first is if inflation does not materialize. The second if the Fed cures the economy of
hyperinflation. I think the Gold Bugs can sleep easy for now.
With gold now trading above $1,100/oz, many investors are starting to wonder if the fundamentals
really support the yellow metal's seemingly unstoppable upward rise. But it's not just a weak dollar
and inflation fears driving gold upward, says precious metals expert Adrian Ash; it also depends
on "hot money" from leveraged players-who might very soon decide to move on.
Adrian Ash is the editor of Gold News and the head
of research at BullionVault, the world's fastest-growing online gold service for private investors.
Formerly head of editorial at Fleet Street Publications, Mr. Ash now regularly contributes to
321gold, GoldSeek and Whiskey and Gunpowder,
and his views on precious metals have been sought by the Financial Times, the Economist, Bloomberg
and others.
HAI Associate Editor Lara Crigger recently caught up with Mr. Ash to discuss the primary drivers
behind today's gold markets, including the real reasons behind gold's rise, why gold is actually
a terrible inflation hedge and whether we're nearing a gold bubble.
Lara Crigger, associate editor, HardAssetsInvestor.com (Crigger): Gold has been on a real tear
lately, and analysts often point to the falling dollar and inflation fears as the reasons behind
its rise. But is that really all that's going on here?
Adrian Ash, head of research, BullionVault (Ash): I think there are several elements behind
gold going so much higher. Firstly, the attitude toward the dollar is a really big part of that,
because gold is priced in dollars. It's really quite mechanical to say dollar down, gold up.
But you'd have to look further, though. Gold has done nominally well against all major currencies.
It's up three times over against the euro; it's done very strongly against the Japanese yen. Against
a global basket of the major currencies of the world, it's made all-time highs. Currency appreciation
is a main concern, driving a lot of money toward gold over the last decade.
But then there also was the government response to this crisis. People think of gold as being
an inflation hedge, but you can't deny the studies that show that gold was actually a terrible
inflation hedge for the best part of the 20th century. It was a great inflation hedge
during the 1970s, and during a genuine currency collapse, like Mexico in the '80s and '90s, or Southeast
Asia in the late '90s or Weimar Germany. Then, certainly it was a fantastic store of wealth. When
inflation reaches hyperinflation proportions, a lump of rare precious metal is a useful way of defending
against that. But in everyday inflation, it was a terrible inflation hedge.
But gold has been a good defense against deflation. If you look at the last couple of years, we
had deflation in asset prices. Again, gold has done very well in defending its value over those times,
because people move to gold when businesses and banks are failing. They want that physical security
that gold offers.
Crigger: So gold will do well regardless of whether we have runaway inflation or catastrophic
deflation on the horizon.
Ash: It comes down to this: Gold tends to do well in times of financial stress. And inflation
or deflation-they're two manifestations of the same thing, which is the destruction of wealth.
High inflation destroys bond investors, cash savings. But then deflation does the same thing, but
kills debtors indiscriminately, meaning cash holders and bond holders are destroyed. The net effect
is the same: A loss of wealth. Gold's appeal steps forward there, as it's rare, physical, tangible
property.
Crigger: Even though spot prices have shot up lately, investments in the gold ETFs have remained
relatively flat lately. Why is that?
Ash: In the past three months, really since the end of summer, the move has been driven
by leverage. If you look at the exchange-traded funds or businesses such as ours-yes, we're
still doing very well, but we're not seeing the same kind of flood of new business that we saw months
ago. That's not the game at the moment.
It's very much about institutional traders using the very cheap money they can now access: hedge
funds, prop desks at the banks and so on. These guys are basically leveraged up on everything. That's
why we see correlations getting very strong again between emerging markets, non-U.S. currencies,
precious metals, and equities across the board. It's very much the reflation rally of 2003-2007 replayed.
The broader markets have wanted to get back to that trend. So many financial players have been looking
to get back to a world they understand-dollar down, everything else up-that's why
I think you've seen such huge gains across the board between September and October.
It's not a different gold market in nature. Obviously, you've got to accept that a lot of hot
money has come into gold, and it's coming in through the futures market, so the chances of a sharp
correction are much greater than if you had a bulwark of cash buying the physical bullion.
Crigger: Given this influx of leveraged players in the market, how long do you think gold's
upward trend will continue to last?
Ash: It depends on a couple of things. Firstly, what triggered the sell-off in gold futures
last time, after the March 2008 high of $1,032/oz? The speculative position in gold futures was then
very long, and wanted to get longer. But as the banking crisis kicked in, a lot of the prime brokers-the
investment banks who'd enabled hedge funds and other large speculators to take huge positions had
to shut them down, because credit was drying up. The cost of credit was going through the roof. So
if you look at the destruction in long positions in mid-2008, any repeat of those circumstances,
I think, would probably see prices come off quite hard.
Then again, that environment encouraged physical buying again by retail investors. I'm not saying
there would necessarily be a replay of that if that were to happen. But certainly, the kind of environment
that would force hedge funds out of long gold positions would likely encourage people to go buy physical.
On the other hand, if the hedge funds were to decide they'd had enough, and were ready to move
on, that's a different story. Again, look at the reflation rally of 2003-2007. There was recycling:
People would move on from one hot trend to another. Sometimes it was the euro, sometimes it was oil,
or gold. But the three of them in general moved together. So if they were to decide to take a breather
on gold for the moment, in the absence of any other kind of shock, you might well see a lack of the
same kind of urgency we had in the middle of 2008, and gold would fall.
Crigger: Are we nearing bubble territory in gold?
Ash: Well, obviously any bubble requires cheap finance. So the accusation can certainly
be made.
But I think where that is amiss is that there simply isn't the overwhelming move into gold by
the broader public that you really associate with a bubble. If you look at gold in terms of how much
money has actually gone into it, compared to how much money is still in other asset classes-consider
that back in 1982 or in the depths of the Great Depression in the 1930s, gold accounted for huge
amounts of investable wealth, probably about one-fifth at some estimates. But today, you're looking
at-even at the most generous estimates-less than 5 percent of investable wealth
worldwide.
So my point is that gold is still under-owned by individual investors, and it's certainly under-owned
on an institutional basis.
Crigger: So clearly there's still room left for investors to jump in.
Ash: Well, I think it's obvious what my view is. But what gold has done over the past few
years has surprised everybody. Looking forward, yes, I think people are right to say that gold's
only going to go higher if there's further trouble ahead.
And I think it's pretty reasonable to say that there probably will be. We've got zero interest
rates across the Western world. We've got billions in government debt having to be issued at those
historic low rates. How do you get out of that? How does the Federal Reserve, or the European
Central Banks of England begin to move away from these extraordinary accommodations? I really just
don't know.
Rick Santelli tells the truth about GLD and SLV on CNBC [Video]
Something that is known to ZH readership since day one, is now finally said openly on the most watched
[probably] business channel in the world.
And just for the sake of it, lets thrown in Peter Schiff and his take on the real price of gold.
Things look grim for the FIAT, even more so with all the recent articles assessing gold as, not
a substitute for current form of currency, but THE preferred form of currency. Gold is finally getting
the attention it should have been given to long, long time ago.
Conrad Murray - 08:37
From the back and forth starting around 2:15, Schiff: "What happens if elephants sprout
wings". A genuine LOL moment.
On the US economy "not growing": Has he looked at the ISM, employment (not just payrolls
but household survey), industrial production, and the leading indicators over the last ten months?
On the ECB bailout: Uhm, yes, they're imitating the Fed because they're pulling out
all the stops to fight the deflationary pressures which they are already behind the curve in fighting.
Once deflation sets in, they're screwed and they know it.
On China "cutting off the US": Do you know of any sane man who cuts off his testicles?
On gold to the moon: Peter you've been talking up your gold positions for years, but
once calm is restored, you're going to take a major haircut on gold. MAJOR.
Leo I usually agree with and go against the flow with that attitude, and I will also, partially
agree with you here. I said partially; here is why.
First off; if deficit is larger than growth, there is no growth.
One dollar borrowed is translated into negative economic creation. Ergo no growth.
Statisticians differentiation between the two, is at most, misleading, and some would call it
fraudulent [think impact on credit derivatives market, LIBOR, TED spread, price and yields of other
bonds etc etc]. I would agree with those who say it is fraudulent. I don't know if you are familiar
with CDS pricing, IRS etc etc pricing mechanisms, but they are based solely on US credit ratings
and interest rates. Fuck that up, the world blows. We are more fragile than ever before.
Also the thing about gold price is that it is diluted via leveraged cash-settled ETFs which have
survived for this long only because gold has become more of a speculative trade since 2008 [maybe
2007], and less of a investment. Since hedge funds who buy GLD, SLV etc etc are not interested into
taking delivery and are more than happy to settle in cash due to reasons you surely must know. ETF
is like a bank; it only has access to X% of deposits, and loans out the rest; the same is with ETFs,
if there is an increase of only 5% in wanting delivery instead of cash gold goes up 20% since GLD
needs to go out and buy said gold which it does not own [i suspect they will soon change contract
variables so that it will became cash-settled-only ETF which would have the same pricing technique
as it does now; that should do the trick] and due to 100:1 leverage employed.
Hence if only physical gold was to be traded i suspect fair price with
current currency weakness is in the area of 50000-100000 dollars. Yes you read that
right. What they did with gold is the same trick that was done with the dollar; they printed it and
artificially lowered its value.
The problem for GLD is that in order for it to function, and to be able to keep gold down, it
needs to maintain a constant distribution of ratios between cash-settled contract termination vs.
delivery taken. If said equilibrium is distorted either by disbelief in the dollar or increase in
delivery taken, the game is over.
If you take the notional value of all dollar denominated gold trading instruments and divided
it by inventory of physical gold i suspect you would get a leverage which is much higher than 100:1.
Of course this plays no role for the markets themselves, and yes Schiff is going agains the flow
and will probably get burned; but he is right; and he even understated golds fair value.
What you said about China is spot on, and I agree with you on your assessment of ECB. The FED
will sacrifice ECB Because preventing dollar deflation is more important than preventing EUR deflation.
Leo Kolivakis - 09:33:
CB,
I never bought gold bullion, gold shares or the GLD, and never will. Why? For the same reason
that I don't buy cigarette stocks. Sure, they may be very profitable investments, but my money
isn't going to go in any industry or investment that adds nothing to society. Why invest in gold
when you can invest in tech, alternative energy, healthcare, infrastructure, nanotech, biotech,
etc.?!?!? It's crazy watching this gold mania take hold as people fear the end of the world is
coming...simply crazy!
Cheeky Bastard - 09:46:
Sure, gold may well be a bubble, because of the massive capital
inflow into it. But if i throw away all the synthetics and hybrids from the equation
which tells me what an ounce of gold is worth against the value of the dollar i come to the price
i said above.
Of all investors in gold, gold synthetics, gold hybrid instruments etc etc, only 1-2% of the
entire pool of investors buy gold for preserving wealth in an environment where the faith in FIAT
is diminishing with each passing day.
I own gold; its not a big percentage of my assets; but i do own it; if for nothing else then
to calm the inner pessimistic me who knows to much about history and present times regarding money
and how money ends and what happens afterwards.
Maybe nothing happens, maybe they continue to play this circle jerk for another 100 years,
maybe they introduce SDRs and begin a new cycle; i really do not know; but it makes me feel better
to have some of my money in physical gold; and i dont care about the liquidity of the markets.
Also i dont invest into anything that is, was or will be publically owned or traded in any
of the numerous exchanges. I had some offers to take my [former] company public and each time
i said no, because instead of hard cash i can utilize in way i find the most appropriate i would
have a piece of paper which value would flactuate with each minute it is traded. Also the whole
bureaucracy which makes the market structure is simply to discusting and greedy for me to be related
to it in any way.
Well with that said, I hope you are, personally, doing well. I read your comment the other
day when people bad mouthed you and it just wasn't in good manner or appropriate. My take is;
keep your investment advice for yourself; since people are distrustful animals who became what
they became due to skepticism which sometimes transforms into paranoia.
Don't try to help anyone, even-though i know you have the best intentions when you recommend
a stock or a sector. But just leave it be; if they want to know more about something, all the
knowledge they can chew is only a few clicks of the mouse away.
Don't shatter your nerves day in day out feeding someone something he/she can not/will not
eat.
Cheeky Bastard - 13:34:
Thanks CB, no worries, I will be taking a step back from now on. Said what I had to say, will
leave it at that. Thanks again, you're a valuable contributor.
doomandbloom - 14:23:
No Leo....there are a few people on the fence..like me..your comments provide a balance to
what could become completely one sided point of view.
living on the edge - 16:27:
Leo, We are all trying to put into focus what realistically can be described as an unclear
future. I made a conscious decision to buy PM's off and on over the past 20 years or so. I have
just under 40% of my liquid assets in gold/silver. The reason the percentage is so high is because
of price appreciation. That makes it easy for me to think of gold when I am trying to ride out
the worst economic storm of a century. Schiff is also ahead of that curve. I struggle with what
else do I need to be doing to assure my families future, and are there better investments I should
be looking at? Land for instance.
Frankly I joined the ZH forum to engage different viewpoints. I discovered perspectives that
were foreign to my way of thinking. Some I will probably discard but others had me rushing to
order books from Amazon this morning.
My thought is you are here for the same reason, trying to make sense of this economic nightmare
we are living through, and how best to make our way.
The problem with investing in land is that it is hard to generate any income (I am assuming
we are not talking about rental property) and property taxes are unpredictable. Most people do
not own land (as in ranch or farm land), and property taxes are voted on by people who do not
have to pay the tax, and benefit from the tax. Hence, in buying land, you are subject to the whims
of voters. Buying a place that you would some day live on makes sense, but parking money in land
is tough, as any appreciation can easily be eaten up by taxes, and the asset can actually lead
to negative cash flow.
Rick64 - 15:35
CB
This is the most pragmatic and logical view of the whole situation. Leo is just betting the
ponzi will go on and many people think it will end soon. The question is when will it end.
you'd be better off buying a ccy like the AUD where they haven't printed money and you can get
yourself a 6% yield.
Johnny Bravo - 17:09
You're completely backwards about GLD though.
Taking GLD away would significantly reduce the
number of speculators in gold.
There are people playing GLD and SLV merely for the specualtive aspects, and not because they
have any desire to own gold at all.
Without the speculators, the price will go down significantly.
The speculators in these ETFs are driving the price. However, without said speculators,
the demand would DECREASE and not increase.
50000 to 100000 gold is just lunacy. There is no fundamental basis for that claim whatsoever.
If there is, I would like to see it. I might believe you if you show me your logic, mathematics,
or whatever.
Like I said though, there is so much demand in gold that comes from people that don't actually
want gold at all. Without GLD, you'd see a similar crash as the one that happened in oil
in 2008. Without speculators, the price would find actual, instead of bubble, values.
GLD makes the price of gold increase, not decrease.
Hulk - 11:04
History Leo, its simply history, some of it quite recent. Au,Ag, time after time, has
proven its worth for thousands of years. My wife's mother, early 60's in asia, had to use it to
buy food after a currency collapse.
Get yourself a copy of Ralph T Foster's "Fiat paper money" and read it. It is a history book.
In the back of the book is a list of fiat currency failures two pages long, small print!
This fiat system is going down Leo, protect yourself...
Johnny Bravo - 17:13:
Sure, it always has value, but WHAT IS that value?
The value is relative to the economic situation. If you feel that the economic situation
will get worse, and worse, and worse: gold is a good investment.
If you feel that the economic situation will get better, than the price of gold will decrease.
The trend never goes on forever in any case.
Which way it will go is the subject of speculation.
I do not believe that the fiat system will end in the near future.
Dollars have been devalued very much since 1913. Yet, I still can use dollars to buy
things. As long as the confidence is there, the system will not crash.
As long as people can use their dollars, the confidence will be there.
Dirtt - 15:43
Cmon Leo. Biotech. Yeah sure there is plenty of good in the sector. But there are
as many crooks in biotech as there are in the mining sector. Whether it is "proven reserves"
or "cell therapy" technology verified by some bought off Harvard wank the holy card doesn't quite
fit.
Now the gold mania? Certainly agree. But on the economy how thick are those rose-colored
glasses? Obviously government spending is a wet dream that follows some.
john_connor - 15:52:
Leo,
I understand the intent of your statement regarding investing in something that adds to society,
but unless I am missing something all you are doing is trading in
the secondary market of shares for a capital gain, end of story. It's not
like you are getting in on an IPO (please correct if I'm wrong) where you are funding the company
with initial capital or even a secondary dilutive issue of new shares where you are re-capitalizing
said company.
Re: gold, you should own physical gold for insurance at the very least. I mean, if your
insurance policy pays off, that means everything really went to hell in a hand basket. I
agree on GLD, and SLV for that matter. They are simply casino instruments used by banks
and hedge funds to hose people.
cossack55 - 16:42:
Screw society. Technology, oh yeah, there is a real boon to society. Ask New Orleans
about infrastructure, they have not gotten it right since 1733. Nano and bio, call Monsanto
and ask for some plastic corn.
Comrade de Chaos - 11:15:
Leo,
I don't think we are growing in terms of the REAL economic growth.
Have the statistical numbers went up or stopped falling, you bet. However we have interfered with
the business cycle, we have fixed RE prices and Credit prices and by doing so most of those numbers
do not necessary represent actual information. What we did is to shift higher future economic
growth into now with little of success to achieve the V shaped recovery. One example would be
Japan, after trying to fix their numbers by huge deflation fighting attempts and huge government
investments they have reduced their economic growth to null for decades to go. It took them 7
years to fall into the recession ( from 1991 to 1997, that's how huge their gov vs GDP expenditure
were) while growing at around 1%. Do we want to call such a growth an economic growth or just
fudging some meaningless (due to price controls, and similar ) numbers?
Another example is USSR. Our statistics is becoming similar to
theirs, even if it is not manipulated, it does not represent the MARKET fundamentals because of
the price fixing and other gov interference.
I would call the event that our economy & society currently experience - the great hibernation.
Goods - 12:32:
Leo I agree with you about Schiff; he has become nothing more than an egotistical blow-hard.
On the other hand the "growth" you are talking about is illusory
and you know it. Based on nothing more than deficit spending. The private
sector is no longer taking on new debt so the US government has stepped in.
Growth based on debt is unsustainable. The deflation
we are noticing right now is nothing more than the debt end game blowing up. And unless the central
banks let these malinvestments fail, the paper money which is used to play this game will implode.
The reason why we had the great depression of the 20s and 30s was partly because the gold standard
set a natural limit to how far the credit game could be played. So in some respects Keynesians
are correct in blaming the gold standard for causing the depression.
Your belief in the hand holding relationship between China and
the US is a false induction belief; It has worked in the past so it should work for ever in the
future. Why should China play along if the US consumers start revolting against
crappy Chinese goods. And if rumours are to be believed, Russia almost convinced China to start
dumping US government and corporate bonds as an act of economic war.
And you are correct, gold does poorly in times of economic stability. But you make a HUGE assumption
by saying, "but once calm is restored." Based on what policy action do you state that? Based on
whose leadership do you state that? What makes you believe this is what the wizard behind the
curtain wants? From you previous comment history, you saw that the housing bubble was unsustainable...
what makes you believe the present economic structure is?
Leo Kolivakis - 13:48:
To Comrade: It's a bit of a stretch to claim that all statistics
on the US economy are fraudulent. At the very least, the trend is showing that the economy has
shifted to growth mode.
To Goods: I agree that the private sector has to take over. Corporations are flush with cash.
In fact, they have record cash levels. This will bolster US investment, driving growth in the
future, even after the stimulus wears off. But it won't be enough. We need US consumers with good
jobs to support consumption.
There is no more China and America, it's Chimerica. Fortune 500 companies are deeply embedded
in China. And China still needs the US consumer to grow their middle class.
As for gold, calm will be restored when the trillion dollars starts
being felt in the financial system. Once banks start lending to each other, credit
will flow again to the real economy. It's a matter of confidence now, but risk premiums are way
out of whack with the fundamentals.
Comrade de Chaos - 14:30:
I am not claiming it's fraudulent. I am claiming it is IRRELEVANT. And it is irrelevant because
it does not describe the market conditions because of the degree of government intervention.
The thing is, the information contend is so distorted that whether we actually grow or stagnate
is a wild guess. It has been done before and as I mentioned all it caused was economic hibernation
and pain for years.
p.s.
Also the real indicator of economic expansion - business expenditures (machinery or R&D) is
FLAT.
hooligan2009 - 15:21:
"Once banks start lending to each other, credit will flow again to the real economy".
Hmmm..i think that's the model we don't want in while we are in the "care and repair" part
of this game. Banks lending to each is only desirable if it facilitates the transfer of capital
to another banks customers. Since all bank risk is now guaranteed
by the Fed/Govt (here and in Europe), there is only one bank. I think until intervention
is withdrawn, we know interbank activity is useless, immoral and serves no economic purpose.
By the way, Shillers case that economic indicators are useless is true. When you have an economy
being pump-primed towards a politically (not economically) determined sector (finance in this
case, to fund bail-outs) all signals are erroneous since they do not represent the discovery of
the best allocation of resources at a reasonable price and risk. Saying an economy is growing
at 4% per annum, when the Government and central banks are pumping in 20% per annum into the economy
is a specious argument akin to the arguments made that the housing bubble was sustainable.
Goods - 16:22:
calm will be restored when the trillion dollars starts being felt in the financial system
Wow... Sorry to say, but my respect for your insight just fell by a trillion dollars with that
statement.
"On gold to the moon: Peter you've been talking up your gold positions for
years, but once calm is restored, you're going to take a major haircut on gold."
In your typical head-in-the-sand cluelessness, Leo, you and your etablishment brethren keep
assuming that we are merely in some typical recession, and just riding through the trough of the
normal business cycle. What you fail to recognize is that that is NOT the case at all ---
we are in the midst of the collapse of the entire monetary and financial
paradigm, a phase change if you will, that is fundamentally altering the entire economic, financial
and political landscape. Our financial boat is heading for the waterfall,
and no amount of rowing is going to drag it back where it was before it became caught in the current
taking it to its inevitable destiny.
Please do tell us all, Leo, just how you see "calm" being restored, given the collapsing financial
and monetary orders? What part of UNSUSTAINABLE do you not understand?
Once again, Leo, you simply refuse to see the forest for the trees.
cossack55 - 16:44:
Who the hell would even want to go back just so we could go thru this again. Must I quote
Georges Santayana?
Johnny Bravo - 17:18:
Sigh, akak... do you always have to make your arguments by insulting people?
Instead of saying "you are an idiot, and here's why" maybe you could say "I disagree with your
logic, and here's why"
Just my two cents...
masterinchancery - 15:45:
Leo:
1.Schiff said China will NOT cut off the US, but it might be better if they did.
2.Give us an example of large scale money printing that was not disastrous.
3."Once calm is restored" -- when will that be in this crazed money printing operation?
4. Real personal income, exclusive of government handouts, has declined in the last 2 years.
Apart from the "G" in GDP, where is this "growth" you claim is happening?
huggy_in_london - 16:05:
The EU are setting Greece up for a default, that's pretty clear. Once you get a default
or debt restructuring there won't be a bid for gold for the next hundred or so bucks as people
come to grips with the fact that the destruction of money is also possible (and in my view the
only solution to this mess).
Schiff is a ranter. All huff and puff. His arguements are weak. It's not
a response to say "well it isn't at $2k so just buy it" ...
ZackAttack - 16:38:
I look at the PMs and I hear a lot of big bells ringing.
I mean, congratulations, you've been in the asset class of the decade. Believe what you like
about the world, but take some profits, get hedged.
demsco - 16:45:
Wow, just wow. The ISM is a survey and not really more than that which is why it is not "the
hot item" at the moment since it is not that hot any longer. The leading indicators have long
since rolled over, what are you looking at?? It peeked a couple months ago now, but let's not
let the facts get in the way of your reality.
Deflation is not bad, actually, a shortage of currency is bad which is not an issue. Most people
are confused on inflation/deflation and why one is bad the other is good, etc. I contend that
deflation is actually pretty good. However, here is not the place to get into it. AS far as China
butting off its testicles with the US, are nuts? No pun intended. The EU is China's largest trade
partners, not the US and, frankly, the world cannot support the US and China growing at 3 and
10%, respectively, a year. China does not care about losing money on the treasuries it owns. They
killed 70M of their own people and they own treasuries as a weapon to hold over our head, don't
kid yourself. They do not need us as much as you would like to think. As far as gold being overvalued,
yawn, stop it. Open your eyes, deflation has been here for 2 years prices are higher. Central
bank demand is here and investor demand is here. Did you know that the Fed and every other CB's
mandate is to create about 3% annual inflation a year? That in itself is bullish for metals, period.
It is supply and demand, period. Personally, I believe in silver more because of actual facts
instead of pure belief or other nonsense you might spout off, I like facts and you are devoid
of them in most times. Calm was here in 2006 and gold was up. Calm was here in 2007 and gold was
up. Calm was here in 2008 and gold was up. Fear showed up in 2009 gold went down only because
of liquidation margin calls, nothing more, and now that fear is back gold is going up. Even under
the most superficial argument your BS doesn't hold water. Sorry Leo, I hate being a dick, but
I am good at it. If you want to share details of why you are wrong I will be more than happy to
trade emails with you.
sheeple - 09:42:
Hi Cheeky,
Do you agree with M.Armstrong's views for gold?
He argued the following points:
- MONEY is not gold
- GOLD is the free hedge against the mismanagement of the state
; it is not a hedge against inflation
-It is a hedge against gov and its policies
-If it is gold that is money, then it rises with deflation and falls with inflation. When gold
is a free market, then it will decline with deflation and rise with inflation
Cheeky Bastard - 09:49
currency mimicks politics
gold opposes both.
the treatment of gold in the 20th century influenced the view Armstrong shares. And he is right.
Basically gold is a universal hedge against any kind of politics and against any and all FIAT
currencies.
sheeple - 10:16:
maybe they introduce SDRs and begin a new cycle
Great! Another fiat controlled by 24 guys and they are going to determine what's good for everyone!!!!!
If we are going to introduce SDR as the "new world currency", how do you see our current currency
system dismantle? You see, how would they "trigger" this introduction?
Cheeky Bastard - 10:28:
currency parity [it will take 2-5 years] which will then trigger deterioration in the values
of collateral[assets] pledged and trigger a few Lehman-esque events which will help push things
further on the political part if the isle. Its really simple. Collateral value deterioration takes
care of all other technicalities and makes outstanding Interest Rate Swaps [70% of the notional
value of all derivatives outstanding] contractually terminated once there is unified monetary
field. Most of the problems solved monetary, risk, and currency wise . The next problem to cope
with will be new energy sources [forget sun, wind and water in their current technological form].
My take is; fusion which is well known even now, although no one in the mainstream even thinks
of discussing it due to significance of oil. Fun times ahead; try to enjoy them.
sheeple - 11:32:
collateral[assets] pledged and trigger a few Lehman-esque events
Bond vigilantes!! You bet ...
Interest Rate Swaps [70% of the notional value of all derivatives outstanding] contractually
terminated once there is unified monetary field
omg good point ... always good to read your post thank you.
hooligan2009 - 15:56:
what's a unified monetary field? where everything is worth nothing (i skipped into unifying
physics theory then for a while, like infinite and infinitessimal).
cossack55 - 16:47
Hey CB, if you have not done so already, check out Hyperion Power Generation. Makes sense
to me which is why they probably won't adopt it.
Goods - 12:36:
Sheeple,
Please watch the documentary The Money Masters by Bill Still. It is freely available on google/video.
hooligan2009 - 16:26:
It may come as a shock to us in the West, but China could simply fund twenty years of spending
on its infrastructure, education and other living standards just based on the western debt it
has accumulated. Political revolution in China would do this quickly, the current regime could
come to this conclusion and adopt it slowly. China owns much of the US and Europe and pretty soon
will own all of it. Reality bites hey?
silvertrain - 16:42:
And I read an article last week that Jong Ill went to china by train and spent some time there
with the brass..I dont know and probably nothing at all but somehting that just struck me as being
odd in the timing of what all has been going on in the last month or so..
Johnny Bravo - 17:23:
Except, Hooligan...
Remember in the 1980's when Japan owned a lot of the US too?
Then what happened? Japan's bubble was found to be fraudulent, and they quickly were
plunged into recession/stagflation/depression/whatever you want to call it.
The same thing can happen to China as well. With all their
manipulation, I wouldn't be surprised if they are in the same boat as 1987 Japan.
There are no perfect systems of money. Its
perfection would be a bond on your energy or work, exchanged. But that would get into whether
your performance over time would be more or less valuable.
To say that a fiat fractional reserve current-sea is money is completely and utterly foolish.
To give a governing body, owned by banks, the power to steal from you and call that a monetary
unit you would rather have is "cog dis" at its mind numbing and breathtaking best.
I believe this is Leo's position in the above. Leo indicates that he would rather have
"Money" OR "Paper Assets" than "Gold," a limited supply universally valued item. While Gold
is not perfect money and can be manipulated, etc, it is not Dollars.
In the History of Monetary Hilarity, this con has been pulled an infinite number of times and
it is truly amazing to me to see it being defended here.
hooligan2009 - 15:27:
Agree with you, unfortunately, gold is pretty useless as money or collateral. There isnt enough
of it. Never have been and never will be. It is pretty, has scarcity value and some industrial
uses, that's it.
Being a gold bug is good right now, because there isn't much else you can do to express a view
on the bullshit that passes for government leadership and monetary value right now.
As soon as a better alternative presents itself, then gold will
revert. If an alternative doesn't present itself then it will stay scarce. As an
alternative, there is as much validity in an invention that converts human faeces into energy
for the home or the car as there is for an inert pretty colored metal. (Ten shit converters making
90 kw a day is a damn sight more valuable than gold to everyone, not just a few gold bugs, when
everyones faith in money is detroyed). :)
masterinchancery - 15:55:
History shows that gold, silver and other durable precious metals have been used as a medium
of exchange since prehistory. No fiat currency without metallic backing has lasted more
than a few decades. The temptation of governments to debase the currency is too strong,
and will eventually destroy the dollar and euro as it did the Zimbabwean dollar and deutschmark
in their time, along with innumerable others.
hooligan2009 - 16:40:
Hmm, I was thinking about the impact across the whole of society, not just those who were active
in the metal. Interesting. Didn't revolution in politics (national socialism) emerge as a solution
to the depression in Germany and the revolution was really all about creating work, refusing to
pay reparations (i.e. debt in todays terms) and ending with some very nasty side-effects?
Sudden Debt - 15:21:
Forget gold or silver.
Go for Platina and Palladium, but only the paper versions remain, because they are both already
sold out EVERYWHERE. Just even try to get some physical, you'll see.
pak - 17:29:
a) not much use investing in essentially non-deliverable commodity futures, especially (hm)
as an armageddon hedge.
b) both have a well-documented history of extreme price volatility and producer-induced supply
manipulation.
c) physical palladium (less so platinum) is simply too rare to be a reliable and liquid PRIVATE
investment.
What is good for Chinese SWF's is not necessarily good for you.
lookma - 15:32:
Sure, they may be very profitable investments, but my money isn't going to go in any industry
or investment that adds nothing to society.
A store of value is not necesasary for economic calculation? Good to know.
masterinchancery
on Sat, 05/15/2010 - 15:56
#353827
A piece of printed paper adds something to society?
by the grateful un...
on Sat, 05/15/2010 - 15:38
#353814
gold is an insurance policy, like a heathcare insurance policy, or hurrican insurance in new orleans,
or a credit default swap?
without physical possession is your insurance policy up to date?
what if the government confiscates gold (fool me twice)
is a house of gold cards better than paper cards?
hooligan2009 - 16:43:
read 353550 below. Cheeky Bastard has the market down pat. We are at a point where you can make
money by jumping on any emotional bandwagon, right now the bandwagon is gold. Its a useless as all
the others, but for as long as it lasts, you will make lots of fiat money (that is confetti, not
worth the paper it is written on). Gold may be a store of value right now, money certainly isn't,
it's paper. The moral hazard created by central banks/western goverments is either the path to Zimbabwe
(hyper inflation) or Japan (permanent stagnation).
Imagine a country that used the same arguments as are being used by our so-called leaders (who
by the way have received no mandate in any democratic process to pursue the policies they are pursuing).
Imagine little old New Zealand with 4 million people saying ok I will print the entire annual GDP
of the economy and give it to the Government to spend on buying up all the failed companies in the
economy. Now take 75 New Zealand's and you have the problem faced by each of Europe and the US. (With
around 40 New Zealands for Japan).
The behavior of Governments is appalling. BUT the solution starts when the problem is broken down
to reality. Break it up into bite sizes pieces, then roll it out.
realitybiter - 15:51:
on the comment regarding the growing economy....how is it that April tax receipt fell nationally,
in California, and Illinois (just the ones I read about) and incomes are growing? Was there
a tax cut I missed? Or are incomes (aka jobs) still shrinking? The recovery is as
fictional as low inflation was when housing prices were rising 10x in twenty years. Stocks?
Tech will get destroyed if growth contracts from here. Who gives a rip about efficiency
when human labor is near free (un or underemployed). These are some messed up times, brought
up by brainiacs that can write 3 chalkboards full of calculus for economics, but can't see simple
math for balancing a budget.
Johnny Bravo - 17:29:
Because April tax receipts reflect the taxes payed in the entire preceding year, while incomes
growing is only a snapshot of this month versus last month, or this year versus last year.
In other words, people may not have been paying taxes a year ago, but they might be getting
a job or raise right now. That is how both scenarios can exist.
Akrunner907 - 16:06:
I think more and more people are taking the "Red Pill". The other illusion is how
far the economy will fall. Depending on the scenario, Gold could become the new proxy of
exchange or it could be just as useless as the paper currency it is attempting to replace.
If we go back to a barter economy, then it will be goods and services that are traded in transactional
exchanges. Gold or paper currency is only as valuable as those willing to accept it in lieu
of a trade. If you want to buy a stick of butter from me I might not be willing to
accept the amount of Gold you are offering, or I might want to barter for another "exchange currency".
If the world devolves into chaos, then we could be looking at a lifestyle like the typical Afghani
– were we meet at a bazar and trade good and services.
I need to go back and refresh my weaving skills.
huggy_in_london - 16:11:
So gold bulls ... what do you think happens to gold when they finally default (or restructure)
Greece? When they start destroying some of the money there won't be a bid for gold. Fine,
buy some for insurance, but it should be a small % of your wealth, and remember that with most insurance
contracts you generally don't get paid out on them/claim!
Lndmvr - 16:12:
Growing economy? My little town will lose 300 jobs and the company is moving away for good
June 1st. I do insurance inspections, Allstate will cancel a policy for one broken roof shingle.
Relentless depression is what I see traveling 5-7 hundred miles a week.
pak - 16:13:
One problem is that the gold market is nowhere close the FX market in terms of liquidity.
That however may eventually be resolved. In a market-driven fashion. With gold at $100,000/oz,
and 1 x Au atom as delivery unit.
bob_dabolina - 16:52:
I think if any currency was backed by gold it would be the hands down strongest currency on
planet Earth.
I think a more realistic and efficient means for the dollar, would be a dollar backed by a
basket of commodities but dominantly gold.
Any thoughts on this?
Lionhead - 17:02:
The videos & the opinions expressed in the comments by Leo & others show the great confusion
that has been created by the financial media & press. The media lack the knowledge to express
critical views & only serve to confuse investors & traders. Would anyone take serious investing
advice from the TV "money honeys" reading a teleprompter script? The result is the increasingly
wild gyrations we are just beginning to see in the stock & bond markets.
Can both gold & stocks do well? Here's an opinion from someone that was on the inside with
the players & big operators, Martin Armstrong:
"This is a DEBT CRISIS and you better start understanding what the hell that truly
means. Capital is confused. The market made its crash [the flash crash] because at first blush
capital in domestic hands listens to the nonsense spun by the shills for the government. This
is a INTERNATIONAL DEBT CRISIS and that means we are facing a crisis in international capital
that will fly instantly to quality. That is why the dollar and gold will rise, and why YES, the
stocks will rise as well!"
bob_dabolina - 17:24:
Take this quote from Charlie Munger:
"When you mix raisins with turds, you've still got turds"
The only, only reason the dollar is percieved as safe in this enviroment is because of the
crisis in Europe. To say that the dollar is strong and healthy is a minomer because the dollar
is not strong, it is percieved to be strong relative primarily to the euro and yen. However, the
fundamentals underlying the dollar are weaker than they have ever been, at least in my analysis.
If one is to compare the value of the dollar vs. gold, or the euro vs. gold, it should be stunningly
clear which of the three have stronger fundamentals, going back at least 15 years. If you want
to juxtapose the action of gold vs. stocks over the same period please feel free to do so. Let
us not forget that gold has fairly no industrial utility.
The question should not be "can gold and stocks do well" the question should be
"where is my money safe and where can I see not only a return ON my
capital but a return OF my capital" I think if you look at the price action the
answer should be quite apparent. It should alarm you that once the situation in Europe runs it's
course, the next obvious domino is the United States and the dollar.
Asia Times The Fed and the nickel dollar By Wayne Jett
Speaking Freely is an Asia Times Online feature that allows guest writers to have their
say. Please
click hereif you are interested in contributing.
When 1971 began, US$35 would buy an ounce of gold. By the end of that year, the same amount of
gold cost $70. In other words, the dollar had lost half its purchasing power as measured by gold.
By the end of 1972, an ounce of gold cost $140, and the dollar had lost an additional 50%. So
the dollar at that time was worth a quarter of the dollar of two years earlier.
The dollar's devaluation in 1971 was not announced by then- president Richard Nixon or by the
US Department of the Treasury. But the devaluation was real, nonetheless. Just as real, in fact,
as when the dollar was officially devalued in 1934 by order of president Franklin Roosevelt from
$20.67 per ounce of gold to $35 per ounce.
During 2003, gold cost about $350 an ounce, 10 times the price at the outset of 1971. The 1971
dollar had shrunk to a dime (the colloquial US name for a 10-cent coin) - a major devaluation of
the currency. Yet the US government has not issued a single notice of devaluation during the 35 years
since 1971. De facto devaluation has occurred, even though it once required a direct order by the
president.
In 1973, the dollar's value was turned over to the Federal Reserve Board by order of Nixon. The
Fed, as it is called, has managed the dollar so that its value "floats" in the market. By this approach,
the Fed points to the market as determining the dollar's value. The truth is, however, the dollar's
value is determined by the Fed's practices, not by the market.
The dollar is neither a commodity nor a product; its value is not determined by the cost of production
or by utility. Its supply can be changed at the Fed's discretion, and demand for the dollar is often
affected drastically by what the Fed says and does.
Consider, for example, what has occurred since 2003, when $350 bought one ounce of gold. In spring
2004, the Fed began spreading the word that its interest-rate target for Federal Reserve funds would
be raised. Since June 2004, the Fed has raised the Funds Rate target 16 times, from 1% to 5%. This
was done, most Fed observers say, to strengthen the dollar.
The rate hikes raised the interest payments made by consumers and by businesses using commercial
paper by $155 billion per year. This drain of working capital from productive enterprises meant fewer
resources available to hire people and to make products.
This is the Fed's intent, since the Fed's theory is that higher unemployment means fewer workers
will demand higher wages that might push prices up. In pursuing its rate-hiking regimen, the Fed
conveyed a message to the economy - month after month - that production and employment should be
reduced.
But the Fed's rate hikes during this period have not strengthened the dollar. Quite the opposite
is the case. Today, one ounce of gold costs more than $700. The dollar is no longer worth a dime
compared with the 1971 dollar, as was the case in 2003. In other words, today's dollar is a nickel's
worth of the 1971 dollar. ("Nickel" is the US colloquialism for the 5-cent coin, which originally
was made of one part nickel and three parts copper.)
The dollar has lost half its value over the past three years; and with most of the loss occurring
within the past 10 months, the dollar's fall is getting steeper. The Fed's theory and performance
are failing badly.
Those who contend that the Fed is trying to make the dollar more valuable now urge faster, larger
hikes in interest rates. They say the Fed waited too long to begin raising rates, and should be more
aggressive. Others argue that a weak dollar allows US exporters to sell more goods and services abroad.
They speak as if the Fed has been seeking that objective and is achieving it with the weaker dollar.
Even with its new, plain-speaking chairman, Ben Bernanke, the Fed is not saying whether it is
trying to increase or to reduce the dollar's value. But definitely the Fed is using a theoretical
model that intends to reduce price increases (ie, strengthen the dollar) by raising the level of
unemployment. The Fed calls it the Consensus New Keynesian Model, but in essence it is the modified
Phillips Curve model. The Phillips Curve, named after New Zealand-born economist Alban William Phillips
(1914-75), describes an inverse relationship between inflation and unemployment; graphically, this
appears as a curve sloping downward and to the right, with inflation on the vertical axis and unemployment
on the horizontal axis.
This being the case, the Fed's theoretical model is most certainly invalid. The dollar's instant
purchasing power relative to gold is the lowest since 1980, which was the dollar's worst year in
history, despite two years of Funds Rate hikes.
The Fed's rate hikes have weakened the dollar, along with economic growth, by reducing demand
for dollars to invest. That creates excess dollars the Fed does nothing to drain. So the Fed itself
is causing monetary inflation. This explains the Fed's reputation for overshooting: rate hikes produce
inflation that chases rates higher.
Throughout history, gold has been an unerring measure of a currency's value. The
present high gold price means the dollar is worth very little now. General prices will have to be
adjusted higher in the next 10 years, probably more than 5% annually, if the dollar's value is not
restored promptly.
In 1979, gold was at $280 an ounce and rising. Fed chairman Paul Volcker at the time thought the
circumstances were so bad he gave up trying to manipulate interest rates to help the dollar. Unfortunately,
Volcker chose an unwise theory (monetarism) that made matters much worse.
This year, gold has touched $725 an ounce and is rising faster than in 1979. Again, the Fed must
abandon its interest-rate targeting. Time is of the essence. This time the Fed should apply tried
and proven classical principles by targeting a value for the dollar as reflected by a price for gold.
The Fed can reach the target by selling its Treasury bonds to remove dollars from the economy.
The target price should be between $375 and $450 an ounce, which would cause the least price displacement
in the economies of the United States and the rest of the world. The precise gold-price target is
not as important as the dollar's stability. Lack of a floor under the dollar is what dropped the
floor from under stock and bond prices during the stock-market crash of 1987.
Wayne Jett is managing principal and chief economist of Classical Capital LLC, a registered
investment adviser in Pasadena, California.
>
The ADP employment number came in 'better than expected' today. This month's
Hunger Games, the Non-Farm Payrolls, are on Friday.
I see where Boris, the lord mayor of London, is readying his water cannon
for the summer of our discontent.
It looks like nature herself is blasting the coasts of Albion with water
cannons of her own righteous indignation. Perhaps a portent? Or just our brave
new world.
The bubble economy continues to bubble on, KBO , with a bull dogged determination.
Although one can hardly blame it for a moment of indecision here and there,
hiding its ragged claws from less austere, and more discerning, eyes.
And having seen the moment of their greatness flicker, they are afraid. Or
was that just a teleprompter glitch, leaving their majesties temporarily agape,
almost ridiculous, almost, at times, the Fool?
And will Bernanke return, like Greenspan's ghost, saying, "That is not what
I meant at all; that is not it, at all"?
Until global excess wakes us, and we drown.
Ben Bernanke On Money and the Sophistry of Modern Monetary Theory
soph·is·try (s f -str ). n. pl. soph·is·tries. 1. Plausible but fallacious
argumentation. 2. A plausible but misleading or fallacious argument.
I see the Cullen Roche is back at it again, telling us all about the wonders
of modern money. The Biggest Myths in Economics
I will take these myths, and comment on them one by one. Some things make
sense, and others, not so much. But perhaps the discussion will help to shed
some light.
I am going to try to do it simply and in straightforward language, because
that is often the best antidote to sophistry.
The government "prints money".
The government really doesn't 'print money' in any meaningful sense.
Most of the money in our monetary system exists because banks created it
through the loan creation process. The only money the government really
creates is due to the process of notes and coin creation. These forms of
money, however, exist to facilitate the use of bank accounts.
This is the 'I didn't do it, because the guys who are working for me
did it' argument.
As you might recall, the banks in the US, and most other places, operated
under a license and regulation of the government. The banks are part of
the Federal Reserve System. They create money under the supervision and
regulation of the Federal Reserve Bank, which in turn is answerable to the
government.
Most of the time the money is created, organically if you will, through
economic activity. The Fed exercises quite a bit of direct and indirect
control over this process as both actor in the markets and a regulator.
This is the very basis of the Federal Reserve.
At other times, the Fed is able to create money on its own volition,
by expanding its Balance Sheet. It can create money at will, and uses it
to enact its policy objectives. Whether you say 'print' or 'create' money
is a matter of usage, as they are both essentially the same in this context
unless you are given to splitting hairs.
You want to know the difference here? If some bank or person started
'printing' its own money apart from the Federal Reserve system or the rules
of the government over commercial paper they would shut them down in a Manhattan
minute. Just ask the Liberty coins guy. The almighty dollar is a jealous
god.
There were times in the past when the 'currency of the US' was created
by private parties and circulated. That is not the case now, except in the
fevered minds of creative imaginations.
Banks "lend reserves"
This myth derives from the concept of the money multiplier, which we
all learn in any basic econ course. It implies that banks who have $100
in reserves will then "multiply" this money 10X or whatever. This was a
big cause of the many hyperinflation predictions back in 2009 after QE started
and reserve balances at banks exploded due to the Fed's balance sheet expansion.
But banks don't make lending decisions based on the quantity of reserves
they hold.
Banks lend to creditworthy customers who have demand for loans. If there's
no demand for loans it really doesn't matter whether the bank wants to make
loans.
This one gets definitionally tricky, because it involves the terminology
of bank accounting and its own particular jargon. But let us cut to the
heart of it by saying that banks make loans with some regards to their assets.
A person cannot just stand up with no money in their pockets and say, I
am a bank and am going to start making loans. They need to be licensed by
the government, and must adhere to certain requirements from their books.
Those nasty things like leverage, risk, etc.
As for Banks being in the business of making loans, that is nonsense.
Banks are in the business of making money, and we should never forget that.
Sitting idly on what in another business would be called working capital
does not do them much good. And people tend to mistake 'working capital'
for 'reserves' and that's where we go off into the jargon wilderness.
What is a creditworthy loan? This is not some black and white threshold,
good or bad, but more like better or worse, an analog measurement of risk
and reward. Anyone who has ever funded competing projects in corporations
understand this. It is intimately tied to risk return and competing opportunities.
I would certainly think that most people understand that making commercial
loans for some meager basis points in return over the long haul is boring
stuff compared to the opportunities to be had in gaming hot money markets
for outsized gains and large bonuses tied to short term results.
And that is the heart of much of the problems in the financial system
today. Speculation is crowding out investment from the commercial banking
system due to the repeal of Glass-Steagall, and the laxity of regulating
the abusive practices of large and powerful players in the markets.
The US government is running out of money and must pay back the national
debt.
There seems to be this strange belief that a nation with a printing press
whose debt is denominated in the currency it can print, can become insolvent.
There are many people who complain about the government 'printing money'
while also worrying about government solvency. It's a very strange contradiction...
As I've described before, the US government is a contingent currency
issuer and could always create the money needed to fund its own operations.
Now, that doesn't mean that this won't contribute to high inflation or currency
debasement, but solvency (not having access to money) is not the same
thing as inflation (issuing too much money).
This is a nice piece of sophistry because while it knocks down a thesis,
it does not prove its antithesis.
Because the US government is NOT running out of money, and it does NOT
have to pay back the national debt, that does not mean that the national
debt has no limit. It just means that we have not yet reached it, whatever
that may be.
At some point you have to get off the theoretical merry-go-round and
try to exchange some of that money which you declare that you have for real
goods. And the perspective of the counterparty weighs in heavily on that
transaction I daresay. One only has to look at the many, many failed currencies
throughout history, from 'contingent currency issuers,' in order to understand
the fallacy of this argument.
Certainly you can force your own citizens to adhere to your commands,
as the MMT crowd are often wont to imply. But it is still a larger world
out there, and absent one world government, there are some degrees of freedom
in determining currency valuations.
The national debt is a burden that will ruin our children's futures.
The national debt is often portrayed as something that must be "paid
back". As if we are all born with a bill attached to our feet that we have
to pay back to the government over the course of our lives. Of course, that's
not true at all. In fact, the national debt has been expanding since the
dawn of the USA and has grown as the needs of US citizens have expanded
over time. There's really no such thing as "paying back" the national debt
unless you think the government should be entirely eliminated (which I think
most of us would agree is a pretty unrealistic view of the world).
This one is almost the same as myth number 3. The national debt is something
that will always exist in a debt based system. The pricing of debt in a
marketplace is how the Federal Reserve system and Treasury are theoretically
restrained from the excessive creation of money.
The very money in your pocket is itself is a 'note' of obligation on
the Balance Sheet of the Fed, and overall a debt obligation of the Treasury.
The 'full faith and credit' of the United States if you will.
But that does not mean that the debt cannot become a burden on our children.
If the debt is misspent and squandered and allowed to outgrow the capacity
to manage it, it can become a very real burden.
But I find that those who make this argument are typically those
who have already grabbed a good portion of the money from some financial
bubble, and now seek to hold their gains. Debt must be managed.
To this point Cullen says "All government spending isn't necessarily
bad just like all private sector spending isn't necessarily good." And I
agree with this completely.
QE is inflationary 'money printing' and/or 'debt monetization'
Quantitative Easing (QE) is a form of monetary policy that involves the
Fed expanding its balance sheet in order to alter the composition of the
private sector's balance sheet. This means the Fed is creating new money
and buying private sector assets like MBS or T-bonds.
When the Fed buys these assets it is technically 'printing' new money,
but it is also effectively 'unprinting' the T-bond or MBS from the private
sector. When people call QE 'money printing' they imply that there is magically
more money in the private sector which will chase more goods which will
lead to higher inflation. But since QE doesn't change the private sector's
net worth (because it's a simple swap) the operation is actually a lot more
like changing a savings account into a checking account. This isn't 'money
printing' in the sense that some imply.
Well yeah, it is money printing, although I agree it is not magical. The
Fed simply expands its Balance Sheet and creates, or prints if you will,
Federal Reserve notes of zero duration, also known as dollars, and exchanges
them for assets of various durations and quality at non-market based prices.
It is not limited to Treasury debt, but can include almost anything really
according to the Fed, whether it be toxic debt mortgages, or common stocks,
etc.
And the Fed is not 'unprinting' anything, until it either writes off
the debt, or return it to its issuer. The Fed is a private corporation.
You can say that the Fed withdraws the liquidity from the market place by
keeping it relativelhy inactive because the Fed does not purchase many things,
but even that is no longer the case. The Fed has grown into quite the organization,
with its own police force. It merely surrenders any 'profits' remaining
after all its discretionary expenses back to the Treasury.
If this was such a simple and benign swap why else would they do it?
It is one of the primary levers the Fed uses to influence monetary policy.
They are increasing and changing the character of the money supply in
the course of managing it. It is what they do for God's sake, besides riding
herd on their banks who normally create the money for them, but occasionally
get derailed by some financial bubble of their own creation.
7) Government spending drives up interest rates and bond vigilantes control
interest rates.
Many economists believe that government spending 'crowds out' private
investment by forcing the private sector to compete for bonds in the mythical
'loanable funds market.' The last 5 years blew huge holes in this concept.
As the US government's spending and deficits rose interest rates continue
to drop like a rock. Clearly, government spending doesn't necessarily drive
up interest rates.
And in fact, the Fed could theoretically control the entire yield curve
of US government debt if it merely targeted a rate. All it would have to
do is declare a rate and challenge any bond trader to compete at higher
rates with the Fed's bottomless barrel of reserves. Obviously, the Fed would
win in setting the price because it is the reserve monopolist. So, the government
could actually spend gazillions of dollars and set its rates at 0% permanently
(which might cause high inflation, but you get the message).
It is not government spending that drives up interest rates, but that does
not mean government spending cannot drive up interest rates. It sure as
hell can.
And I would hope to think that bond vigilantes can help to control interest
rates, otherwise the entire Federal Reserve system and the US dollar is
based on a fallacy. See what Mr. Bernanke has to say below. This is the
confidence on which the dollar rests.
In fact the Fed COULD exercise reserve monopolist powers and print all
the money it wishes at zero rates. And the 'vigilantes' could respond by
shifting their wealth into other non-dollar instruments, en masse.
What is somewhat confusing is that the relationship is not straightforward,
but is a somewhat non-linear dynamic with a lag. You can get away with quite
a bit of economic behavior in the short term. But eventually you can reach
a tipping point, if there remain enough agents who are free to dissent from
the dictates of a central authority that has fallen into error, aka 'vigilantes.'
The Fed was created by a secret cabal of bankers to wreck the US economy.
The Fed is a very confusing and sophisticated entity. The Fed catches
a lot of flak because it doesn't always execute monetary policy effectively.
But monetary policy is not the reason why the Fed was created. The Fed was
created to help stabilize the US payments system and provide a clearinghouse
where banks could meet to help settle interbank payments.
...So yes, the Fed exists to support banks. And yes, the Fed often makes
mistakes executing policies. But its design and structure is actually quite
logical and its creation is not nearly as conspiratorial or malicious as
many make it out to be.
This is reductio ad absurdam. The Fed is not a monster or inherently
evil. But that does not make it good.
The Fed was created in somewhat extraordinary circumstances, wrapped
in political secrecy in the aftermath of a banking crisis. And it was driven
by a small group of powerful men who united to promote a common purpose.
I will not speak to their motives.
There is a long controversy about the proper role of a central bank in
the US, going back to its very founding, and this treatment makes light
of that.
It is a great power to create and distribute money, that can be used
for good or ill. And therefore it must be constrained, and subject to oversight.
And history shows that this power is frequently abused.
Fallacy of composition.
The biggest mistake in modern macroeconomics is probably the fallacy
of composition. This is taking a concept that applies to an individual and
applying it to everyone.
Could not agree more, especially if you extend it to anecdotal information.
But I would tend to refer to it as the fallacy of reasoning from the particular
to the general. But I would not call it 'the biggest.'
One of the most perennial myths is that a skill in making money, especially
through financial speculation, is the sign of wisdom in other things. Some
of the best traders I have known are borderline savants and white collar
criminals, whom I would hardly trust to handle my family's future.
Alas, wealth and beauty are not always companions of virtue in this world.
They become accustomed to obsequiousness, and lose site of their common
humanity. And there is nothing sadder or more tedious than a man who has
become wealthy, who decides to grace the public with his wisdom, bad haircut
and all.
I think a more pernicious and prevalent economic myth is the notion that
economics can dictate public policy through some appeal to economic laws
as if they were physical laws like gravity. Public policy is best decided
by determining goals and priorities and then allowing many things, including
economics, to shape the implementation of that policy.
But economics has been elevated to a position in our societies which
is wholly inappropriate and a source of great mischief, especially when
the truly dangerous myths like 'naturally efficient markets' become the
basis for policy decisions without proper regard for their effects. The
'austerity for the sake of the public while sustaining corrupt practices'
myth is perhaps the most cruel and appalling.
Economics is a science.
Economics is often thought of as a science when the reality is that most
of economics is just politics masquerading as operational facts.
Economics is a social science, and not a physical science. There are
plenty of facts, and somewhat ironically Mr. Cullen has just leaned heavily
on quite of few of the ones he tends to favor, whether they are right or
not.
The worst of it is when economics is used by those who claim an 'authority'
from it to promote policies that are quackery, as we have seen all too much
in the past twenty years in particular with regard to the natural goodness
of the power of 'the Market.'
What concerns me though is the follow on to this declaration of the myth
of economics as science. It is that extreme resort of relativism which holds
that since economics is all bullshit, why not use it, and shamelessly, to
promote a particular point of view, wrapping it in as much jargon and intimidating
hoo hah as you can manage? Since there is no science, there are no necessary
consequences, and we may do as we please. And that is a sophistry of the
first order.
And this view is being promoted by the economists themselves, those few
members of a 'disgraced profession' like accountants and regulators, who
were willing to say and do almost anything for the promise of money, favors,
and political connections.
And this deterioration in professional standards has long been my objection
to much that has been said and is being said about money by these most modern
of thinkers, caught up in the will to power, who believe that since there
is no god of consequences, then everything is lawful.
They lose their grounding in the reality of commerce and risk, and start
throwing around harebrained notions like 'platinum coins.' They bring the
childish politics of their academic departments to weigh in on serious policy
decisions with serious real world consequences.
Even a few faux Nobel laureates have been seen to join in this Dionysian
dance, a filigree of modern monetary contrivance. Skip the coin, default,
and be damned if you will, but a old fish wrapped in silk is still a dead
and stinking fish.
Speaking about money, It is worth reading what Mr. Bernanke has written
about money in this essay below. It speaks volumes.
"What has this got to do with monetary policy? Like gold, U.S. dollars
have value only to the extent that they are strictly limited in supply.
But the U.S. government has a technology, called a printing press (or, today,
its electronic equivalent), that allows it to produce as many U.S. dollars
as it wishes at essentially no cost.
By increasing the number of U.S. dollars in circulation, or even by credibly
threatening to do so, the U.S. government can also reduce the value of a
dollar in terms of goods and services, which is equivalent to raising the
prices in dollars of those goods and services. We conclude that, under a
paper-money system, a determined government can always generate higher spending
and hence positive inflation.
Of course, the U.S. government is not going to print money and distribute
it willy-nilly (although as we will see later, there are practical policies
that approximate this behavior). Normally, money is injected into the economy
through asset purchases by the Federal Reserve.
To stimulate aggregate spending when short-term interest rates have reached
zero, the Fed must expand the scale of its asset purchases or, possibly,
expand the menu of assets that it buys.
Alternatively, the Fed could find other ways of injecting money into
the system--for example, by making low-interest-rate loans to banks or cooperating
with the fiscal authorities. Each method of adding money to the economy
has advantages and drawbacks, both technical and economic.
One important concern in practice is that calibrating the economic effects
of nonstandard means of injecting money may be difficult, given our relative
lack of experience with such policies. Thus, as I have stressed already,
prevention of deflation remains preferable to having to cure it.
If we do fall into deflation, however, we can take comfort that the logic
of the printing press example must assert itself, and sufficient injections
of money will ultimately always reverse a deflation."
The Last but not LeastTechnology is dominated by
two types of people: those who understand what they do not manage and those who manage what they do not understand ~Archibald Putt.
Ph.D
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Re: (Score:3)
by (630) writes:Yeah, we're done with this article.
Re: (Score:2)
by creimer (824291) writes:If you're worry about your money being inflated away, convert your fiat currency into precious metals like silver and gold.
Re:And OP is retarded. (Score:5, Insightful)
by Culture20 (968837) writes: on Monday May 18, 2015 @12:33PM (#49719145)Precious metals are only worth something because other people want them. Because they think the metals are worth something because other people want the metals because they think they're worth something because... They're pretty, they're partly lasting and they're rare. Until they're not: aluminum used to be a valuable metal. Now I coat my armpits with it every morning, and half the metal objects I own are aluminum.
Reply to This Parent ShareIf you're expecting a big crash, you're better off purchasing items of utility or improving your land for raising food.
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Flag as InappropriateRe: (Score:2, Informative)
by creimer (824291) writes:Never mind that gold and silver were used as money for thousands of years before the printing press made it possible to issue fiat currency.
Re: (Score:3)
by Enry (630) writes:So were rocks and salt. Your point?
Re: (Score:3)
by AthanasiusKircher (1333179) writes:Never mind that gold and silver were used as money for thousands of years before the printing press made it possible to issue fiat currency.
Nonsense. Gold and silver can be "fiat" currency just as paper money can be. Fiat currency just means that a currency derives part of its value from the government's declaration that it shall function as a currency.
For example, the U.S. government says that the "dollar" must be used to pay taxes. It could equally say that "gold" must be used to pay taxes, in which case gold's price would probably go up, since it would be more useful to pay for things with. That addition in value due to the government'
Re:And OP is retarded. (Score:5, Informative)
by Sique (173459) writes: on Monday May 18, 2015 @12:58PM (#49719331) HomepageThe volatility of precious metals is known since the Ancient times. Precious metals have never been a good storage for monetary value, their main advantage was their ability to be measured easily (either by weighing them or by counting minted coins), and to be carried around easily - advantages you also have with paper money or with the numbers on a banking account.
Compare for instance the prices for platinum and gold, two precious metals with very similar properties: Same frequency of occurrence in the Earth crust, same properties (density between 19-20 g per cubic centimeter, does not oxydate easily, can be cast and cold formed), same usages (mainly jewelry, some industrial usage, some coined or cast into bars to be stored as assets). Their prices have been so volatile recently, that platinum was about twice the price of gold, and vice versa within just a decade. Compared with that, the dollar/euro exchange rate is an example of long time stability.