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Mary wrote:

Money has no intrinsic value. Its value is extrinsic, comparative.

Now don't upset the bigendians (hard money) folks by telling them they are not really different than the littleendians (fiat money) folks... 

Monies – Joining Economic and Legal Perspectivesby David Bholat, Jonathan Grant and Ryland Thomas

Bank Underground

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.

Finally, durability means maintaining fixed nominal value through time. A rough legal equivalent of durability is an option for instant par redemption. State-backed monies such as fivers and promises of immediate conversion into them are monies probably because states retain the power to fix the nominal meaning of their unit of account and can choose to accept only claims denominated in that unit of account in discharge of tax obligations.

Monies

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.

BoE reserve accounts

BoE reserve accounts are debt obligations owed by the Bank to commercial banks and other Sterling Monetary Framework (SMF) participants. They are the largest liabilities on the Bank’s balance sheet and have been used by banks for settling their obligations with each other since at least the mid-19th century.

Scottish and Northern Ireland banknotes

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:

  1. 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?
  2. 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.

If you want to get in touch, please email us at [email protected]


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Old News ;-)

[Jul 14, 2021] Cryptos are a collectors item just like fine art.

Jul 13, 2021 | www.moonofalabama.org

jsanprox , Jul 12 2021 1:59 utc | 103

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.


Hoarsewhisperer , Jul 12 2021 3:36 utc | 104

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.

Stonebird , Jul 12 2021 8:31 utc | 107

Jörgen Hassler | Jul 12 2021 5:32 utc | 105

"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.


vk , Jul 12 2021 15:47 utc | 113

@ Posted by: jsanprox | Jul 12 2021 1:59 utc | 103

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.

[Mar 06, 2021] Pointless Pain Is What We're Enduring. And All for the Sake of Accepting That Money is Not a Constraint on Our Potential

Mar 06, 2021 | www.nakedcapitalism.com

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.


DTK , March 6, 2021 at 8:28 am

Hey Steve K,
Please explain why MMT is a bad joke.
Thank You

dummy , March 6, 2021 at 2:59 pm

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?

eg , March 6, 2021 at 5:37 pm

Depends upon what the additional money is used for -- if it's to employ the currently unemployed productively, then everyone is better off.

dummy , March 6, 2021 at 6:59 pm

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.

occasional anonymous , March 6, 2021 at 5:43 pm

That isn't what MMT says. You're arguing against a strawman.

eg , March 6, 2021 at 10:14 am

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.

Louis Fyne , March 6, 2021 at 7:53 am

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%?

honest question.

PlutoniumKun , March 6, 2021 at 8:03 am

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.

Susan the other , March 6, 2021 at 1:16 pm

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.

James E Keenan , March 6, 2021 at 9:55 am

Two points:

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.

HotFlash , March 6, 2021 at 11:42 am

"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.

fwe'theewell , March 6, 2021 at 1:01 pm

Michelle Obama, izzat you? Gorgeous designer bootstraps.

The Rev Kev , March 6, 2021 at 5:53 pm

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.

RODGER MITCHELL , March 6, 2021 at 8:21 am

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.

Economists: Revise your economics textbooks.

Gengiskahn , March 6, 2021 at 3:55 pm

How do you define inflation?

DTK , March 6, 2021 at 8:36 am

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.

Patrick , March 6, 2021 at 9:02 am

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!

Patrick ,

Patrick , March 6, 2021 at 9:21 am

Adding that yes, "fear of inflation" is an applicable "economic or monetary reason or law" that may explain the conservative position.

Anonapet , March 6, 2021 at 11:42 am

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.

Adam Eran , March 6, 2021 at 1:50 pm

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.

Patrick , March 6, 2021 at 1:50 pm

"Then the MMT School are conservative"

In my example, no. The MMT School does not invoke inflation FEAR to deny nurses a meaningful wage raise.

Fear. Of change. Of "others". Of a level playing field? These pesky conservatives.

(For the record I did not excel in Father Brennan's freshman year logic class. And that was fifty years ago!)

Amfortas the hippie , March 6, 2021 at 2:23 pm

https://en.wikipedia.org/wiki/Bond_vigilante

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.

see: https://www.latimes.com/archives/la-xpm-1994-06-16-me-4587-story.html

for an enlightening memento mori of being right here before .Time is, indeed, cyclical, like the Ancients insisted.

Patrick , March 6, 2021 at 6:39 pm

"Maybe Pepe Escobar when they hide the rum". LOL! Needed that.

[Jan 26, 2021] 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

Jan 26, 2021 | www.moonofalabama.org

uncle tungsten , Jan 26 2021 1:11 utc | 172

c1ue #118
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?


psychohistorian , Jan 26 2021 1:29 utc | 173

@ 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.

Thanks for your comments.

uncle tungsten , Jan 26 2021 1:32 utc | 174
arby #110
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.

While the BS is pumped the ponzi is inflated.

[Aug 08, 2020] Russia-China -Dedollarization- Reaches -Breakthrough Moment- As Countries Ditch Greenback For Bilateral Trade -

Aug 08, 2020 | www.zerohedge.com

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 Email Print

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.

https://lockerdome.com/lad/13084989113709670?pubid=ld-dfp-ad-13084989113709670-0&pubo=https%3A%2F%2Fwww.zerohedge.com&rid=www.zerohedge.com&width=890

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.

[Aug 08, 2020] The Dollar Standard Slipping Out of Control- -- Strategic Culture

Aug 08, 2020 | www.strategic-culture.org

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.

[Jul 19, 2020] A trillion here, a trillion there, pretty soon you're talking real money (creation) -- Crooked Timber

Jul 19, 2020 | crookedtimber.org

Larry Hamelin 07.18.20 at 9:37 am (no link)

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.

MisterMr 07.18.20 at 10:11 am ( 4 )

"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.

Bradley C Kuszmaul 07.18.20 at 10:38 am ( 5 )

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.

John Quiggin 07.18.20 at 10:40 am ( 6 )

@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.

Lee A. Arnold 07.18.20 at 11:27 am ( 7 )

@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?

bob mcmanus 07.18.20 at 11:50 am ( 8 )

How much is enough (to pay for our policy goals)?

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)?

J-D 07.19.20 at 2:03 am ( 14 )

@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.

John Quiggin 07.19.20 at 3:50 am ( 15 )

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.

eg 07.19.20 at 4:08 am ( 16 )

@Alan White #13

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.

[Jul 15, 2020] -There Are No Free Lunches- - Former Reserve Bank Of India Chief Explains Why MMT Will Never Work -

Jul 14, 2020 | www.zerohedge.com

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."

https://lockerdome.com/lad/13084989113709670?pubid=ld-dfp-ad-13084989113709670-0&pubo=https%3A%2F%2Fwww.zerohedge.com&rid=www.zerohedge.com&width=890

.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.

* * *

Source: Macro Hive

[May 10, 2020] MMT and COVID-19

May 10, 2020 | www.moonofalabama.org

financial matters , May 9 2020 22:43 utc | 34

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.

[Apr 28, 2020] Hudson gives him the primary credit for providing the foundation for Modern Monetary Theory

Apr 28, 2020 | www.moonofalabama.org

karlof1 , Apr 27 2020 0:25 utc | 53

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.

[Apr 24, 2020] The Use and Abuse of MMT

Apr 24, 2020 | www.moonofalabama.org

karlof1 , Apr 23 2020 18:19 utc | 35

Musburger @3--

I highly suggest you read "The Use and Abuse of MMT" by Michael Hudson, with Dirk Bezemer, Steve Keen and T.Sabri Öncü.


Leser , Apr 23 2020 18:55 utc | 41

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

karlof1 , Apr 23 2020 19:22 utc | 48
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.

suzan , Apr 23 2020 19:56 utc | 50
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.


https://michael-hudson.com/2020/04/covid-plan-more-capital-gains-not-profits/

[Apr 21, 2020] On monetary policy: there is always money for corporate welfare, the military, tax relief and benefits for the oligarchy but never money for health care, education, infrastructure

Notable quotes:
"... 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. ..."
Apr 21, 2020 | www.moonofalabama.org

Noah Way , Apr 21 2020 16:42 utc | 75

@ #6 Passer by

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.

gm , Apr 21 2020 16:51 utc | 77

@Posted by: Noah Way | Apr 21 2020 16:42 utc | 75

Shorter version: "Deficits Don't Matter" Dick Cheney, 2002.
https://www.chicagotribune.com/news/ct-xpm-2004-01-12-0401120168-story.html

[Mar 15, 2020] While it is still popular to claim that the United States has never defaulted on its debt, this is a myth

Mar 15, 2020 | www.moonofalabama.org

Likklemore , Mar 14 2020 22:42 utc | 44

@c1ue 28 and 30

Given that 2/3rds or more of the debt is owed to Americans

suggest you whisper that to the Chinese, other sovereign holders and non-US individuals - you know those Tbills and Tbonds.

Nobody has a better credit rating than the USG - because the USG can literally not default.

Really? Why did S&P downgrade US credit rating in 2014?

and

what do you think happened on August 15 1971? that date can be categorized as recent!

LINK


[.]
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.[.]

Oops then there was 1979 said caused by word-processing error
so we defaulted on some of them."

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

[Jan 16, 2020] Will The US Obsession With Sanctions Destroy The Dollar

Notable quotes:
"... 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." ..."
Jan 16, 2020 | www.zerohedge.com

by Tyler Durden Thu, 01/16/2020 - 17:50 0 SHARES

Authored by Ryan McMaken via The Mises Institute,

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 Interest describes 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.

Source.

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.


Arising , 11 minutes ago link

Sanctions are a weak man's weapon when he can't/won't negotiate.

Maghreb , 29 minutes ago link

https://en.wikipedia.org/wiki/Anti-Nazi_boycott_of_1933 January....

https://en.wikipedia.org/wiki/Executive_Order_6102 April

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.

Schroedingers Cat , 2 hours ago link

The Us Dollar will be destroyed sometime between now and 1 week before the Sun turns into a red giant and swallows the Earth.

uhland62 , 1 hour ago link

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.

CashMcCall , 2 hours ago link

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.

CashMcCall , 2 hours ago link

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.

alphasammae , 3 hours ago link

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.

jm , 3 hours ago link

Probably, but it will take a while. Alternatives are few at present.

CashMcCall , 2 hours ago link

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.

Maghreb , 21 minutes ago link

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.

https://www.pbs.org/wgbh/frontline/article/veterans-face-greater-risks-amid-opioid-crisis/

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.

https://en.wikipedia.org/wiki/French_Connection

https://en.wikipedia.org/wiki/Nixon_shock

https://www.youtube.com/watch?v=eMs6eI1VRBQ

fackbankz , 1 hour ago link

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.

Maghreb , 35 minutes ago link

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.

https://en.wikipedia.org/wiki/Military_payment_certificate

https://en.wikipedia.org/wiki/Strategic_Hamlet_Program

After World War II penicillin was a global commodity used as black market currency to cure venereal disease.

https://www.bbc.com/news/technology-50851420

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.

Demeter55 , 3 hours ago link

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.

pedoland , 3 hours ago link

the Fed destroyed the dollar

madashellron , 3 hours ago link

IT'S CALLED SHOOTING YOURSELF IN THE FOOT, NOT ONCE BUT A THOUSAND TIMES!

Mustafa Kemal , 3 hours ago link

CAATSA, Countering American Adversaries Through Sanctions,

https://www.treasury.gov/resource-center/sanctions/Programs/Pages/caatsa.aspx

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.

https://www.amazon.com/Losing-Military-Supremacy-American-Strategic-ebook/dp/B07DVSM76H/ref=sr_1_2?keywords=martyanov&qid=1579218682&sr=8-2

Element , 3 hours ago link

... the American regime is weaponizing sanctions to dominate the planet.

Good. Because the alternative is to bomb countries.

Element , 3 hours ago link

... and are waiting us out. The other is that our military is not as good as we claim and some of us know it.

Because everyone else's military is so much better, right?

Idiot.

Mustafa Kemal , 3 hours ago link

You appear "ideologically possessed" as Jordan Pederson says; namely you do not seek the truth but have a position to promote.

Here read em and weep

https://www.amazon.com/Losing-Military-Supremacy-American-Strategic-ebook/dp/B07DVSM76H/ref=sr_1_2?keywords=martyanov&qid=1579218682&sr=8-2

logicalman , 3 hours ago link

It's hard to break with the Mob.

NotAGenius , 1 hour ago link

You don't, alive.

44magnum , 3 hours ago link

Zionist banker bucks masquerading as US Dollars.

No US dollars since 1913

3rdWorldTrillionaire , 3 hours ago link

Not true, the US Treasury issued certificates backed by silver as late as the 1960s.

Silver Fox 47 , 3 hours ago link

Truth bomb

BillEpstein , 3 hours ago link

american war whores sure have proven eisenhower to be a prophet

Silver Fox 47 , 3 hours ago link

along with Gen. Smedley Butler

indus creed , 1 hour ago link

....who, unlike Ike, was a combat General.

Element , 3 hours ago link

No

crypt007 , 4 hours ago link

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

Son of Captain Nemo , 4 hours ago link

$USD was already DOA when Don Rumsfeld declared that $2.3 trillion ( https://www.youtube.com/watch?v=a6pkCG9fs3I ) was missing from the DOD t he day before this was allowed to ( https://www.ae911truth.org/ ) happen!...

The rest is shall we say "academic" ( https://www.zerohedge.com/news/2019-03-29/true-size-us-national-debt-including-unfunded-liabilities-222-trillion-dollars )!!!

P.S.

"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!

NotAGenius , 1 hour ago link

See "logicalman"'s comment above. You can't break with the mob. Alive.

crypticcurrency , 4 hours ago link

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.

CashMcCall , 2 hours ago link

who ran the conference BANNON.

PGR88 , 4 hours ago link

Germany's deputy foreign minister Niels Annen wrote "Europe needs new instruments to be able to defend itself from licentious extraterritorial sanctions."

Dare we say the word? (((gold)))

crypt007 , 4 hours ago link

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

inhibi , 4 hours ago link

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)

Woodenman , 4 hours ago link

When you build a house of cards it can collapse faster than you can blink.

TBT or not TBT , 2 hours ago link

Tell that to the mullahs. Shades of the Berlin Wall moment for the USSR.

eekastar , 4 hours ago link

All 4 are loosing credibility fast

Consuelo , 4 hours ago link

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.

Element , 3 hours ago link

Too much truth!

You've got the anti-crown shrieking, "The End Is Nigh!".

They'll still be screaming it in 2050, while they themselves are being lowered into a coffin.

Mustafa Kemal , 3 hours ago link

The days of US Military Supremacy are over

https://www.amazon.com/Losing-Military-Supremacy-American-Strategic-ebook/dp/B07DVSM76H/ref=sr_1_2?keywords=martyanov&qid=1579218682&sr=8-2

luffy0212 , 2 hours ago link

Your comparison is retarded. Economically you been overtaken

Chinese and Russians just haven't completely crash JUSA dollar to allow the world to transition away from you parasites without feeling much pain.

we know you dontunderstand the word pragmatism.

Militarily

you can be removed conventionally at any moment and be made to bleed dry

again Pragmatism comes into play

what better way then to allow the war criminals to crumble on their own and left stranded around the world once dollar goes bloop


alternative payment systems are being implemented and put into use

but again a transition must gradually allow for broader use to avoid the pain and aches that come with hastily made moves

again the word pragmatism comes into mind

lastly 80% is no longer the case

And the percentage keeps decreasing day by day

yerfej , 4 hours ago link

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.

Woodenman , 4 hours ago link

Superbly inteligent coment!

JBL , 1 hour ago link

biden....36 yrs in the senate?

yeah yeah, the woke electorate's gunna clean house n vote in the good guys

ted41776 , 4 hours ago link

you too can have freedom and democracy and live under the threat of losing everything you have if you don't do as you're told

WHERE DO I SIGN UP?

nope-1004 , 4 hours ago link

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.

Woodenman , 4 hours ago link

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.

ReturnOfDaMac , 4 hours ago link

Bullshyt, it was King Dollar yesterday, it's King Dollar today, and by Gawd, it's King Dollar FOREVER!!

You will use our Dollar and dammit, you WILL like it.

CashMcCall , 2 hours ago link

Sounds like Kudlow has been back into the ding dong daddy white powder... LOL...

Don't forget SARC... some may not have captured your subtle humor.

cogitergosum , 4 hours ago link

The dollar's days as a global reserve currency are numbered because..

TRUMP LOST THE PETRODOLLAR.

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"

That is true and accurate in the case of burgerland and its rulers!
https://www.dailymail.co.uk/news/article-7881839/New-images-damage-caused-Iranian-missile-strike-Iraqi-base.html

https://www.dailymail.co.uk/news/article-7893435/US-military-lost-contact-drones-overhead-Iranian-ballistic-missile-strike.html

DisorderlyConduct , 4 hours ago link

LOL. That's hilarious.

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...

Checkmate.

Woodenman , 4 hours ago link

Trump shredded the JCPOA, not Iran.

DisorderlyConduct , 3 hours ago link

Obama did by not putting it to the Senate for ratification. That is how the US becomes bound by a treaty.

Trump did what he had a right and the mandate to do. The JCPOA has no broad-based support in the US and still doesn't. Should have never existed.

That aside, The US was not the only nation in the agreement. The rest of you are free to work it out.

TBT or not TBT , 2 hours ago link

A U.S. induhvidual signed it. The U.S. declined to.

cogitergosum , 4 hours ago link

okay boomer

enjoy some petrodollar humor

http://boards.4chan.org/pol/thread/239782961/geopolitics-china-trade-deal-edition

DisorderlyConduct , 3 hours ago link

LOL.

luffy0212 , 1 hour ago link

You're the typical jarhead indispensable fodder dumbass.

no checkmate fool none at all.

close the high school history book.

Element , 3 hours ago link

What a ridiculous argument, the USA has its own oil and gas, more than the Saudis have!

Your version of reality is 40 years out of date.

Element , 3 hours ago link

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.

See Japan after WWII - that would occur to Iran.

The End

cogitergosum , 2 hours ago link

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!

TBT or not TBT , 2 hours ago link

We thought you didn't like pork. What's your beef with hamburger?

cogitergosum , 2 hours ago link

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.

luffy0212 , 1 hour ago link

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.

[Jan 10, 2020] The Saker interviews Michael Hudson

Highly recommended!
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. ..."
Jan 09, 2020 | thesaker.is

[this interview was made for the Unz Review ]

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! ­


Col...'the farmer from NZ' on January 09, 2020 , · at 5:19 pm EST/EDT

What a truly superb interview!

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.

Cheers from the south seas
Col

And the link to the Askary interview: . https://youtu.be/UD1hWq6KD44

Col...'the farmer from NZ' on January 09, 2020 , · at 8:22 pm EST/EDT
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."

Cheers
Col

And the link https://oilprice.com/Geopolitics/Middle-East/Is-Iraq-About-To-Become-A-Chinese-Client-State.html#

Anonymouse on January 09, 2020 , · at 5:20 pm EST/EDT
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.

Little Black Duck on January 09, 2020 , · at 7:01 pm EST/EDT
They're bit part players in decline, subservient to the great dollar and oil pyramid scheme that keeps America afloat.

So who owns the dollar? And who owns the oil companies?

Osori on January 09, 2020 , · at 8:06 pm EST/EDT
I'd never thought of that "stationary aircraft carrier" comparison between Israel and the British, very apt.
Zachary Smith on January 09, 2020 , · at 9:53 pm EST/EDT
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.

44360 on January 09, 2020 , · at 5:34 pm EST/EDT
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.

Ahmed on January 09, 2020 , · at 5:37 pm EST/EDT
"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.

Azorka1861 on January 09, 2020 , · at 5:57 pm EST/EDT
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.

https://www.veteranstoday.com/2020/01/08/vital-the-deeper-story-behind-the-assassination-of-soleimani/

..

Nils on January 09, 2020 , · at 6:05 pm EST/EDT
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?

Much thanks for this interview, Saker

Col...'the farmer from NZ' on January 09, 2020 , · at 6:26 pm EST/EDT
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.

Regards
Col

Mike from Jersey on January 09, 2020 , · at 7:26 pm EST/EDT
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.
Outlaw Historian on January 09, 2020 , · at 7:48 pm EST/EDT
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.

RR on January 09, 2020 , · at 7:59 pm EST/EDT
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."

Frank on January 09, 2020 , · at 10:27 pm EST/EDT
@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.
Anonymous on January 09, 2020 , · at 6:34 pm EST/EDT
A truly superb interview, thanks Michael Hudson.
David on January 09, 2020 , · at 6:39 pm EST/EDT
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.
Mike from Jersey on January 09, 2020 , · at 7:17 pm EST/EDT
Excellent article.

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.

Rubicon on January 09, 2020 , · at 10:22 pm EST/EDT
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.

Craig Mouldey on January 09, 2020 , · at 8:19 pm EST/EDT
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.
Mike from Jersey on January 09, 2020 , · at 9:25 pm EST/EDT
Actually, oil underlies everything.

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.

Rubicon on January 09, 2020 , · at 10:26 pm EST/EDT
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.
Stanislaw Janowicz on January 09, 2020 , · at 8:58 pm EST/EDT
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".
Greg Horrall on January 09, 2020 , · at 9:42 pm EST/EDT
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.

Ann Watson on January 09, 2020 , · at 10:42 pm EST/EDT
So now we know why Michael Hudson avoids the Israel involvment – Like Pepe.
Лишний Человек on January 09, 2020 , · at 11:02 pm EST/EDT
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.

[Jan 09, 2020] Protecting the Dollar Standard is the main national security objective of the USA

Jan 09, 2020 | www.moonofalabama.org

vk , Jan 9 2020 19:35 utc | 43

@ Posted by: Cynica | Jan 9 2020 19:20 utc | 38

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.


Cynica , Jan 9 2020 19:20 utc | 39

@Kali #22

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.

vk , Jan 9 2020 19:35 utc | 43
@ Posted by: Cynica | Jan 9 2020 19:20 utc | 38

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.

vk , Jan 9 2020 19:40 utc | 45
@ Posted by: vk | Jan 9 2020 19:35 utc | 42

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.

karlof1 , Jan 9 2020 19:45 utc | 47
Cynica @38--

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 .

karlof1 , Jan 9 2020 19:55 utc | 48
Walter @39--

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)."

c1ue , Jan 9 2020 19:58 utc | 49
@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.

[Jan 08, 2020] "Debt Wish 2020" Did Iran strike affects dollar status as the world reserve currency, because it is a clear sign the the period of the USA absolute hegemony after the dissolution of the USSR came the end?

Jan 08, 2020 | www.moonofalabama.org

karlof1 , Jan 8 2020 0:02 utc | 110

psychohistorian @88--

What was your take on "Debt Wish 2020"?

Jezabeel @82--

"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.

[Dec 01, 2019] Will America's Trade Policy End Up Destroying The Dollar

Dec 01, 2019 | www.zerohedge.com

Will America's Trade Policy End Up Destroying The Dollar? by Tyler Durden Sat, 11/30/2019 - 23:30 0 SHARES

Authored by Alasdair Macleod via GoldMoney.com,

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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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.

[Nov 30, 2019] Practitioner's Guide to MMT

Part 1 and Part 2
Nov 30, 2019 | themacrotourist.com
              1. Danny November 28, 2019 at 3:27 pm

                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.

                https://www.greanvillepost.com/2019/11/15/jimmy-dore-with-dylan-ratigan-the-super-rich-have-no-country/

                After the 1 hour 39 minute mark here:
                https://www.youtube.com/watch?v=23Dc2ZfpKmo

                Reply
                1. OpenThePodBayDoorsHAL November 28, 2019 at 6:16 pm

                  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.

                  End the Fed.

                  Reply
                  1. Yves Smith Post author November 28, 2019 at 10:46 pm

                    No this is totally wrong and I don't have the time now to debunk it. Ratigan is not a funding markets expert and it shows.

                    Reply
                    1. OpenThePodBayDoorsHAL November 29, 2019 at 1:51 am

                      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

                  2. cnchal November 28, 2019 at 11:40 pm

                    Interesting comment Dylan made regarding politicians.

                    The political system rewards those that are the best at raising money and character assasination.

                    Trump assassinates his own character better than anyone else. Bernie is great at raising lots of money with small donations from many people.

                    Bernie or bust.

                    Reply
              2. Yves Smith Post author November 28, 2019 at 10:45 pm

                *Sigh*

                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.

                Reply
                1. skippy November 28, 2019 at 11:03 pm

                  You just can't washout that commodity money stain in some peoples minds .

                  Reply
                2. OpenThePodBayDoorsHAL November 29, 2019 at 1:54 am

                  42 days seems longish to apply to the overnight money markets, no? Macro Voices/Alhambra have a very different perspective

                  Reply
            1. Yves Smith Post author November 28, 2019 at 10:41 pm

              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.

              Reply
      1. xkeyscored November 28, 2019 at 12:39 pm

        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.

        Reply
        1. JTMcPhee November 28, 2019 at 8:52 pm

          From "The Highlander:" "In the end, there can be only one."

          Reply

[Nov 28, 2019] Making Sense of the National Debt

Nov 28, 2019 | research.stlouisfed.org

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:

Japanification of the USA:

Birthrates in the U.S. are falling. Abortions have also hit an all-time low

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:

Social counterrevolution and the decline in US life expectancy

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.

Posted by: vk | Nov 28 2019 15:44 utc | 12

[Aug 25, 2019] IMF's Special Drawing Rights (SDR) currency.

Aug 25, 2019 | www.moonofalabama.org

Grieved , Aug 25 2019 3:00 utc | 89

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.

[Aug 25, 2019] Keynes was correct about the need for a neutral global reserve currency for trade rather than a national currency serving as world reserve currency

Aug 25, 2019 | www.moonofalabama.org

donkeytale , Aug 24 2019 23:03 utc | 48

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.

[Aug 25, 2019] I agree that US abuses it exorbitant providge , but that is what hegemoney always does. Power corrupts and has always done so

Aug 25, 2019 | www.moonofalabama.org

Contributor , Aug 24 2019 22:49 utc | 45

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.


Perimetr , Aug 24 2019 23:11 utc | 50

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.

C I eh? , Aug 24 2019 23:14 utc | 51
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.

... ... ...

dh-mtl , Aug 24 2019 23:18 utc | 52
On May 23, on MOA, I made the following comment:

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.

Jackrabbit , Aug 24 2019 23:21 utc | 53
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.

donkeytale , Aug 24 2019 23:29 utc | 54
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.

donkeytale , Aug 24 2019 23:47 utc | 55
The ghost cities of China.
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.

Daniel , Aug 24 2019 23:57 utc | 57
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 | 59 vk , 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.

milomilo , Aug 25 2019 0:16 utc | 61
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.

S , Aug 25 2019 0:22 utc | 62
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.

vk , Aug 25 2019 0:43 utc | 63
Here's the famous memorandum where Trump admits China is (by exclusion) at least an "developed" economy:

Trump Targets China Over WTO 'Developing Nation' Crackdown

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.
ADKC , Aug 25 2019 0:53 utc | 66
donkeytale @54

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.

[Aug 25, 2019] 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.

Aug 25, 2019 | www.moonofalabama.org

Godfree Roberts , Aug 24 2019 22:43 utc | 41

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.

[Aug 25, 2019] U.S. Decoupling From China Forces Others To Decouple From U.S.

G7 is not less then 50% of world economics.
Aug 25, 2019 | www.moonofalabama.org
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:

The headline above the article is also wrong:

Trump retaliates in trade war by escalating tariffs on Chinese imports and demanding companies cut ties with China

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

[Aug 17, 2019] On currency manipulation: The USA afministration wants to weaken dollar but this is not an easy task

Aug 17, 2019 | economistsview.typepad.com

Fred C. Dobbs , August 07, 2019 at 02:23 PM

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.

[Aug 17, 2019] If the U.S. abuses its exorbitant privilege too much by bullying, there will eventually be a switch.

Notable quotes:
"... 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. ..."
Aug 17, 2019 | economistsview.typepad.com

Fred C. Dobbs , August 07, 2019 at 06:22 AM

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."

JohnH -> Fred C. Dobbs... , August 07, 2019 at 09:26 AM
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.

[Aug 08, 2019] What's at Risk if US Stumbles Into a Currency War

Aug 08, 2019 | economistsview.typepad.com

Fred C. Dobbs , August 07, 2019 at 06:22 AM

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."

JohnH -> Fred C. Dobbs... , August 07, 2019 at 09:26 AM
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.

[Aug 03, 2019] Trump created a 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.

Aug 03, 2019 | www.nakedcapitalism.com

Noel Nospamington , August 3, 2019 at 10:50 am

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.

[Aug 02, 2019] 'Dr Doom' economist Nouriel Roubini in Bitcoin battle

Aug 02, 2019 | economistsview.typepad.com

(Ron) Weakley , July 23, 2019 at 03:30 AM

https://www.bbc.com/news/business-48852059

'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...

RC (Ron) Weakley said in reply to RC (Ron) Weakley... , July 23, 2019 at 03:34 AM
Oh, RE: The Great Crypto Heist

Jul 16, 2019 | Nouriel Roubini

https://www.project-syndicate.org/commentary/cryptocurrency-exchanges-are-financial-scams-by-nouriel-roubini-2019-07


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?]

Joe -> RC (Ron) Weakley... , July 23, 2019 at 03:55 AM
Wild traders are a feature, 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.

RC (Ron) Weakley said in reply to Joe... , July 23, 2019 at 04:11 AM
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.
Joe -> RC (Ron) Weakley... , July 23, 2019 at 05:39 AM
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.

RC (Ron) Weakley said in reply to Joe... , July 23, 2019 at 09:51 AM
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.
RC (Ron) Weakley said in reply to RC (Ron) Weakley... , July 23, 2019 at 10:05 AM
Actual automated trading algorithms run on computers all the time and have been for decades now, no cryptocurrencies required.
Julio -> RC (Ron) Weakley... , August 01, 2019 at 07:50 AM
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").

Julio -> Joe... , July 23, 2019 at 10:01 AM
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.
RC (Ron) Weakley said in reply to Julio ... , July 23, 2019 at 10:07 AM
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.
Joe -> RC (Ron) Weakley... , July 23, 2019 at 11:56 AM
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.

RC (Ron) Weakley said in reply to Joe... , July 24, 2019 at 03:40 AM
Duh! Cryptography and cryptocurrencies are not the same thing.
kurt -> Joe... , July 25, 2019 at 04:07 PM
Crypto - the money laundering index.
mulp -> Joe... , July 23, 2019 at 02:26 PM
"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.

kurt -> mulp ... , July 25, 2019 at 04:09 PM
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.
anne -> RC (Ron) Weakley... , July 23, 2019 at 05:14 PM
The Roubini-Hayes video:

https://www.youtube.com/watch?v=qlZukhN_C6c&t=12s

RC (Ron) Weakley said in reply to anne... , July 24, 2019 at 03:41 AM
thanks

[Jul 31, 2019] Tell me now, how did George Soros get so rich, and why was the Bretton Woods system abandoned?

Jul 31, 2019 | economistsview.typepad.com

David -> reason... ,

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.

canonicalthoughts.blogspot.com

kurt -> David ... , July 16, 2019 at 10:04 AM
1. Under the gold standard prices were much more unstable. This argument doesn't pass even the most modest scrutiny. https://www.minneapolisfed.org/community/financial-and-economic-education/cpi-calculator-information/consumer-price-index-1800

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.

David -> kurt... , July 16, 2019 at 11:33 AM
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

Total gold in the world, 3.4B troy oz (105,000 t) see: https://pubs.usgs.gov/gip/gold/gold.pdf
Annual production ~2500t, which is about 2.4% of the total.

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.

http://canonicalthoughts.blogspot.com

reason -> David ... , July 17, 2019 at 08:06 AM
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.

reason -> reason... , July 17, 2019 at 08:30 AM
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)?
David -> RC (Ron) Weakley... , July 16, 2019 at 08:50 AM
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.

canonicalthoughts.blogspot.com

RC (Ron) Weakley said in reply to David ... , July 16, 2019 at 10:11 AM
[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.]

https://theweek.com/articles/626620/how-john-maynard-keynes-most-radical-idea-could-save-world

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.]


David -> RC (Ron) Weakley... , July 16, 2019 at 11:42 AM
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?

http://canonicalthoughts.blogspot.com

RC (Ron) Weakley said in reply to David ... , July 16, 2019 at 12:16 PM
"...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. ]

David -> RC (Ron) Weakley... , July 16, 2019 at 01:21 PM
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.
RC (Ron) Weakley said in reply to David ... , July 16, 2019 at 02:22 PM
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.

reason -> David ... , July 18, 2019 at 05:18 AM
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.
David -> reason... , July 17, 2019 at 10:32 AM
Yes, this beats around the bush as they say.

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...

anne -> David ... , July 17, 2019 at 04:46 PM
https://fred.stlouisfed.org/graph/?g=lSfN

January 30, 2018

Nonfarm business productivity and real compensation, 1948-2018

(Percent change)


https://fred.stlouisfed.org/graph/?g=lSfP

January 30, 2018

Nonfarm business productivity and real compensation, 1948-2018

(Indexed to 1948)

David -> anne... , July 18, 2019 at 06:11 AM
Anne, thanks for the graphs.

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.

reason -> David ... , July 19, 2019 at 02:19 AM
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.
reason -> reason... , July 19, 2019 at 02:37 AM
For your amusement.
http://ok-cleek.com/blogs/?p=27691
David -> reason... , July 19, 2019 at 04:31 AM
I agree, and am working on just that.
reason -> reason... , July 19, 2019 at 12:59 PM
oops - not negative interest rates - negative income tax.
reason -> David ... , July 18, 2019 at 12:19 AM
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.

As I said read "Between Debt and the Devil".

reason -> reason... , July 18, 2019 at 12:27 AM
Not to mention what was happening demographically (which was massive). Sorry, I really should not have forgotten that. The real world matters.
David -> reason... , July 19, 2019 at 04:38 AM
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?
reason -> David ... , July 19, 2019 at 12:58 PM
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.
Paine -> David ... , July 17, 2019 at 12:14 PM
Commodity money
Is our new friends preference

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

Paine -> Paine ... , July 17, 2019 at 12:19 PM
The Recalcitrance of markets has always been a wish away reality

And price systems are often reified into angel dust

And shipped from Chicago FOB

mulp -> RC (Ron) Weakley... , July 17, 2019 at 04:15 PM
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.

anne -> mulp ... , July 17, 2019 at 04:40 PM
Aside:

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.

Thank you MULP.

[Jul 29, 2019] Michael Hudson Trump s Brilliant Strategy to Dismember US Dollar Hegemony by Michael Hudson

Highly recommended!
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. ..."
Feb 01, 2019 | www.nakedcapitalism.com

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.

Footnotes

[1] "It Can't be Fixed: Senior ICC Judge Quits in Protest of US, Turkish Meddling," January 31, 2019.

[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.

[3] ibid

[4] Corina Pons, Mayela Armas, "Exclusive: Venezuela plans to fly central bank gold reserves to UAE – source," Reuters, January 31, 2019.

[5] Constanze Stelzenmüller, "America's policy on Europe takes a nationalist turn," Financial Times, January 31, 2019.

By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is "and forgive them their debts": Lending, Foreclosure and Redemption from Bronze Age Finance to the Jubilee Year< Jointly posted with Hudson's website


doug , February 1, 2019 at 8:03 am

We see the Democratic Party showing the same colors. Yes we do. no escape? that I see

drumlin woodchuckles , February 1, 2019 at 9:43 am

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.

drumlin woodchuckles , February 1, 2019 at 2:27 pm

I read somewhere that the Czarist Imperial Army had a saying . . . "Quantity has a Quality all its own".

... ... ...

Cal2 , February 1, 2019 at 2:54 pm

Drumlin,

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.

drumlin woodchuckles , February 1, 2019 at 8:56 pm

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.

Quanka , February 1, 2019 at 8:29 am

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?

The Rev Kev , February 1, 2019 at 8:43 am

Here is a bit more info on it but Trump is already threatening Europe if they use it. That should cause them to respect him more:

https://www.dw.com/en/instex-europe-sets-up-transactions-channel-with-iran/a-47303580

LP , February 1, 2019 at 9:14 am

The NYT and other have coverage.

https://www.google.com/amp/s/www.nytimes.com/2019/01/31/world/europe/europe-trade-iran-nuclear-deal.amp.html

Louis Fyne , February 1, 2019 at 8:37 am

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.

Mel , February 1, 2019 at 9:18 am

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.

integer , February 1, 2019 at 8:43 am

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.

James , February 1, 2019 at 10:34 am

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.

drumlin woodchuckles , February 1, 2019 at 2:39 pm

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.

integer , February 1, 2019 at 8:09 pm

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.

Stephen Gardner , February 1, 2019 at 9:02 am

Excellent article but I believe the expression is "cui bono": who benefits.

hemeantwell , February 1, 2019 at 9:09 am

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?

Oregoncharles , February 1, 2019 at 3:23 pm

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.

whine country , February 1, 2019 at 9:15 am

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.

a different chris , February 1, 2019 at 9:30 am

Unfortunately this

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.

orange cats , February 1, 2019 at 11:22 am

"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.

OpenThePodBayDoorsHAL , February 1, 2019 at 1:41 pm

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.

orange cats , February 1, 2019 at 3:47 pm

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.

skippy , February 1, 2019 at 8:09 pm

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.

timbers , February 1, 2019 at 12:26 pm

I don't agree, and do agree. The distinction is this:

If you fix a few of Hudson's errors, and take him as making the point that USD is losing it's hegemony, IMO he is basically correct.

Brian (another one they call) , February 1, 2019 at 9:56 am

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?

Steven , February 1, 2019 at 10:23 am

Great stuff!

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.

Oh , February 1, 2019 at 3:52 pm

The use of the stick will only go so far. What's the USG going to do if they refuse?

Summer , February 1, 2019 at 10:46 am

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.

Yikes , February 1, 2019 at 12:07 pm

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?

Ian Perkins , February 1, 2019 at 12:21 pm

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.

Michael A Gualario , February 1, 2019 at 12:49 pm

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.

Oregoncharles , February 1, 2019 at 2:12 pm

" 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.

Oregoncharles , February 1, 2019 at 3:41 pm

Wukchumni beat me to the suspicion that the gold isn't there.

The Rev Kev , February 1, 2019 at 7:40 pm

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-

https://www.whas11.com/article/news/local/after-40-years-fort-knox-opens-vault-to-civilians/466441331

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

Summer , February 1, 2019 at 5:44 pm

A non-accountable standard. It's more obvious BS than what is going on now.

jochen , February 2, 2019 at 6:46 am

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.

Susan the Other , February 1, 2019 at 2:19 pm

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.

skippy , February 2, 2019 at 2:44 am

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.

ChrisAtRU , February 1, 2019 at 6:02 pm

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.

mikef , February 1, 2019 at 6:07 pm

" 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."

http://www.tomdispatch.com/blog/176373/tomgram%3A_alfred_mccoy%2C_tweeting_while_rome_burns

Rajesh K , February 1, 2019 at 7:23 pm

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?

Keith Newman , February 2, 2019 at 1:12 am

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.

RBHoughton , February 1, 2019 at 9:16 pm

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.

skippy , February 2, 2019 at 1:11 am

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.

/lasse , February 2, 2019 at 7:50 am

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.

Sound of the Suburbs , February 2, 2019 at 10:26 am

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

Sound of the Suburbs , February 2, 2019 at 10:29 am

When the delusion takes hold, it is the beginning of the end.

The British Empire will last forever
The thousand year Reich
American exceptionalism

As soon as the bankers thought they thought they were "Master of the Universe" you knew 2008 was coming. The delusion had taken hold.

Sound of the Suburbs , February 2, 2019 at 10:45 am

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.

This is the US (46.30 mins.) https://www.youtube.com/watch?v=ba8XdDqZ-Jg

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.).

https://www.youtube.com/watch?v=8YTyJzmiHGk

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.

skippy , February 2, 2019 at 5:28 pm

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.

[Jul 28, 2019] Goodbye Dollar, It Was Nice Knowing You! by Philip Giraldi

This might be not the end, but it is definitely the beginning of the decline of the dollar
Jul 04, 2019 | www.strategic-culture.org

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.

[Jul 24, 2019] Russia Urges Independence From Imposed World Order Of US Financial System

Jul 24, 2019 | www.zerohedge.com

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.

Image via Newsmax

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.

Russian Deputy Foreign Minister Sergei Ryabkov. Image source: TASS

Deputy FM Ryabkov held up the Venezuela situation as an example of "barefaced misappropriation of assets kept at Western banks."

He described further :

"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.


CashMcCall , 39 minutes ago link

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.

Ignorance is bliss , 46 minutes ago link

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?

Blankone , 1 hour ago link

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.

EHM , 1 hour ago link

"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

PKKA , 1 hour ago link

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.

[Jul 24, 2019] JPMorgan We Believe The Dollar Could Lose Its Status As World s Reserve Currency

Jul 24, 2019 | www.zerohedge.com

JPMorgan: We Believe The Dollar Could Lose Its Status As World's Reserve Currency

by Tyler Durden Tue, 07/23/2019 - 12:55 0 SHARES

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.

China regaining its status as a global superpower

Source: Angus Maddison Database, IMF, J.P. Morgan Private Bank Economics. Data as of June 14, 2019

Earnings in China are becoming more balanced

Source: Bloomberg, J.P. Morgan Private Bank Economics. Data as of September 30, 2018. The low-value added sectors series is HP filtered to smooth over cyclical volatility. Low-value added includes materials and industrials. High-value added includes tech, health care, consumer staples, and consumer discretionary.

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.

USD share of central bank reserves, %

Source: Exante. Data as of September 30, 2018. The series is FX-adjusted.
Trade Wars have long-term consequences

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).

FX exposure

Source: J.P. Morgan Private Bank as of June 13, 2019.

angle-asshole identity , 55 minutes ago link

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.

zeropol , 52 minutes ago link

Guess it was accepted not because it's a currency but because it is silver.

angle-asshole identity , 51 minutes ago link

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.

Meximus , 48 minutes ago link

Spanish pieces of eight is the modern day mexican 0.720 onza.

Spain ceased producing these once méxico won independence in 1821.

They all came from the national mint.

So for over 100 years the MXN was the world's reserve currency.

angle-asshole identity , 41 minutes ago link

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.

ThomasEdmonds , 1 hour ago link

https://www.globalresearch.ca/world-dedollarizing/5684049

Let it Go , 1 hour ago link

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.

https://Manipulating Value Of US Dollar is A Very Dangerous Policy .html

Let it Go , 1 hour ago link

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.

http://World Currency Will Be Part Of The Financial Endgame.html

natxlaw , 1 hour ago link

Trump gets the weak dollar he always wanted. We can pay off our debts and buy $15/gallon gas.

HRH of Aquitaine 2.0 , 2 hours ago link

CIPS, the Chinese Interbank Payment System was created a few years ago, 2015 as I recall. https://en.wikipedia.org/wiki/Cross-Border_Inter-Bank_Payments_System

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.

[Jul 22, 2019] Michael Hudson pointed out in Super Imperialism how the US can run a big trade deficit as it can just print dollars to cover it.

Jul 22, 2019 | www.nakedcapitalism.com

Sound of the Suburbs , July 22, 2019 at 7:57 am

This is the US (46.30 mins.)
https://www.youtube.com/watch?v=ba8XdDqZ-Jg

This comes from an MMT talk and you can see how the trade deficit balloons around 2000.

Michael Hudson pointed out in Super Imperialism how the US can run a big trade deficit as it can just print dollars to cover it.

Putting the two together.

It looks like the system used to work by allowing the Government deficit to cover the trade deficit.

Now, they have tried to balance the Government budget causing problems for the private sector and financial crises.

It all sums to zero and something needs to cover that trade deficit.

It worked when the Government deficit covered it, but not now.

[Jul 22, 2019] 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.

Jul 22, 2019 | www.nakedcapitalism.com

"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.

Ian Perkins , July 21, 2019 at 9:16 am

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.

Off The Street , July 21, 2019 at 9:19 am

Peripherally related MMT 2nd of 3 articles

[Jul 22, 2019] 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.

Jul 22, 2019 | www.moonofalabama.org

Grieved , Jul 22 2019 5:46 utc | 107

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.

The Finance Curse

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.

[Jul 22, 2019] T>here'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.

Notable quotes:
"... 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. ..."
Jul 22, 2019 | www.nakedcapitalism.com

"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.


Ian Perkins , July 21, 2019 at 9:16 am

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.

Off The Street , July 21, 2019 at 9:19 am

Peripherally related MMT 2nd of 3 articles

jsn , July 21, 2019 at 11:50 am

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.

Jonathan Holland Becnel , July 21, 2019 at 1:43 pm

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.

HUDSON 2024

softie , July 21, 2019 at 3:27 pm

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.

Kurtismayfield , July 21, 2019 at 5:20 pm

And those corporations get favorable rates on money printed by the government.. and the government backs trillions in mortgage and student loans.

Not much different.

softie , July 21, 2019 at 10:22 pm

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.

Wukchumni , July 21, 2019 at 10:15 am

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.

Clive , July 21, 2019 at 10:44 am

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.

barefoot charley , July 21, 2019 at 11:31 am

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.

Summer , July 21, 2019 at 1:20 pm

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.

hunkerdown , July 22, 2019 at 5:20 am

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.

Susan the other` , July 21, 2019 at 2:30 pm

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.

karlof1 , July 21, 2019 at 4:56 pm

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.

[Jul 22, 2019] I think Calvin and his role in today's debt based monetary system is much underestimated

Jul 22, 2019 | www.moonofalabama.org

Alexander P , Jul 22 2019 13:09 utc | 138

@84 Karlof1

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 .

[Jul 22, 2019] 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

Jul 22, 2019 | www.moonofalabama.org

psychohistorian , Jul 21 2019 15:20 utc | 2

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.

John Merryman , Jul 21 2019 15:39 utc | 4

psychohistorian,

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.

John Merryman , Jul 21 2019 15:49 utc | 7
psycho,

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.

Bemildred , Jul 21 2019 16:06 utc | 8
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.
Russ , Jul 21 2019 16:17 utc | 11
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.

bevin , Jul 21 2019 16:22 utc | 12
"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.

fastfreddy , Jul 21 2019 16:31 utc | 13
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.

"Send Her Back!, Send Her Back!"

[Jul 21, 2019] Michael Hudson US Economic Warfare and Likely Foreign Defenses>

Jul 21, 2019 | www.nakedcapitalism.com

By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is "and forgive them their debts": Lending, Foreclosure and Redemption from Bronze Age Finance to the Jubilee Year Keynote paper delivered at the 14th Forum of the World Association for Political Economy, July 21, 2019

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.


Mael Colium , July 21, 2019 at 8:53 am

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.

timbers , July 21, 2019 at 9:13 am

"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.

Synoia , July 21, 2019 at 11:57 am

Among the reports of companies leaving China, I've not seen any who declare they will return manufacturing to the US.

One of the major objectives of Tariffs, historically, is to favor local manufacture over imports. Other than defense, is that happening?

Boeing appears to be the poster child of how well a company with a large defense arm performs in the commercial sector.

Oh , July 21, 2019 at 12:44 pm

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.

lazycat1984 , July 21, 2019 at 12:23 pm

"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.

Oh , July 21, 2019 at 1:03 pm

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.

Plenue , July 21, 2019 at 2:30 pm

"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.?)"

They have. Russia has dropped 84% of the Treasury Securities it held. https://money.cnn.com/2018/07/30/investing/russia-us-debt-treasury/index.html

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.

Roger Boyd , July 21, 2019 at 4:10 pm

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.

timbers , July 21, 2019 at 5:35 pm

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.

Ian Perkins , July 21, 2019 at 9:16 am

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.

flora , July 21, 2019 at 1:11 pm

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.

http://heteconomist.com/classical-vs-neoclassical-economics-tax-and-rent/

RBHoughton , July 21, 2019 at 9:42 pm

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

jsn , July 21, 2019 at 11:36 am

"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?

Vato , July 21, 2019 at 12:57 pm

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??

Thank you

Off The Street , July 21, 2019 at 9:19 am

Peripherally related MMT 2nd of 3 articles

Trey N , July 21, 2019 at 9:20 am

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??

barefoot charley , July 21, 2019 at 10:05 am

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!)

ex-PFC Chuck , July 21, 2019 at 12:36 pm

" Have proofreaders gone the way of buggy whips?"

Yes. The job has been outsourced to Spellcheck.

Vato , July 21, 2019 at 1:04 pm

The translations of his books into German are even worse. Lots of typos and often contentual mistranslation.

Adams , July 21, 2019 at 10:09 am

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.

Monty , July 21, 2019 at 6:02 pm

You should ask for a refund!

Oh wait

Anon , July 21, 2019 at 8:42 pm

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).

jsn , July 21, 2019 at 11:50 am

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.

sporble , July 21, 2019 at 1:14 pm

+1

Jonathan Holland Becnel , July 21, 2019 at 1:43 pm

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.

HUDSON 2024

softie , July 21, 2019 at 3:27 pm

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.

Stephen Gardner , July 21, 2019 at 4:45 pm

Uprising? Whatever it takes.

Kurtismayfield , July 21, 2019 at 5:20 pm

And those corporations get favorable rates on money printed by the government.. and the government backs trillions in mortgage and student loans.

Not much different.

softie , July 21, 2019 at 10:22 pm

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.

Oh , July 21, 2019 at 3:17 pm

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.

Wukchumni , July 21, 2019 at 10:15 am

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.

Synoia , July 21, 2019 at 3:51 pm

I've used Copper .

Clive , July 21, 2019 at 10:44 am

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.

barefoot charley , July 21, 2019 at 11:31 am

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.

barefoot charley , July 21, 2019 at 11:41 am

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.

The Rev Kev , July 21, 2019 at 11:05 am

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.

Peter , July 21, 2019 at 12:29 pm

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.

Daniel Rich , July 21, 2019 at 8:57 pm

@ Peter,

Perhaps we'll get an 'Easter Island V2.0 – The Extended Edition' rehash

Summer , July 21, 2019 at 1:20 pm

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.

Susan the other` , July 21, 2019 at 2:30 pm

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.

karlof1 , July 21, 2019 at 4:56 pm

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.

Jonathan Holland Becnel , July 21, 2019 at 6:56 pm

Thanks for the link!

flora , July 21, 2019 at 10:25 pm

One quibble with the closing 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.

US Naval base in Subic Bay, Philippines was closed in 1992 after a leasing disagreement with the Philippine govt .
https://www.nytimes.com/1991/12/28/world/philippines-orders-us-to-leave-strategic-navy-base-at-subic-bay.html

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.

ElViejito , July 21, 2019 at 10:50 pm

Subic Bay is back in business as a resupply port for U.S. exercises in the Phillipines. https://www.csmonitor.com/World/Asia-Pacific/2015/1112/US-Navy-edges-back-to-Subic-Bay-in-Philippines-under-new-rules

[Jul 06, 2019] Neoliberal economics and other fairytales about money by Peter McKenna

Notable quotes:
"... 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. ..."
Jul 04, 2019 | www.theguardian.com

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.

ss="rich-link tone-news--item rich-link--pillar-news"> Business Today: sign up for a morning shot of financial news Read more

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

[Jul 05, 2019] The World Bank and IMF 2019 by Michael Hudson and Bonnie Faulkner

Highly recommended!
Notable quotes:
"... 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". ..."
Jul 05, 2019 | www.unz.com

"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.

[Jul 04, 2019] The role of having world reserve currency in the unleashing the USA militarism

Jul 04, 2019 | www.unz.com

J. Gutierrez, July 2, 2019 at 5:49 pm GMT 600 Words @Commentator Mike

Hey Mike,

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...

[Jun 26, 2019] Neoliberalism Has Tricked Us Into Believing a Fairytale About Where Money Comes From by Mary MELLOR

Jun 26, 2019 | www.strategic-culture.org

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.

The magic money tree. © Kate Mc , Author provided

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".

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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.

The magic money tree. © Kate Mc , Author provided

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.

[Apr 18, 2019] My advice is to drop the idea of acquiring gold. There are just too many issues for the small buyer to safely overcome.

Apr 18, 2019 | www.moonofalabama.org

james , Apr 17, 2019 7:30:29 PM | link

@ christian - find a place like this in some city close by to where you live - it will be easier in person and avoid shipping and insurance costs..

https://www.jandm.com/systemhome.htm


Zachary Smith , Apr 17, 2019 9:11:34 PM | link

@ Christian J Chuba #37

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!

Hmpf , Apr 17, 2019 10:29:49 PM | link
@ Christian J Chuba | Apr 17, 2019 7:22:58 PM | 37

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).

[Feb 27, 2019] It's Just Wrong - Fed Chair Powell Destroys MMT Dreams

Feb 27, 2019 | www.zerohedge.com

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."


Let it Go , 10 hours ago link

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.

http://brucewilds.blogspot.com/2015/04/interest-rates-inflation-and-debt-matter.html

Condor_0000 , 14 hours ago link

The Fed loved MMT when it was called quantitative easing and all the trillions were going to the one-percenters. They proved MMT works beautifully.

It's funny how the ruling-class talks so differently depending upon whether the 1% are benefiting or the 99% are benefiting.

"Reagan proved deficits don't matter." - greedy capitalist-**** **** Cheney as the 1% were looting the public till for tax cuts.

alfbell , 15 hours ago link

This is not fair to MMT for two reasons...

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.

HamburgerToday , 16 hours ago link

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.

Batman11 , 17 hours ago link

Alan Greenspan tells Paul Ryan the Government can create all the money it wants and there is no need to save for pensions.

https://www.youtube.com/watch?v=DNCZHAQnfGU

What matters is whether the goods and services are there for them to buy with that money.

Money comes out of nothing and is just numbers typed in at a keyboard.

Too much and you get inflation (consumer price and/or asset price inflation), too little and you get deflation.

The true nature of money is revealed with hyper inflation.

Wheel barrows of the stuff won't buy you anything, it has no intrinsic value.

yogibear , 16 hours ago link

Hence state bailouts of NJ, IL, CA, etc. Money from helicopters coming to those that are broke!

Freebies from the Fed.

JD59 , 17 hours ago link

It is all FIAT CURRENCY, the debt is WORTHLESS, and means nothing.

Rusty Pipes , 16 hours ago link

Tell that to future (unaborted) generations. $10 billion a week in interest payments now, at relatively low rates, and rising.

Stuck on Zero , 17 hours ago link

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.

brushhog , 17 hours ago link

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?

daveeemc2 , 17 hours ago link

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.

[Feb 09, 2019] Large Excess Reserves and the Relationship between Money and Prices - FRB Richmond

Notable quotes:
"... 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. ..."
Feb 09, 2019 | economistsview.typepad.com

Joe , February 06, 2019 at 04:54 PM

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.

[Feb 05, 2019] Money's true nature is law. When a country collapses, then its money collapses.

Feb 05, 2019 | www.unz.com

MEFOBILLS , says: February 3, 2019 at 8:07 pm GMT

@nsa Sorry, not true.

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.

cassandra , says: February 3, 2019 at 8:38 pm GMT
@eah

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.

[Feb 04, 2019] 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.

Feb 04, 2019 | www.unz.com

cassandra , says: February 4, 2019 at 9:43 pm GMT

@MEFOBILLS +++++

I'd extend your comment a bit.

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.

[Feb 03, 2019] Neoliberalism and Christianity

Highly recommended!
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. ..."
May 02, 2018 | www.moonofalabama.org

karlof1 , May 1, 2018 2:27:06 PM | 13

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.

psychohistorian , May 1, 2018 3:31:50 PM | 26
@ 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

james , May 1, 2018 10:30:01 PM | 96
@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...

WJ | May 1, 2018 10:48:58 PM | 100

James @96,

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.

WJ , May 1, 2018 8:23:40 PM | 88
Juliana @84,

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.

[Jan 29, 2019] Modern Monetary Theory A Cargo Cult

Jan 29, 2019 | www.zerohedge.com

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:

  1. Disgruntled employees don't work hard, and may even sabotage machinery.
  2. So companies must overpay to keep them from slacking.
  3. Higher pay per worker means fewer workers, because companies have a finite budget.

Yellen concludes -- you guessed it:

  1. 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.

[Nov 20, 2018] 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.

Nov 20, 2018 | www.unz.com

jilles dykstra , says: November 14, 2018 at 12:21 pm GMT

@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.

[Nov 20, 2018] It is an interesting side-note that both Christianity and Islam both prohibit the use of usury

Nov 20, 2018 | www.unz.com

tac , says: November 14, 2018 at 6:35 am GMT

@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.

http://www.vanguardnewsnetwork.com/v1/index274.htm

[Oct 25, 2018] Should we trust MMT?

Oct 25, 2018 | www.nakedcapitalism.com

Tvc15 , October 23, 2018 at 2:34 pm

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".

https://youtu.be/jvunhn47F20

Tvc15 , October 23, 2018 at 3:31 pm

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.

JohnnyGL , October 23, 2018 at 6:45 pm

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.

ChristopherJ , October 23, 2018 at 7:33 pm

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:

http://bilbo.economicoutlook.net/blog/?p=39889

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.

That's how we got here in the first place

Plenue , October 23, 2018 at 8:18 pm

"he's been here before and took umbrage to the NC crew saying that taxation for revenue is obsolete."

It's not just obsolete as in "we don't need to do this anymore". Instead it literally doesn't happen at the federal level.

Yves Smith , October 23, 2018 at 9:36 pm

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.

ChrisAtRU , October 23, 2018 at 7:19 pm

Joe B. is part of AMI (American Monetary Institute). This installment from NEP should sort you out.

#MMT v #AMI/#PositiveMoney

Yves Smith , October 23, 2018 at 9:43 pm

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.

ChrisAtRU , October 24, 2018 at 12:22 pm

#Yikes I learned early on to avoid the #PositiveMoney trap, and this anecdote should convince others of the same.

skippy , October 24, 2018 at 12:41 am

All part of the broader sound money camp, not unlike Mr. Volcker's recent NYT piece.

[Oct 09, 2018] US Russia Sanctions Are 'A Colossal Strategic Mistake', Putin Warns

Oct 09, 2018 | russia-insider.com

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."

[Oct 09, 2018] The Continuing Dominance of the Dollar by Josepth Joyce

Notable quotes:
"... Financial Times ..."
"... Global Financial Stability ..."
Oct 09, 2018 | angrybearblog.com

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.

[Oct 08, 2018] The city of Los Angeles has on its ballot for the November elections a measure to create a city-owned bank.

Oct 08, 2018 | www.moonofalabama.org

Grieved , Oct 7, 2018 4:13:53 PM | link

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:

Episode 1289 Keiser Report

[Oct 02, 2018] Randy Wray Modern Monetary Theory How I Came to MMT and What I Include in MMT naked capitalism

Notable quotes:
"... 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. ..."
"... See: https://mythfighter.com/2018/08/27/ten-answers-that-are-contrary-to-popular-wisdom/ ..."
"... There is no avoiding bad government. ..."
"... "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." ..."
Oct 02, 2018 | www.nakedcapitalism.com

Randy Wray: Modern Monetary Theory – How I Came to MMT and What I Include in MMT Posted on October 2, 2018 by Yves Smith By L. Randall Wray, Professor of Economics at Bard College. Originally published at New Economic Perspectives

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.

Hilary Barnes , October 2, 2018 at 3:01 am

Out of my depth: "7. For that reason, the JG is a critical component of MMT." The JG?

BillC , October 2, 2018 at 3:07 am

Job guarantee (especially as distinguished from a basic income guarantee). See here for fairly recent coverage by Lambert.

Epistrophy , October 2, 2018 at 6:16 am

I had exactly the same question. Thank you.

skippy , October 2, 2018 at 7:04 am

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.

dcrane , October 2, 2018 at 5:31 am

The paragraph on "double entry book-keeping" is also a bit too inside-baseball. Otherwise I enjoyed the essay.

PlutoniumKun , October 2, 2018 at 6:11 am

Yup, he lost me on quadruple entry book-keeping, thats the first time I ever heard of that concept.

Quanka , October 2, 2018 at 8:02 am

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.

todde , October 2, 2018 at 12:15 pm

that's pretty much it

Peter Pan , October 2, 2018 at 1:37 pm

Does Steve Keen's "Minsky" program utilize quadruple-entry bookkeeping?

Todde , October 2, 2018 at 1:47 pm

Double entry

Grebo , October 2, 2018 at 3:12 pm

Yes it does. Double entry for each party to the transaction.

todde , October 2, 2018 at 3:29 pm

you are right – it does give each parties transactions.

horostam , October 2, 2018 at 8:43 am

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

HotFlash , October 2, 2018 at 12:10 pm

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.

JCC , October 2, 2018 at 9:40 am

#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.

Mel , October 2, 2018 at 10:11 am

Employer of Last Resort? (Wikipedia)

Matthew Platte , October 2, 2018 at 11:29 am

DoD?

JCC , October 2, 2018 at 2:45 pm

Guilty as charged :-)

For non-US readers, DoD is D epartment o f D efense, the undisputed-by-many home of TLAs.

lyman alpha blob , October 2, 2018 at 3:10 pm

Ha! I really love this blog.

somecallmetim , October 2, 2018 at 12:51 pm

NC?

;)

Bill C , October 2, 2018 at 3:02 am

Thank you for this post!

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.

HotFlash , October 2, 2018 at 12:14 pm

No no! He said "Many readers might want to skip to the bullet points near the end, which summarize what I include in MMT."

el_tel , October 2, 2018 at 4:55 am

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.

skippy , October 2, 2018 at 5:07 am

Thanks for your efforts Mr Wray, your provide a rich resource to familiarize most and in some cases refute doctrinaire attitudes. Kudos.

BTW completely agree with the perspective against PR marketing of the topic or individuals wrt MMT or PK.

Lambert Strether , October 2, 2018 at 5:23 am

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!

DavidEG , October 2, 2018 at 5:54 am

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).

larry , October 2, 2018 at 6:14 am

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.

el_tel , October 2, 2018 at 8:53 am

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".

kgw , October 2, 2018 at 11:15 am

I get this "http's server IP address could not be found." I'll try, gasp, googling it

el_tel , October 2, 2018 at 11:24 am

FWIW I mucked around with the link in Firefox (although I typically use Opera, which gave me that same error) and could read it.

Epistrophy , October 2, 2018 at 6:34 am

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

skippy , October 2, 2018 at 7:12 am

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.

Epistrophy , October 2, 2018 at 7:38 am

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.

skippy , October 2, 2018 at 7:45 am

I think WWII is instructive here.

Clive , October 2, 2018 at 7:58 am

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.

If something is necessary, it should be done.

vlade , October 2, 2018 at 8:06 am

Human laws (any and all, for simplicity I include culture, customs etc.. here) are not laws of nature.

They change over time to survive. The easy way, or the hard way.

Or they don't survive at all, that's an option too.

witters , October 2, 2018 at 9:09 am

"Human laws (any and all, for simplicity I include culture, customs etc.. here) are not laws of nature."

Wave Function Collapse?

voteforno6 , October 2, 2018 at 8:14 am

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.

Epistrophy , October 2, 2018 at 8:26 am

I was thinking of implementing the whole concept of MMT, of which the JG is but one part, with this statement. Perhaps I did not make that clear.

voteforno6 , October 2, 2018 at 8:36 am

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.

skippy , October 2, 2018 at 3:16 pm

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.

todde , October 2, 2018 at 4:37 pm

Power.

I want 12 people lined up at the door to take your job, and then you will know where the power lies

Carla , October 2, 2018 at 11:18 am

Re-writing the U.S. Constitution is something people think about and talk about all the time, FYI.

todde , October 2, 2018 at 1:08 pm

the Amendment required to create the Federal Reserve System

What Amendment was that?

And since the Constitution gives Congress the power to coin money I am unaware of any reason an amendment would be necessary.

Epistrophy , October 2, 2018 at 3:43 pm

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.

todde , October 2, 2018 at 4:05 pm

16th Amendment had nothing to do with the Federal Reserve.

And I think you are confusing 'you must buy health insurance or face a tax", with "You have a right to have healthcare".

If the government forced you to work, you may have a case.

There are 3 things the feds can spend federal funds on, pay debt, provide for the common defense, and the general welfare clause.

The General Welfare clause has been interpreted very widely in regards to Government spending.

New Deal, Social Security, Medicare/aid all survived court challenges, or if they lost, they lost on regulatory issues, and not 'spending' issues

Epistrophy , October 2, 2018 at 7:28 am

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 , October 2, 2018 at 7:37 am

A. GDP is non distributional.

B. Had taxation not been promoted as theft in some camps Volcker would have not had to jack IR to such a upper bound during the Vietnam war.

C. Government Debt allocated to socially productive activities is a long term asset with distributional income vectors.

D. Ask the Greeks.

Epistrophy , October 2, 2018 at 7:48 am

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.

larry , October 2, 2018 at 7:58 am

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.

Epistrophy , October 2, 2018 at 8:34 am

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.

John k , October 2, 2018 at 10:31 am

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.

Brian , October 2, 2018 at 11:30 am

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.

TroyMcClure , October 2, 2018 at 12:10 pm

Money is not a commodity and does not "lose value" the more of it there is.

todde , October 2, 2018 at 12:57 pm

we used to protect the banks depositors and the government put the the bank in receivership.

That went away in the 21st century for some reason.

Now we protect the bank and put the Government in receivership (Greece).

todde , October 2, 2018 at 12:08 pm

Some points:

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.

HotFlash , October 2, 2018 at 12:32 pm

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.

Benjamin Wolf , October 2, 2018 at 7:44 am

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.

voteforno6 , October 2, 2018 at 8:19 am

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.

WobblyTelomeres , October 2, 2018 at 9:23 am

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:

http://neweconomicperspectives.org/modern-monetary-theory-primer.html

HotFlash , October 2, 2018 at 12:39 pm

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!

Todde , October 2, 2018 at 3:10 pm

Its real if you pay an interest rate on it

Grebo , October 2, 2018 at 3:48 pm

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.

Neither kind warrant bunched panties.

todde , October 2, 2018 at 4:39 pm

no panties bunched.

horostam , October 2, 2018 at 8:51 am

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?

Epistrophy , October 2, 2018 at 9:31 am

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 ".

The Rev Kev , October 2, 2018 at 9:48 am

Is there any point in working for a jobs guarantee when the only sort of jobs that would probably be guaranteed would be MacJobs and Amazon workers?

Newton Finn , October 2, 2018 at 11:23 am

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.

HotFlash , October 2, 2018 at 12:51 pm

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.

Todde , October 2, 2018 at 3:11 pm

Government job guarantees is an idea as old as the pyramids.

Frankly so is mmt

Mel , October 2, 2018 at 11:34 am

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 .

HotFlash , October 2, 2018 at 12:56 pm

Ding ding ding!

Grebo , October 2, 2018 at 3:23 pm

Bill Mitchell was not too impressed with the INET paper: Part 1 .
There's three parts! Mitchell rarely has the time to be brief.

Tinky , October 2, 2018 at 6:02 am

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.

Wukchumni , October 2, 2018 at 7:06 am

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.

skippy , October 2, 2018 at 7:30 am

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.

Benjamin Wolf , October 2, 2018 at 8:01 am

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.

Tinky , October 2, 2018 at 9:44 am

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.

WobblyTelomeres , October 2, 2018 at 9:48 am

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).

Tinky , October 2, 2018 at 9:54 am

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.

Wukchumni , October 2, 2018 at 10:13 am

The only way the gold standard returns, is if it's forced on the world on account of massive fraud in terms of fiat money, but that'll never happen.

WobblyTelomeres , October 2, 2018 at 10:56 am

Tinky:

I'm curious as to what you consider the "*true* value of gold". Could you elaborate?

I'm dense/obtuse and thus not an economist!

Tinky , October 2, 2018 at 11:18 am

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.

Wukchumni , October 2, 2018 at 10:00 am

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.

https://en.wikipedia.org/wiki/Sovereign_(British_coin)

Benjamin Wolf , October 2, 2018 at 12:23 pm

When fiat currencies invariably degrade, and especially at a fast rate, gold has proven to be a relative store of value for millennia.

Currencies do not degrade. Political systems degrade.

Bridget , October 2, 2018 at 8:25 am

" 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.

Tinky , October 2, 2018 at 9:48 am

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.

Bridget , October 2, 2018 at 10:10 am

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.

TroyMcClure , October 2, 2018 at 12:20 pm

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.

Bridget , October 2, 2018 at 1:30 pm

Maybe because the economy did not have the productive capacity to increase goods? It takes more than a magic wand and wishful thinking.

voteforno6 , October 2, 2018 at 8:29 am

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.

Tinky , October 2, 2018 at 9:50 am

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.

WobblyTelomeres , October 2, 2018 at 11:35 am

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.

Tinky , October 2, 2018 at 1:59 pm

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.

todde , October 2, 2018 at 2:14 pm

not if it would be done over time, as the debt comes due.

We could also tax the excess dollars from the system with a large capital gains tax rate.

todde , October 2, 2018 at 3:04 pm

so I don't believe there will be a hyper-inflation of goods, but in asset prices. That is why I would raise the capital gains rate.

The failure of MMT is when the hyper-inflation occurs in goods and services.

Taxing a middle class person while his cost of living is rising will be a tough political act to do.

WobblyTelomeres , October 2, 2018 at 2:19 pm

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.

You said never.

Tinky , October 2, 2018 at 3:30 pm

Yes I did. I was simply being lazy, as I typically do add "except via hyperflation", when discussing debts that can only be repaid in that manner.

That "solution" is obviously no solution at all, as it would lead to chaos.

Interpret it any way that you wish.

todde , October 2, 2018 at 11:37 am

So what is the new solution proposed by 'gold bugs'?

Tinky , October 2, 2018 at 2:06 pm

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.

todde , October 2, 2018 at 2:26 pm

and when commodity prices fluctuate you will still have government printing and eliminating money to maintain the price.

I would say, if that was the argument, stick to gold as it is one of the more stable commodities.

AlexHache , October 2, 2018 at 11:43 am

Can I ask what your solution would be? I don't think you've mentioned it.

HotFlash , October 2, 2018 at 1:08 pm

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.

Bridget , October 2, 2018 at 1:31 pm

Don't forget a nice supply of 30 year old single malt scotch!

Tinky , October 2, 2018 at 2:04 pm

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.

Wukchumni , October 2, 2018 at 2:19 pm

Why not the GOILD standard?, one mineral moves everything, while the other just sits around gathering dust, after being extracted.

David Swan , October 2, 2018 at 2:28 pm

"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.

WobblyTelomeres , October 2, 2018 at 3:27 pm

THIS!!!

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.

Tinky , October 2, 2018 at 3:44 pm

The debt may not have to be repaid, but the interest does have to be serviced. Good luck with that in the long run.

WobblyTelomeres , October 2, 2018 at 4:18 pm

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.

MisterMr , October 2, 2018 at 8:46 am

"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.

Tinky , October 2, 2018 at 9:56 am

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.

skippy , October 2, 2018 at 3:55 pm

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.

WobblyTelomeres , October 2, 2018 at 4:26 pm

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.

Fried , October 2, 2018 at 6:06 am

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.

Tinky , October 2, 2018 at 6:13 am

No such prompt for me (using Mac desktop computer, OS 10.11.6 and Safari browser.

Fried , October 2, 2018 at 7:35 am

Thanks. It seems to be blocking my IP address, no idea why. Not sure why I have to be human to look at a website.

Epistrophy , October 2, 2018 at 8:46 am

Try running your IP address through a blacklist checker maybe it's been flagged

Fried , October 2, 2018 at 10:03 am

Hm, I can't find anything that would explain it. Maybe the website just generally blocks Austrians. ;-)

el_tel , October 2, 2018 at 10:10 am

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.)

kgw , October 2, 2018 at 11:57 am

I ended up physically typing in the url to Bill Mitchell's blog: that worked.

el_tel , October 2, 2018 at 12:43 pm

yeah think that's what I did

larry , October 2, 2018 at 6:45 am

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.

William Beyer , October 2, 2018 at 7:00 am

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.

Grumpy Engineer , October 2, 2018 at 8:26 am

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.

I can't think of another reason inequality skyrocketed so badly during the Obama years: https://www.newsweek.com/2013/12/13/two-numbers-rich-are-getting-richer-faster-244922.html . Other than interest rates, his policies weren't all that different from Clinton or Bush.

Tinky , October 2, 2018 at 10:38 am

Not to mention that interest rates are designed to reflect risk . Artificially suppressed rates mask risk, and inevitably lead to gross malinvestment.

todde , October 2, 2018 at 12:31 pm

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.

todde , October 2, 2018 at 3:07 pm

if government creates money to lend to borrowers it should be at a zero interest rate.

The loans would be based on public policy decisions, and not business decisions.

HotFlash , October 2, 2018 at 1:36 pm

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.

Adam1 , October 2, 2018 at 3:12 pm

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.

michael hudson , October 2, 2018 at 8:38 am

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

horostam , October 2, 2018 at 8:57 am

The Babylonian Madness is contagious thanks prof hudson

gramsci , October 2, 2018 at 9:22 am

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?

Wukchumni , October 2, 2018 at 12:50 pm

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.

HotFlash , October 2, 2018 at 1:54 pm

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.

David Swan , October 2, 2018 at 2:43 pm

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.

Wukchumni , October 2, 2018 at 9:31 am

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?

Adam1 , October 2, 2018 at 9:40 am

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.

HotFlash , October 2, 2018 at 2:00 pm

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.

Wukchumni , October 2, 2018 at 10:11 am

Take Indians for instance

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.

Chauncey Gardiner , October 2, 2018 at 12:34 pm

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?

Mel , October 2, 2018 at 12:53 pm

Michael Hudson described some of it earlier this year:
https://www.nakedcapitalism.com/2018/07/michael-hudson-argentina-gets-biggest-imf-loan-history.html

Rodger Malcolm Mitchell , October 2, 2018 at 3:48 pm

All hyperinflations are caused by shortages, usually shortages of food. See: https://mythfighter.com/2018/08/27/ten-answers-that-are-contrary-to-popular-wisdom/

There is no avoiding bad government.

PKMKII , October 2, 2018 at 1:57 pm

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.

Rodger Malcolm Mitchell , October 2, 2018 at 3:41 pm

"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?

Grebo , October 2, 2018 at 4:20 pm

"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.

[Sep 27, 2018] 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.

Sep 27, 2018 | www.moonofalabama.org

Sunny Runny Burger , Sep 26, 2018 4:06:24 PM | link

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.

karlof1 , Sep 26, 2018 5:13:27 PM | link

Sunny Runny Burger @24--

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.

[Sep 21, 2018] The Dollar Shortage China's Bond Selling Are About To Corner the Fed Zero Hedge Zero Hedge

Sep 21, 2018 | www.zerohedge.com

The Dollar Shortage & China's Bond Selling Are About To Corner the Fed

by Palisade Research Fri, 09/21/2018 - 19:22 8 SHARES

Via Adem Tumerkan @ Palisade-Research.com

- 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."

Remember – dumping U.S. debt is China's nuclear option (which I wrote about back in April – click here to read if you missed it ).

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.

[Sep 15, 2018] 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".

Sep 15, 2018 | www.moonofalabama.org

psychohistorian , Sep 15, 2018 7:51:52 PM | link

@ 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".

Jen , Sep 15, 2018 8:01:37 PM | link

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.

karlof1 , Sep 15, 2018 8:13:22 PM | link

Jen @27--

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.

jrkrideau , Sep 15, 2018 9:03:58 PM | link

@ 27 Jen

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.

[Aug 13, 2018] The Annals of Roacheforque Back That A$$et Up ...

Aug 13, 2018 | roacheforque.blogspot.com

Sunday, August 12, 2018 Back 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.

https://i.ytimg.com/vi/tuzJadb4vm8/0.jpg

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[Aug 03, 2018] The "accounting view" of money: money as equity

Aug 03, 2018 | www.nakedcapitalism.com

Marco Saba , August 2, 2018 at 6:11 pm

It seems that bad debts can be composed with fake liabilities, here:
The "accounting view" of money: money as equity (Part I)
http://blogs.worldbank.org/allaboutfinance/node/916
The "accounting view" of money: money as equity (Part II)
http://blogs.worldbank.org/allaboutfinance/node/917
The "accounting view" of money: money as equity (Part III)
http://blogs.worldbank.org/allaboutfinance/node/918

[Jul 28, 2018] Putin The US Is Making A Big Mistake By Weaponizing The Dollar Zero Hedge

Jul 28, 2018 | www.zerohedge.com

After the liquidation of its US Treasury holdings, surging gold reserves, and switching to a non-SWIFT payment system , Russian President Putin attempted to quell general concerns noting that "Russia isn't abandoning the dollar."

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.

Just last night we laid out the four major moves that Russia seems to be taking to de-dollarize so we suspect this comment by Putin is lipstick on that pig so that the rest of the world doesn't front-run him.

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


strannick -> BaBaBouy Fri, 07/27/2018 - 10:11 Permalink

Putin: "Russia isnt abandoning the dollar"

Russia's just selling all its US Treauries and then using the cash to buy gold.

"The first to sell is a rat. The last to sell is a fool"

beemasters -> strannick Fri, 07/27/2018 - 10:19 Permalink

"Regarding our American partners placing limitations, including those on dollar transactions, I believe is a big strategic mistake. "

It's been going on for a long time (with other weaker nations) and he is just voicing it now?

Brazen Heist II -> beemasters Fri, 07/27/2018 - 10:23 Permalink

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.

Klassenfeind -> Brazen Heist II Fri, 07/27/2018 - 10:53 Permalink

As always, Putin is spot on!

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!

Brazen Heist II -> Klassenfeind Fri, 07/27/2018 - 10:58 Permalink

Charles de Gaulle called that the exorbitant privilege

Bokkenrijder -> Brazen Heist II Fri, 07/27/2018 - 11:00 Permalink

These ZH Trump fanboys are the biggest idiots.

Really, you couldn't make this shit up;

*) 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!

Brazen Heist II -> Bokkenrijder Fri, 07/27/2018 - 11:11 Permalink

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.

Klassenfeind -> Brazen Heist II Fri, 07/27/2018 - 11:13 Permalink

"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...

Brazen Heist II -> Klassenfeind Fri, 07/27/2018 - 11:26 Permalink

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.

Money_for_Nothing -> Klassenfeind Fri, 07/27/2018 - 11:47 Permalink

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?

Giant Meteor -> Klassenfeind Fri, 07/27/2018 - 12:05 Permalink

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 ..

HardAssets -> Klassenfeind Fri, 07/27/2018 - 13:12 Permalink

'Stupid' ?, no I highly doubt that.

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.

Scipio Africanuz -> Klassenfeind Fri, 07/27/2018 - 13:49 Permalink

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!...

Consuelo -> Brazen Heist II Fri, 07/27/2018 - 11:27 Permalink

+1

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.

Brazen Heist II -> Consuelo Fri, 07/27/2018 - 11:32 Permalink

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.

HardAssets -> Brazen Heist II Fri, 07/27/2018 - 13:24 Permalink

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.

Vendetta -> Bokkenrijder Fri, 07/27/2018 - 12:32 Permalink

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 ...

[Jul 14, 2018] Beyond Money

Notable quotes:
"... 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 ..."
Jul 14, 2018 | beyondmoney.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.

MUST WATCH!

https://www.youtube.com/embed/i_wOEL6dprg?version=3&rel=1&fs=1&autohide=2&showsearch=0&showinfo=1&iv_load_policy=1&wmode=transparent

Here's the YouTube link: https://youtu.be/i_wOEL6dprg

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

https://www.youtube.com/embed/rQouKi7xDpM?version=3&rel=1&fs=1&autohide=2&showsearch=0&showinfo=1&iv_load_policy=1&wmode=transparent

Here's the YouTube link: https://youtu.be/rQouKi7xDpM

[Jul 04, 2018] Dollar Hegemony

Jul 04, 2018 | www.henryckliu.com
Dollar Hegemony

By
Henry C K Liu

(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.

[Jun 10, 2018] The Battle for Money Has Begun naked capitalism

Notable quotes:
"... 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 ..."
Jun 10, 2018 | www.nakedcapitalism.com

Disturbed Voter , June 8, 2018 at 6:30 am

Perhaps the cost of the 2008/2009 bailout was too high? And I don't mean quantitively. It seems modern man has no sense of the qualitative.

Odysseus , June 8, 2018 at 5:22 pm

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.

PlutoniumKun , June 8, 2018 at 6:32 am

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.

Watt4Bob , June 8, 2018 at 8:08 am

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.

Morty , June 9, 2018 at 12:18 pm

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.

Norb , June 8, 2018 at 7:27 am

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.

Summer , June 8, 2018 at 1:54 pm

"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."

Akin to a religious conversion.

DHG , June 8, 2018 at 3:47 pm

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.

Paul L. , June 8, 2018 at 7:58 pm

What is your alternative?

Watt4Bob , June 8, 2018 at 7:34 am

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.

Read more;

Watt4Bob FDL June 2014

perpetualWAR , June 8, 2018 at 10:32 am

I don't believe money is money. Pretty certain I am in the 99%. "Money" or currency says right on the face that it is a debt instrument.

Samuel Conner , June 8, 2018 at 7:54 am

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

http://siteresources.worldbank.org/SAFETYNETSANDTRANSFERS/Resources/281945-1124119303499/SSNPrimerNote25.pdf

)

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).

TroyMcClure , June 8, 2018 at 8:11 am

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.

liam , June 8, 2018 at 10:22 am

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.

Watt4Bob , June 8, 2018 at 8:18 am

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.

Samuel Conner , June 8, 2018 at 9:57 am

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.

Watt4Bob , June 8, 2018 at 1:19 pm

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.

MyLessThanPrimeBeef , June 8, 2018 at 2:03 pm

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!!!!!!!!!!!!

bruce wilder , June 8, 2018 at 7:03 pm

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.

Paul L. , June 8, 2018 at 8:34 pm

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.

Alejandro , June 9, 2018 at 1:06 pm

Why were they accepted as payment?

Yves Smith Post author , June 9, 2018 at 9:43 pm

"MMT debt" is a non-sequitur..

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).

Older & Wiser , June 9, 2018 at 10:58 pm

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.

Yves Smith Post author , June 10, 2018 at 1:08 am

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.

Adam1 , June 8, 2018 at 8:17 am

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.

Paul L. , June 8, 2018 at 8:36 pm

"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?

Alejando , June 9, 2018 at 1:10 pm

Paying taxes. Unpaid parking tickets are debts, no borrowing involved.

voteforno6 , June 8, 2018 at 8:40 am

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.

OpenThePodBayDoorsHAL , June 8, 2018 at 7:16 pm

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 .

https://mises.org/library/deflating-deflation-myth

Free your mind.

OpenThePodBayDoorsHAL , June 8, 2018 at 7:21 pm

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.

Paul L. , June 8, 2018 at 8:39 pm

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!

skippy , June 9, 2018 at 3:02 am

Sigh no such thingy as "real" money, same issue with using terms like "natural" as a quantifier.

This also applies to say pods above statement about "freeing the mind", especially when referencing Mises.org or other AET affiliates.

The Rev Kev , June 8, 2018 at 8:48 pm

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.

skippy , June 9, 2018 at 3:13 am

Uh .

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.

The Rev Kev , June 9, 2018 at 10:51 pm

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.

skippy , June 9, 2018 at 11:56 pm

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.

skippy , June 10, 2018 at 12:43 am

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.

Older & Wiser , June 8, 2018 at 9:03 pm

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.

Plenue , June 10, 2018 at 1:04 am

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.

skippy , June 10, 2018 at 1:39 am

Concur.

Pespi , June 9, 2018 at 3:19 am

That all sounds very neat but is not true. Money is not a labor token, it is not a token of anything but an act of accounting.

templar99 , June 8, 2018 at 9:12 am

' Everybody needs money, that's why they call it money ' David Mamet ' Heist '

The Rev Kev , June 8, 2018 at 9:52 am

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.

JEHR , June 8, 2018 at 11:44 am

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.

MyLessThanPrimeBeef , June 8, 2018 at 12:14 pm

We have to consider, think or experiment with other systems. The comment below by Anarcissie is a good start.

Anarcissie , June 8, 2018 at 11:53 am

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.

bruce wilder , June 8, 2018 at 6:46 pm

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.

Paul L. , June 8, 2018 at 8:44 pm

"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.

bruce wilder , June 9, 2018 at 12:47 am

What is the accepted meaning of the term, "intermediary", when discussing banking?

I am unclear what definition you are referencing.

Yves Smith Post author , June 9, 2018 at 10:08 pm

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.

Anthony K Wikrent , June 8, 2018 at 9:59 am

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 .

MyLessThanPrimeBeef , June 8, 2018 at 10:17 am

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.

Lord Koos , June 8, 2018 at 2:17 pm

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.

MyLessThanPrimeBeef , June 8, 2018 at 3:43 pm

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.

Anthony K Wikrent , June 8, 2018 at 6:28 pm

The technology of smart phones originated almost entirely with DARPA -- see Mariana Mazzucato's The Entrepreneurial State

bruce wilder , June 8, 2018 at 6:28 pm

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.

Anthony K Wikrent , June 8, 2018 at 6:36 pm

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.

Paul L. , June 8, 2018 at 8:47 pm

Your first scenario is already in existence today, my friend. As far as the second scenario – what exactly is it that you have against democracy?

Ignacio , June 8, 2018 at 10:09 am

It is just intuitive that giving central bankers the monopoly for money creation is not a good idea

Paul L. , June 8, 2018 at 8:49 pm

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.

Martin , June 9, 2018 at 12:38 am

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?

Yves Smith Post author , June 9, 2018 at 2:00 am

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.

Jamie Walton , June 9, 2018 at 7:39 am

Good point Yves. My research revealed the same re. previous state banks.

Yves Smith Post author , June 9, 2018 at 8:24 am

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).

Jamie Walton , June 9, 2018 at 9:52 am

Agreed. Could a public banking option run through the U.S. Post Office be a better approach (they have branches and staff everywhere already)?

Watt4Bob , June 9, 2018 at 3:56 pm

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.

Yves Smith Post author , June 9, 2018 at 9:47 pm

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.

skippy , June 9, 2018 at 11:30 pm

And what did ND do as far WRT usury in being a CC tool.

Wukchumni , June 8, 2018 at 10:11 am

I was talking with my wife about DeBeers and the man-made diamonds they're selling @ 1/10th of the price of the genuine article

what if some neo-alchemist did the same thing with gold?

It would in an instant, render all of it worth $130 an ounce, on it's way to $13 an ounce.

And more importantly, take away the only real alternative to digitally produced ducats.

SubjectivObject , June 9, 2018 at 1:11 pm

allotropes
you need need natural allotropes

Jim Haygood , June 8, 2018 at 10:30 am

" 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.

False Solace , June 8, 2018 at 11:57 am

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.

MyLessThanPrimeBeef , June 8, 2018 at 12:07 pm

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."

Susan the other , June 8, 2018 at 11:59 am

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?

Wukchumni , June 8, 2018 at 12:03 pm

Nobody's going to willingly go back to a gold standard, it would have to come about because money via digital deceit has failed in entirety.

Jim Haygood , June 8, 2018 at 12:23 pm

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.

Wukchumni , June 8, 2018 at 12:30 pm

It is worth noting that the Federal government struck well over 10 million ounces of gold in coin form for use in circulation from 1861 to 1865

And the CSA?

Not one grain worth

Anthony K Wikrent , June 8, 2018 at 6:40 pm

I've gathered and read much on the greenbacks, but don't recall that very interesting data about minted gold. Any sources you might recommend?

Wukchumni , June 9, 2018 at 4:40 pm

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.

http://www.amergold.com/gold-news-info/gold-coin-mintages.php

Wukchumni , June 8, 2018 at 12:42 pm

p.s.

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.

https://en.wikipedia.org/wiki/National_Bank_Note

MyLessThanPrimeBeef , June 8, 2018 at 1:40 pm

Specifically, in this case:

Assets = Equity (+ zero liabilities)

The accounting identity is still good.

Susan the other , June 9, 2018 at 10:06 am

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.

JTFaraday , June 9, 2018 at 12:52 pm

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.

Older & Wiser , June 8, 2018 at 1:03 pm

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. .."

OpenThePodBayDoorsHAL , June 8, 2018 at 7:42 pm

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.

Older & Wiser , June 8, 2018 at 6:40 pm

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 .

OpenThePodBayDoorsHAL , June 8, 2018 at 7:47 pm

Ask any economist or banker what they think about fixing the price of goods and services and see how they answer.

Watch their heads explode when you then ask if it's a clever idea to fix the most important price in the global economy.

Yves Smith Post author , June 9, 2018 at 9:53 pm

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.

Synoia , June 9, 2018 at 10:49 pm

I visited a gold mine for a tour onec. At the end of the tour was the gold refinery, and on the floor two ingots of gold.

They made the offer, "if you could life one with one hand, you could keep it."

I tried.

And discobered that the ingit, was

a) Pyramidal in shape so ones fingers slid off it
b) F .. heavy. 140 lb.

When you see gold "bars" being tossed around in the movies, it's complete bs. Arnold at his best coud not toss them around.

So we went an had a beer instead. Wiser, but not sadder.

Plenue , June 10, 2018 at 1:13 am

"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.

steven , June 8, 2018 at 10:52 am

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.

Paul L. , June 8, 2018 at 8:57 pm

Soddy doesn't object to democratizing the money supply and turning over its creation the democratically elected government.

skippy , June 9, 2018 at 6:18 am

Soddys drama is making money a physical object when its a contract with time and space qualities,

blennylips , June 9, 2018 at 7:28 am

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."

Not bad for a physicist!

blennylips , June 9, 2018 at 8:02 am

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!)

http://backreaction.blogspot.com/2018/06/video-trailer-for-lost-in-math.html

djrichard , June 8, 2018 at 10:54 am

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.

Wukchumni , June 8, 2018 at 11:06 am

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.

That says a lot.

Jim Haygood , June 8, 2018 at 12:36 pm

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

Wukchumni , June 8, 2018 at 12:46 pm

{imagines Bernanke working tables @ South Of The Border, and typical waiter spiel going something along these lines }

"Bienvenidos amigos, me llamo Benito, may I start you with an endless supply of chips?"

Alejandro , June 9, 2018 at 1:54 pm

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

Thornton Parker , June 8, 2018 at 10:58 am

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.

John , June 8, 2018 at 11:45 am

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.

economicator , June 8, 2018 at 1:19 pm

Right on.

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.

Pespi , June 9, 2018 at 3:34 am

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.

bruce wilder , June 8, 2018 at 12:42 pm

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.

Wukchumni , June 8, 2018 at 1:44 pm

Ideally in a battle of money

a squadron of F-35's would be pitted against a fleet of Zumwalt Class destroyers

Summer , June 8, 2018 at 2:13 pm

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?)

Mercury , June 8, 2018 at 3:46 pm

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."

http://www.unz.com/mhudson/us-vs-china-housingand-those-millennials/

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?

Grebo , June 8, 2018 at 5:23 pm

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.

Watt4Bob , June 8, 2018 at 5:29 pm

I'm sort of disappointed in this thread.

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?

Korual , June 8, 2018 at 6:54 pm

It's the difference between nationalization and centralization. We can change policy direction or we can double down, as the Swiss are considering.

OpenThePodBayDoorsHAL , June 8, 2018 at 8:11 pm

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.

Paul L. , June 8, 2018 at 7:21 pm

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 .

Clint Ballinger , June 8, 2018 at 7:29 pm

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

http://clintballinger.edublogs.org/2017/11/02/omfg-mmtpm-get-along/

steven , June 8, 2018 at 8:43 pm

I'm sort of disappointed in this thread.

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.

Paul L. , June 8, 2018 at 9:23 pm

Please explain your comment "Money IS debt". Money may represent a debt but is not debt in and of itself.

steven , June 9, 2018 at 1:24 am

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.

Jamie Walton , June 9, 2018 at 7:48 am

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.

Paul L. , June 9, 2018 at 10:24 am

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.

WobblyTelomeres , June 9, 2018 at 10:28 am

SOME proponents of MMT first make the claim that money is debt.

FIFY.

tegnost , June 9, 2018 at 10:33 am

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

steven , June 9, 2018 at 11:17 am

I don't believe you are

"naive on these points"

. 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.

Paul L. , June 9, 2018 at 1:10 pm

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.

steven , June 9, 2018 at 5:11 pm

I believe we know what wealth is

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 , June 9, 2018 at 11:24 am

I'll add watt4bob has stated what I feel is true, which is that we have MMT right now, and it's more commonly known as socialism for the rich

Paul L. , June 9, 2018 at 1:04 pm

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.

tegnost , June 9, 2018 at 2:42 pm

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.

Paul L. , June 9, 2018 at 3:37 pm

tegnost – If you have to go there to make your point I let others judge.

tegnost , June 9, 2018 at 5:18 pm

ok how bout I come into your yard and look for some gold?

Plenue , June 10, 2018 at 1:33 am

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.

RBHoughton , June 8, 2018 at 9:15 pm

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.

Oregoncharles , June 8, 2018 at 11:50 pm

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.

Yves Smith Post author , June 9, 2018 at 1:45 am

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.

steven , June 9, 2018 at 11:03 am

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".)

skippy , June 9, 2018 at 8:12 pm

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.

steven , June 9, 2018 at 9:55 pm

Skippy,

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.

skippy , June 9, 2018 at 11:21 pm

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".

skippy , June 9, 2018 at 11:22 pm

BTW it would be incumbent of you to redress my concerns above without forging a new path which excludes them.

steven , June 10, 2018 at 1:40 am
"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. "

(emphasis added)

Sister Gloria , June 9, 2018 at 8:46 am

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.

Paul L. , June 9, 2018 at 9:45 am

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.

skippy , June 9, 2018 at 8:23 pm

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.

Sound of the Suburbs , June 9, 2018 at 4:13 pm

MMT has looked at publicly created money.

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 .

https://www.youtube.com/watch?v=EC0G7pY4wRE&t=3s

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.

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf

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.

djrichard , June 9, 2018 at 4:19 pm

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.

Synoia , June 9, 2018 at 10:41 pm

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).

Older & Wiser , June 9, 2018 at 8:21 pm

China´s Battle for 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 ."

https://mises.org/wire/china-trouble

skippy , June 9, 2018 at 9:39 pm

I know the answer to this dilemma – Praxeology – !!!!!

skippy , June 9, 2018 at 8:29 pm

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.

skippy , June 9, 2018 at 9:27 pm

Sorry comment was directed at djrichard above.

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.

The Rev Kev , June 9, 2018 at 10:26 pm

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." "

skippy , June 9, 2018 at 10:50 pm

https://www.nakedcapitalism.com/2011/11/mark-ames-libertarian-liars-top-reagan-adviser-cato-institute-chairman-william-niskanen-%E2%80%9Cdeficits-don%E2%80%99t-matter%E2%80%9D.html

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.

[Jun 10, 2018] Trump At G-7 Closing Remarks We're The Piggy Bank That Everybody's Robbing

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?' ..."
Jun 10, 2018 | www.zerohedge.com

On trade:

"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.

And this meeting likely won't be any different.


Simplifiedfrisbee -> ravolla Sat, 06/09/2018 - 11:31 Permalink

Unprepared son of a bitch.

Sack of filth.

Klassenfeind -> Dickweed Wang Sat, 06/09/2018 - 11:43 Permalink

"We're the piggy bank that everybody is robbing." Excuse me?!

Errrr, that so-called "piggy bank' just happens to;

  1. have the world's reserve currency
  2. dominates the entire planet militarily since the end of the Cold War
  3. dictates "regime change" around the world
  4. 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?'

Who THE FUCK is robbing who here?!?

Escrava Isaura -> helltothenah Sat, 06/09/2018 - 14:51 Permalink

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.

https://www.telegraph.co.uk/news/worldnews/europe/1356047/Euro-federalists-financed-by-US-spy-chiefs.html

bshirley1968 -> Escrava Isaura Sat, 06/09/2018 - 15:00 Permalink

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.

waspwench -> bshirley1968 Sat, 06/09/2018 - 16:47 Permalink

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?)

bshirley1968 -> waspwench Sat, 06/09/2018 - 18:45 Permalink

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.

mkkby -> helltothenah Sat, 06/09/2018 - 17:52 Permalink

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.

[Jun 05, 2018] Jim Chanos on Fraud "Cryptocurrency Is a Security Speculation Game Masquerading as a Technological Breakthrough" naked capit

Notable quotes:
"... 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. ..."
"... down with the blockchain ..."
Jun 05, 2018 | www.nakedcapitalism.com

Jim Chanos on Fraud: "Cryptocurrency Is a Security Speculation Game Masquerading as a Technological Breakthrough" Posted on June 5, 2018 by Yves Smith 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.

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.


ChrisAtRU , June 5, 2018 at 10:57 am

Ha! Timely from Izabella Kaminska today:

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

flora , June 5, 2018 at 11:55 am

Tasnim should have contacted Osborne's London Evening Standard, not the FT. ;)

Ignacio , June 5, 2018 at 12:15 pm

Ethical cryptocurrency!!!
Sounds great, hahahahahahahahahahahaha!

So, we have learned two things lately about things that will happen when the crisis unfolds:

– There is high risk for a deflationary wage spiral
– The fraudsters won't be (again) prosecuted

ChrisAtRU , June 5, 2018 at 6:37 pm

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 ?

Needless to say, the usual suspects have chimed in.

#HowCanIMakeMoney

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 .

Lambert Strether , June 5, 2018 at 11:39 am

I think of "The Bezzle" as the happy time between hubris and nemesis.

Wukchumni , June 5, 2018 at 12:21 pm

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.

Synoia , June 5, 2018 at 1:42 pm

Why wouldn't a Zimbabwe type country embrace cryptocurrency as money of the iRealm?

Because 50% of the people DO NOT HAVE ELECTRICITY.

If the do have electricity, they cannot afford to Verify a Cryptocurrency.

Before making comments about 3rd world countries, visit a few, a look outside the tourist areas.

Soweto or Alexandria near Joburg, or the Township on the East side of Boksburg in South Africa.

Or The area near Apapa, Nigeria close to the Mobil Tank Farm.

Wukchumni , June 5, 2018 at 1:48 pm

as if you need a physical location within a country, in order to make cryptos~

They're mining bitcoins in Inner Mongolia, for instance.

Wukchumni , June 5, 2018 at 2:14 pm

p.s.

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)

Jim Haygood , June 5, 2018 at 12:25 pm

'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.

Got gold?

PKMKII , June 5, 2018 at 2:11 pm

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.

diptherio , June 5, 2018 at 3:55 pm

That's the best pun I've seen in awhile!

skippy , June 5, 2018 at 4:07 pm

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 .

Isotope_C14 , June 5, 2018 at 1:40 pm

"like totalitarian communism"

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.

Tim , June 5, 2018 at 2:38 pm

Brilliant!

Sadly, there will be plenty of people LFIN right up to the coming RIOT as a consequence of the autopiloted crash from the fraud.

Micky9finger , June 5, 2018 at 2:46 pm

Whenever i get to Zimbabwe in an article i stop reading.
A sure sign the economics is going off the rails into neoliberalism and argle bargle.

Rates , June 5, 2018 at 4:11 pm

"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.

djrichard , June 5, 2018 at 4:31 pm

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.

djrichard , June 5, 2018 at 4:42 pm

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.

RBHoughton , June 5, 2018 at 7:34 pm

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:

https://www.youtube.com/watch?v=bBC-nXj3Ng4

[May 03, 2018] A sovereign that HAS NO DEBT IN A FOREIGN CURRENCY has zero risk of insolvency

May 03, 2018 | www.moonofalabama.org

karlof1 | May 2, 2018 5:28:28 PM | 175

WJ @172--

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.

paulmeli , May 2, 2018 6:07:44 PM | 176

james @ 166
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).

ashley albanese , May 2, 2018 6:40:23 PM | 177
May2 172

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 !

paulmeli , May 2, 2018 6:49:08 PM | 178
@ SteveK9 @ 160

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:

"Never Touch the Money System"

james , May 2, 2018 7:51:46 PM | 179
@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

Josh , May 2, 2018 7:56:05 PM | 180
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.
paulmeli , May 2, 2018 8:07:23 PM | 181
james @ 179
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.

david hogg , May 2, 2018 8:23:36 PM | 182
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."

spudski , May 2, 2018 8:44:26 PM | 183
paulmeli @ 181

Excellent précis of corporate/country asset stripping.

Pft , May 2, 2018 9:16:21 PM | 184
@paulmeli 176

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.

[Mar 23, 2018] How money work

Mar 23, 2018 | www.moonofalabama.org

Posted by: Allen | Mar 22, 2018 9:02:51 PM | 42


Allen , Mar 22, 2018 9:02:51 PM | 42

An Imaginary Conversation....

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.

There it is...

psychohistorian , Mar 23, 2018 12:06:52 AM | 68
@ jivno who keeps asking how money works

http://www.globalresearch.ca/the-federal-reserve-cartel-the-eight-families/25080

hojo , Mar 23, 2018 4:11:22 AM | 78
jinvo @48
Here's an interesting 144-slide presentation on "Modern Monetary Theory" from J.D. Alt .

[Mar 22, 2018] 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.

Notable quotes:
"... 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)-- ..."
Mar 22, 2018 | turcopolier.typepad.com

robt willmann 21 March 2018 at 01:43 PM

John Minnerath,

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)--

http://www.chinadaily.com.cn/business/2015-10/08/content_22127404.htm

https://sputniknews.com/business/201603091036035210-vtb-bank-payment/

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--

http://www.plata.com.mx/enUS/More/322?idioma=2

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.

[Mar 22, 2018] 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.

Notable quotes:
"... I see the global monetary reset currently underway as the slowly moving, but unstoppable, glacier that is forcing all other events. ..."
Mar 22, 2018 | turcopolier.typepad.com

EEngineer -> robt willmann... 21 March 2018 at 04:14 PM

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.

[Feb 05, 2018] Blockchain: what it is, what it does, and why you probably don't need one by Scott Adams Interest in blockchain is at a fever pitch lately. This is in large part due to the eye-popping price dy...

Feb 05, 2018 | andolfatto.blogspot.com

[Feb 05, 2018] Link to my past posts on the subject of Bitcoin and Blockchain

Feb 05, 2018 | andolfatto.blogspot.com

Sunday, January 21, 2018 Blockchain: 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

h(t-1) = { e(t-1), e(t-2), ..., e(0) }, t = 1,2,3,...

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:

H(t-1) = { E(t-1), E(t-2), ... , E(0) }, t = 1,2,3,...

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.

Link to my past posts on the subject of Bitcoin and Blockchain .

[Jan 12, 2018] >When Your Bank Fails, Don't Walk Run!

Notable quotes:
"... or history. ..."
"... "Bail Outs." ..."
"... "Too Big to Fail," ..."
"... "Globally Active, Systemically Important, Financial Institutions" ..."
"... "unsecured creditors" ..."
"... "Good morning, Sir!," ..."
"... "would be glad to help me." ..."
"... "Today, you've come to the right place." ..."
"... "super-priority" ..."
"... Naked Capitalism ..."
"... before you may have your savings cash. ..."
"... "cross-border bank resolution." ..."
"... "Resolving Globally Active, Systemically Important, Financial Institutions." ..."
"... Financial Sense ..."
"... "about two days." ..."
"... Au Contraire ..."
"... "We expect to be cutting a lot out of Dodd-Frank," ..."
Jan 12, 2018 | dissidentvoice.org

by Brett Redmayne-Titley / January 11th, 2018

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

Read other articles by Brett .

This article was posted on Thursday, January 11th, 2018 at 8:01am and is filed under Banks , Barack Obama , Cyprus , Deposits/Depositors , Donald Trump , EU , Greece , Money supply , Wall Street .

[Dec 26, 2017] BotCoin: Bitcoins are pure speculative assets which enable people to gamble. by Robert Waldmann

Notable quotes:
"... 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? ..."
Dec 25, 2017 | angrybearblog.com

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?

[Jul 28, 2017] Reply

Jul 28, 2017 | marknesop.wordpress.com

cartman , July 23, 2017 at 11:38 am

G7 Ambassadors Support Cutting of Pensions in the Ukraine
marknesop , July 23, 2017 at 12:13 pm
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.

Cortes , July 23, 2017 at 4:18 pm
And pollution of areas of Russian soil from blown in GMO seeds. Creating facts on the ground.
Patient Observer , July 24, 2017 at 4:18 am
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.
Jen , July 24, 2017 at 5:03 am
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.

yalensis , July 24, 2017 at 2:30 pm
Nine out of ten doctors recommend Camels.
The other one doctor is a woman, who smokes Virginia Slims.

Patient Observer , July 24, 2017 at 6:09 pm
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.
kirill , July 24, 2017 at 8:09 pm
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.
Jen , July 25, 2017 at 4:56 am
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.

marknesop , July 25, 2017 at 9:18 am
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.

Patient Observer , July 25, 2017 at 7:07 pm
In an economy based on looting, it makes perfect sense. Money flows only one way until its all gone.

[Jun 27, 2017] Inflation and money velocity

Notable quotes:
"... 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 ..."
Jun 27, 2017 | economistsview.typepad.com

djb , June 27, 2017 at 02:56 AM

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

djb -> djb... , June 27, 2017 at 02:58 AM
another way to look at inactive money is to say that part of the money supply has no velocity, ie it is not contributing to income.

[Jun 11, 2017] Estimates vary, but some believe 90% of all gold mined in 5000 years is still held by humans as property.

Jun 11, 2017 | economistsview.typepad.com

djb , June 09, 2017 at 02:09 PM

"Bitcoin and the conditions for a takeover of fiat money - longandvariable"

conditions are:

"hell freezing over"

DrDick - , June 09, 2017 at 04:27 PM
Pretty much. Bitcoin really is the quintessential "fiat money" (a redundancy, since all money is fiat currency, even gold and silver).
cm - , June 09, 2017 at 10:07 PM
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).

mulp - , June 10, 2017 at 03:00 PM
Money is proxy for labor.

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.

cm - , June 11, 2017 at 10:26 AM
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.

DrDick - , June 11, 2017 at 11:57 AM
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.
cm - , June 09, 2017 at 10:14 PM
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".

DrDick - , June 11, 2017 at 12:00 PM
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.
DrDick - , June 11, 2017 at 12:01 PM
It is also the ultimate pyramid scheme.

[Apr 25, 2017] The Operation and Demise of the Bretton Woods System: 1958 to 1971

Notable quotes:
"... By Michael Bordo, Professor of Economics, Rutgers University. Originally published at VoxEU ..."
"... See original post for references ..."
"... Greatest scam in history. ..."
"... So, it's not 'out of thin air. It's back by the might of the Pentagon mightier than gold. ..."
"... It is hard to believe in can continue much longer despite of Bordo's view that it will. ..."
Apr 25, 2017 | www.nakedcapitalism.com
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:

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.

See original post for references

0 0 5 0 0 This entry was posted in Currencies , Economic fundamentals , Globalization , Guest Post , Macroeconomic policy , The dismal science on April 25, 2017 by Yves Smith . Subscribe to Post Comments 59 comments Jim Haygood , April 25, 2017 at 11:00 am

'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):

http://greshams-law.com/wp-content/uploads/2012/02/Screen-shot-2012-02-12-at-21.23.00.png

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.

jsn , April 25, 2017 at 1:35 pm

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.

Robert NYC , April 25, 2017 at 3:19 pm

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.

Gman , April 25, 2017 at 5:24 pm

+1.

gepay , April 25, 2017 at 8:30 pm

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?

Susan the other , April 25, 2017 at 11:09 am

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.

Robert NYC , April 25, 2017 at 3:29 pm

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."

jsn , April 25, 2017 at 5:25 pm

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.

OpenThePodBayDoorsHAL , April 25, 2017 at 6:53 pm

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.

Moneta , April 25, 2017 at 7:30 pm

No inflation can also lead to a form of confiscation where you are not letting new entrants (the young) into the game.

No inflation could reflect a form of protectionism.

MyLessThanPrimeBeef , April 25, 2017 at 3:30 pm

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.

RBHoughton , April 25, 2017 at 7:35 pm

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?

Enquiring Mind , April 25, 2017 at 11:18 am

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.

jsn , April 25, 2017 at 1:09 pm

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.

Oregoncharles , April 25, 2017 at 1:28 pm

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.

jsn , April 25, 2017 at 3:25 pm

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.

Robert NYC , April 25, 2017 at 3:54 pm

@jsn, you get it!

Yves Smith Post author , April 25, 2017 at 9:39 pm

No, no, no, no, this is 100% wrong.

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.

Robert NYC , April 25, 2017 at 3:45 pm

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.

craazyboy , April 25, 2017 at 4:07 pm

" 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.

Robert NYC , April 25, 2017 at 4:30 pm

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.

Mark P. , April 25, 2017 at 5:33 pm

Greatest scam in history.

It absolutely is. It's as much an advance on the British Empire as that was on the Roman system.

craazyboy , April 25, 2017 at 5:41 pm

"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.

Robert NYC , April 25, 2017 at 8:14 pm

" 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.

Yves Smith Post author , April 25, 2017 at 9:45 pm

No, you have this wrong.

They want the jobs!

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.

Robert NYC , April 25, 2017 at 4:56 pm

You sound like you must be an economist.

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"

craazyboy , April 25, 2017 at 5:47 pm

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.

a different chris , April 25, 2017 at 11:41 am

>The dollar standard will be with us for a long time.

Why?

jsn , April 25, 2017 at 1:01 pm

That struck me as "famous last words" material.

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.

Yves Smith Post author , April 25, 2017 at 9:49 pm

There isn't a viable alternative.

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.

lyman alpha blob , April 25, 2017 at 11:43 am

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???

wandering mind , April 25, 2017 at 3:16 pm

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. :(

RBHoughton , April 25, 2017 at 7:42 pm

Wander no more Mind, you have struck on the bedrock of reality

Henry , April 25, 2017 at 12:21 pm

" 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.

Yves Smith Post author , April 25, 2017 at 9:54 pm

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.

Kalen , April 25, 2017 at 1:16 pm

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.

jsn , April 25, 2017 at 1:48 pm

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.

OpenThePodBayDoorsHAL , April 25, 2017 at 6:15 pm

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.

jsn , April 25, 2017 at 6:46 pm

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.

jsn , April 25, 2017 at 7:07 pm

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.

Robert NYC , April 25, 2017 at 8:18 pm

@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.

Todde , April 25, 2017 at 10:24 pm

Split Tally sticks.

OpenthepodbaydoorsHAL , April 25, 2017 at 9:58 pm

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.

Vikas Saini , April 25, 2017 at 2:41 pm

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.

Mark P. , April 25, 2017 at 5:14 pm

More than worth a read. Essential.

Robert NYC , April 25, 2017 at 9:46 pm

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..

Robert NYC , April 25, 2017 at 3:16 pm

"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.

https://www.bloomberg.com/news/features/2016-05-30/the-untold-story-behind-saudi-arabia-s-41-year-u-s-debt-secret

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.

MyLessThanPrimeBeef , April 25, 2017 at 3:33 pm

So, it's not 'out of thin air.

It's back by the might of the Pentagon mightier than gold.

Robert NYC , April 25, 2017 at 3:49 pm

Exactly! But nobody at the Fed is going to explain this to anyone, anytime soon.

Mark P. , April 25, 2017 at 5:30 pm

MyLessThanPrimeBeef wrote: So, it's not 'out of thin air. It's back by the might of the Pentagon mightier than gold.

And in turn the seignorage on that ability to create as much of the global reserve currency as the U.S. likes pays for the Pentagon.

https://en.wikipedia.org/wiki/Seigniorage

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.

steven , April 25, 2017 at 3:47 pm

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)

@Robert NYC – Thanks for the link.

Mark P. , April 25, 2017 at 5:23 pm

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.

Steven , April 25, 2017 at 7:03 pm

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 , April 25, 2017 at 8:19 pm

I think there is indeed a link between the usd as reserve currency and the military budget.

Robert NYC , April 25, 2017 at 9:12 pm

@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.

Robert NYC , April 25, 2017 at 8:21 pm

@Mark P.

yes that is the conundrum. It doesn't make a lot of sense but it goes on and on. Another 50 years? Unlikely.

Adamski , April 25, 2017 at 7:20 pm

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"

George Job , April 25, 2017 at 9:05 pm

That fiat currencies have lasted hundreds of years jsn is simply not true. I was thinking forty but here we see 27!
http://georgewashington2.blogspot.com/2011/08/average-life-expectancy-for-fiat.html

And it's the US and Canada being the only countries globally not marking their gold holdings to market. (or audit) Reserve currency indeed!
http://marketupdate.nl/en/analysis-china-marks-gold-reserve-at-market-value/

Tim , April 25, 2017 at 9:52 pm

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.

[Apr 14, 2017] If the Federal Reserve can create trillions of dollars with a single keystroke, and the Fed is the governments bank, then why does President Obama claim weve run out of money?

Apr 14, 2017 | economistsview.typepad.com
RGC , April 14, 2017 at 05:48 AM
So ask yourself this question:

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.

http://neweconomicperspectives.org/2012/03/where-did-the-federal-reserve-get-all-that-money.html

RGC -> RGC... , April 14, 2017 at 05:51 AM
Prominent C20th Economist Explains How the Lie is for Our Own Good

Posted on 2 January 2014

Infamous footage of Paul Samuelson, posted by Mike Norman, explaining why we can't be trusted with the truth.

Just believe the scary bedtime story about the big bad Budget Deficit and stay asleep now. There's a good child.

http://heteconomist.com/prominent-c20th-economist-explains-how-the-lie-is-for-our-own-good/

BenIsNotYoda -> RGC... , April 14, 2017 at 06:59 AM
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.
BenIsNotYoda -> BenIsNotYoda... , April 14, 2017 at 07:04 AM
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.

RGC -> BenIsNotYoda... , April 14, 2017 at 07:40 AM
There has been a major propaganda element in economics for a long time.

People have to dig deep to discover the truth and many don't have the time.

There is a lot of money behind the propaganda on the neoclassical/neoliberal side so it gets a lot more publicity.

As that side sinks the society deeper and deeper into malfunction, hopefully more people will take the time to understand.

JohnH -> RGC... , April 14, 2017 at 09:13 AM
Yep! "There has been a major propaganda element in economics for a long time."

Robert Rubin had an opinion piece at the Council on Foreign Relations, another propaganda rag: "Don't Politicize the Federal Reserve"
http://www.cfr.org/monetary-policy/dont-politicize-federal-reserve/p39037

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?

[Apr 13, 2017] 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.

Apr 13, 2017 | economistsview.typepad.com
anne , April 13, 2017 at 07:44 AM
http://cepr.net/blogs/beat-the-press/china-and-currency-values-fast-growing-countries-run-trade-deficits

April 13, 2017

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.

* http://www.slate.com/blogs/moneybox/2017/04/12/trump_changes_his_mind_decides_china_isn_t_a_currency_manipulator_after.html

** http://www.imf.org/external/pubs/ft/weo/2016/02/weodata/weorept.aspx?pr.x=45&pr.y=7&sy=1990&ey=2000&scsm=1&ssd=1&sort=country&ds=.&br=1&c=522%2C924%2C536%2C578%2C548%2C582&s=NGDP_RPCH%2CBCA_NGDPD&grp=0&a=

*** http://img.timeinc.net/time/magazine/archive/covers/1999/1101990215_400.jpg

**** http://cepr.net/blogs/beat-the-press/trump-china-and-trade

-- Dean Baker

[Apr 13, 2017] Currency manipulation vs currency management

Apr 13, 2017 | economistsview.typepad.com
anne , April 12, 2017 at 08:23 AM
http://cepr.net/blogs/beat-the-press/trump-china-and-trade

April 11, 2017

Trump, China, and Trade

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."

* https://www.nytimes.com/2017/04/11/business/economy/trump-china-currency-manipulation-trade.html

-- Dean Baker

[Apr 12, 2017] Should France leave the EU, would euros held by, say, someone in Italy then become worthless?

Apr 12, 2017 | economistsview.typepad.com
Anachronism -> anne... , April 12, 2017 at 04:58 AM
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.

What a mess.

anne -> Anachronism... , April 12, 2017 at 05:18 AM
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.
pgl -> Anachronism... , April 12, 2017 at 05:42 AM
"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."

What did he ignore again?

pgl -> Anachronism... , April 12, 2017 at 05:43 AM
"should France leave the EU, would euros held by, say, someone in Italy then become worthless?"

They could readily convert existing Euros into Francs. This is the reverse of what they did in 1999.

Peter K. -> pgl... , April 12, 2017 at 08:27 AM
PGL thinks France can easily convert Euros into Francs or Germany can convert its Euros into DMs?

That would blow up the monetary union.

What a nut bar.

pgl -> Peter K.... , April 12, 2017 at 09:26 AM
"That would blow up the monetary union."

Oh gee - the end of the Euro would be the end of the universe. My internet stalker writes another incredibly stupid comment.

Peter K. -> pgl... , April 12, 2017 at 09:53 AM
" My internet stalker writes another incredibly stupid comment."

Shut up, old man. Stick to the subject at hand. Oh right you WANT to change the subject with insults.

Peter K. -> Anachronism... , April 12, 2017 at 08:29 AM
"So, should France leave the EU..."

Even if Greece left it would cause turmoil in the financial markets. That's the known unknown people are focused on to start the next crisis.

[Apr 12, 2017] What is the conceptual difference between the monetary base and outside money ?

Apr 12, 2017 | economistsview.typepad.com
Lee A. Arnold April 12, 2017 at 03:02 AM

A question, for anyone: What is the conceptual difference between the "monetary base" and "outside money"? pgl -> Lee A. Arnold ... , April 12, 2017 at 05:40 AM
Outside money is money that is not a liability for anyone "inside" the economy. Think gold and silver.

The monetary base represents bank reserves and cash which are liabilities of the FED.

Lee A. Arnold -> pgl... , April 12, 2017 at 06:23 AM
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"?
RGC -> Lee A. Arnold ... , April 12, 2017 at 07:08 AM
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.

Lee A. Arnold -> RGC... , April 12, 2017 at 09:13 AM
According to the definitions I can find, cash notes and coins (currency) are "outside money", even though they circulate within the private economy.
pgl -> RGC... , April 12, 2017 at 09:24 AM
You are using a different definition of "outside" here.
RGC -> pgl... , April 12, 2017 at 10:03 AM
How about this:

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.

https://minneapolisfed.org/research/SR/SR374.pdf

JF -> Lee A. Arnold ... , April 12, 2017 at 08:57 AM
Reserves established by govt fiat????

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.

Govt fiat money created these??? No.

What concerns you?

pgl -> JF... , April 12, 2017 at 09:25 AM
Good point and the right question.
Lee A. Arnold -> JF... , April 12, 2017 at 09:53 AM
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.

pgl -> Lee A. Arnold ... , April 12, 2017 at 09:24 AM
Of course banks reserves are not backed by gold. Gold is outside money - reserves are different.

But the FED does record them as a liability. Are you saying the FED is made up of Martians or what?

Not sure why you are confusing what appears to be a very simple distinction.

Peter K. -> pgl... , April 12, 2017 at 09:52 AM
"Not sure why you are confusing what appears to be a very simple distinction."

Not everyone is as smart as the pompous PGL the Facile!

[Apr 09, 2017] As soon as regulators relax their vigilance banks start feckless expansion

Notable quotes:
"... 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". ..."
Apr 09, 2017 | economistsview.typepad.com
RGC -> RGC... April 08, 2017 at 07:17 AM

As John Kenneth Galbraith remarked:

"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.

RGC -> RGC... , April 08, 2017 at 07:33 AM
[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."

http://conversableeconomist.blogspot.com/2015/07/pushing-on-string-origin-story.html

Peter K. -> RGC... , April 08, 2017 at 08:05 AM
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.

RC AKA Darryl, Ron said in reply to RGC... , April 08, 2017 at 09:14 AM
Thx.

OK, this is a joke =

We are all quantity of money theory people now.

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.

RC AKA Darryl, Ron said in reply to RC AKA Darryl, Ron... , April 08, 2017 at 09:28 AM
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.
RC AKA Darryl, Ron said in reply to RC AKA Darryl, Ron... , April 08, 2017 at 09:30 AM
Since the FFR was at the ZLB, further lowering long term interest rates also flattened the yield curve.
Peter K. -> RC AKA Darryl, Ron... , April 08, 2017 at 10:27 AM
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.

RGC -> RC AKA Darryl, Ron... , April 08, 2017 at 09:29 AM
Subtle..... I think.
Peter K. -> RC AKA Darryl, Ron... , April 08, 2017 at 10:29 AM
Again you're muddying the issue. It's not really monetarists versus Keynesians.

It's these know-nothing lefties who think that tight money doesn't matter.

RC AKA Darryl, Ron said in reply to Peter K.... , April 08, 2017 at 11:35 AM
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.
Peter K. -> RGC... , April 08, 2017 at 08:01 AM
"Monetary policy has always been ineffective in stimulating demand"

Simply not true.

RGC -> Peter K.... , April 08, 2017 at 08:11 AM
As I've told you before, I see no point in arguing the issue with you.
Peter K. -> RGC... , April 08, 2017 at 08:28 AM
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.
Peter K. -> Peter K.... , April 08, 2017 at 08:41 AM
"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.

Pinkybum -> Peter K.... , April 08, 2017 at 09:25 AM
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.
Peter K. -> Pinkybum... , April 08, 2017 at 10:24 AM
"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.

RGC -> Peter K.... , April 08, 2017 at 09:18 AM
Because I know you won't change your mind and you can't resist getting personal.
Peter K. -> RGC... , April 08, 2017 at 10:24 AM
You just repeat the same quotes over and over again as if that will change anyone's minds.
RGC -> Peter K.... , April 08, 2017 at 10:36 AM
This is exactly why I don't want to discuss the issue with you. You never address the issue and you make a personal remark.
Peter K. -> RGC... , April 08, 2017 at 10:48 AM
I never address the issue? All you do is repeat quotes form men who have long since died.
RC AKA Darryl, Ron said in reply to Peter K.... , April 08, 2017 at 11:36 AM
Men rather than mice though.
yuan -> RGC... , April 08, 2017 at 09:58 AM
monetary policy can redistribute capital in a more equitable manner. are you opposed to this? do you think the rich deserve their gains?
RGC -> yuan... , April 08, 2017 at 10:41 AM
I think your statement is erroneous. Show me how "monetary policy can redistribute capital in a more equitable manner." and we could discuss it.
yuan -> RGC... , April 08, 2017 at 11:11 AM
the owning/lending class tends to dislike inflation for some reason...
Jerry Brown said in reply to RGC... , April 08, 2017 at 11:19 AM
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.

RGC -> Jerry Brown... , April 08, 2017 at 11:34 AM
I like your understanding of "equitable" better.

[Apr 08, 2017] A new study suggests that near-zero interest rates - accompanied by a lackluster recovery - may become a common occurrence.

Notable quotes:
"... 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. ..."
Apr 08, 2017 | www.nytimes.com

Peter K., Saturday, April 08, 2017 at 08:21 AM

https://www.nytimes.com/2017/04/07/upshot/the-economy-may-be-stuck-in-a-near-zero-world.html?partner=rss&emc=rss&_r=1

" 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.

Alt facts from Wolfers.

libezkova -> Peter K.... April 08, 2017 at 03:15 PM

"A new study suggests that near-zero interest rates - accompanied by a lackluster recovery - may become a common occurrence."

That's another way to spell "end of cheap oil"

[Apr 04, 2017] I am shocked, shocked to find that gambling is going on in here!

Notable quotes:
"... Casablanca, ..."
Apr 04, 2017 | www.businessinsider.com

Rick: How can you close me up? On what grounds?

Captain Renault: I'm shocked, shocked to find that gambling is going on in here!

– From the classic scene in Casablanca, made in 1942

Casablanca

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.

[Apr 04, 2017] The Production of Money

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 ..."
Apr 04, 2017 | economistsview.typepad.com
Peter K. , April 03, 2017 at 01:38 PM
https://www.ft.com/content/40b5b516-152c-11e7-b0c1-37e417ee6c76

'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.

[Mar 23, 2017] The Credit Theory of Money

Mar 23, 2017 | economistsview.typepad.com
tjfxh :

Reply Tuesday, March 21, 2017 at 04:15 PM , March 21, 2017 at 04:15 PM
David Graeber, Debt: The First 5000 Years. Melville House; Updated Expanded edition (2014).

Michael Hudson and Marc Van De Mieroop, Debt and Economic Renewal in the Ancient Near East. Capital Decisions Ltd (2002).

Geoffrey Ingham, The Nature of Money. Polity (2004).

A. Mitchell Innes, "The Credit Theory of Money," The Banking Law Journal, Vol. 31 (1914), Dec./Jan., 151-168.

_____________, "What is Money?," The Banking Law Journal, Vol. 30 (1913), May. 377-409

L. Randall Wray, Theories of Money and Banking. Edward Elgar (2012)

______________, Understanding Modern Money:The Key to Full Employment and Price Stability. Edward Elgar (1998)

anne -> tjfxh ... , March 21, 2017 at 04:34 PM
https://www.community-exchange.org/docs/The%20Credit%20Theoriy%20of%20Money.htm

1914

The Credit Theory of Money
By A. Mitchell Innes

https://www.community-exchange.org/docs/what%20is%20money.htm

1913

What Is Money?
By A. MITCHELL INNES

[ I do appreciate these references. ]

[Mar 22, 2017] Economist's View How Money Made Us Modern

Mar 22, 2017 | economistsview.typepad.com
How Money Made Us Modern Patrick Kiger at National Geographic:
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. ...

Posted by Mark Thoma on Tuesday, March 21, 2017 at 10:06 AM in Economics | Permalink Comments (10)

View blog reactions

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Comments Feed You can follow this conversation by subscribing to the comment feed for this post. Shah of Bratpuhr : , March 21, 2017 at 11:08 AM

Article ended with Bitcoin... otherwise, great story.
Shah of Bratpuhr -> Shah of Bratpuhr... , March 21, 2017 at 11:09 AM
Bitcoin is quite volatile vs USD.

https://btcvol.info/

tjfxh : , March 21, 2017 at 12:34 PM
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.
kthomas -> tjfxh ... , March 21, 2017 at 01:03 PM
....coffee. Was there nothing you agreed with?
tjfxh : , March 21, 2017 at 02:09 PM
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.
anne -> tjfxh ... , March 21, 2017 at 02:32 PM
Do set down any specific references when possible.
JohnH : , March 21, 2017 at 02:32 PM
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/

pgl -> JohnH... , March 21, 2017 at 03:26 PM
"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.

tjfxh : , March 21, 2017 at 04:15 PM
David Graeber, Debt: The First 5000 Years. Melville House; Updated Expanded edition (2014).

Michael Hudson and Marc Van De Mieroop, Debt and Economic Renewal in the Ancient Near East. Capital Decisions Ltd (2002).

Geoffrey Ingham, The Nature of Money. Polity (2004).

A. Mitchell Innes, "The Credit Theory of Money," The Banking Law Journal, Vol. 31 (1914), Dec./Jan., 151-168.

_____________, "What is Money?," The Banking Law Journal, Vol. 30 (1913), May. 377-409

L. Randall Wray, Theories of Money and Banking. Edward Elgar (2012)

______________, Understanding Modern Money:The Key to Full Employment and Price Stability. Edward Elgar (1998)

anne -> tjfxh ... , March 21, 2017 at 04:34 PM
https://www.community-exchange.org/docs/The%20Credit%20Theoriy%20of%20Money.htm

1914

The Credit Theory of Money
By A. Mitchell Innes

https://www.community-exchange.org/docs/what%20is%20money.htm

1913

What Is Money?
By A. MITCHELL INNES

[ I do appreciate these references. ]

[Feb 19, 2017] Privilege: still exorbitant. An analysis of the international role of the dollar.

Notable quotes:
"... 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." ..."
Feb 19, 2017 | economistsview.typepad.com
Peter K. : February 18, 2017 at 06:50 AM
J.W. Mason has some interesting links at his blog:

http://jwmason.org/slackwire/links-and-thoughts-for-feb-17/

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."

Darryl noted Keynes's Bancor.

https://en.wikipedia.org/wiki/Bancor

[Jan 23, 2017] re F@ck Work naked capitalism

Jan 23, 2017 | www.nakedcapitalism.com
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.

Carlos , January 23, 2017 at 2:31 am

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.

Dogstar , January 23, 2017 at 7:44 am

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.

MtnLife , January 23, 2017 at 8:39 am

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.

Jonathan Holland Becnel , January 23, 2017 at 11:51 am

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.

Marco , January 23, 2017 at 1:22 pm

Many MANY folks take drugs and alcohol specially BECAUSE of their jobs

JohnnyGL , January 23, 2017 at 10:46 am

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.

jrs , January 23, 2017 at 1:04 pm

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.

skippy , January 23, 2017 at 1:50 pm

Totally flippant and backhanded comment jrs, might help to substantiate your perspective with more than emotive slurs.

disheveled . Gezz Calvinists – ????? – how about thousands of years of Anthro or Psychology vs insinuations about AET or Neoclassical

jrs , January 23, 2017 at 1:01 pm

Don't forget commute another 2 hours because you can't afford anything close by!

Ruben , January 23, 2017 at 3:27 am

OMG, where to begin:

"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.

Hard to take it seriously.

Furzy , January 23, 2017 at 4:19 am

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?

tony , January 23, 2017 at 6:06 am

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.

fresno dan , January 23, 2017 at 8:37 am

Furzy
January 23, 2017 at 4:19 am

http://www.pragcap.com/modern-monetary-theory-mmt-critique/

skippy , January 23, 2017 at 4:55 am

So where are your – laws – from Ruben . ??????

UserFriendly , January 23, 2017 at 6:57 am

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.

skippy , January 23, 2017 at 7:39 am

Taxes to mop up . but that's theft in some ideological camps .

disheveled must have printing presses down in the basement .

Ruben , January 23, 2017 at 7:58 am

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.

Jamie , January 23, 2017 at 9:55 am

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?

susan the other , January 23, 2017 at 1:48 pm

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."

JohnnyGL , January 23, 2017 at 11:16 am

"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.

Jamie , January 23, 2017 at 10:05 am

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.

Jim Haygood , January 23, 2017 at 12:11 pm

" money is a boundless government instrument "

Restated: " Trees grow to the sky and beyond. "

During expansions, the economy is always operating at the real resource constraint. Attempts to goose it with MMT can only destabilize it.

Mel , January 23, 2017 at 12:46 pm

"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.

PKMKII , January 23, 2017 at 9:18 am

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.

vlade , January 23, 2017 at 5:28 am

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.

PKMKII , January 23, 2017 at 9:27 am

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.

Praedor , January 23, 2017 at 5:42 am

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.

Dblwmy , January 23, 2017 at 11:03 am

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.

jerry , January 23, 2017 at 11:12 am

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.

Anti-Schmoo , January 23, 2017 at 6:02 am

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

Mrs Smith , January 23, 2017 at 6:08 am

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?

financial matters , January 23, 2017 at 6:35 am

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.

UserFriendly , January 23, 2017 at 7:02 am

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.

Stephanie , January 23, 2017 at 7:06 am

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.

HotFlash , January 23, 2017 at 11:18 am

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.

Praedor , January 23, 2017 at 12:28 pm

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".

BeliTsari , January 23, 2017 at 6:32 am

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!

PlutoniumKun , January 23, 2017 at 7:09 am

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.

Torsten , January 23, 2017 at 7:33 am

Yes. Not either/or but both/and.

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 :-(

aj , January 23, 2017 at 7:48 am

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.

Murph , January 23, 2017 at 9:08 am

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.

aj , January 23, 2017 at 11:17 am

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.

PlutoniumKun , January 23, 2017 at 10:42 am

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.

aj , January 23, 2017 at 11:39 am

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.

oho , January 23, 2017 at 8:04 am

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.

Dita , January 23, 2017 at 8:06 am

Make-work will set you free?

voteforno6 , January 23, 2017 at 8:32 am

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.

BeliTsari , January 23, 2017 at 8:46 am

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( ) Machete, pick-axe, big old hemp bag
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( ) ephedrine, pseudoephedrine, fast car

Norb , January 23, 2017 at 9:15 am

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.

jerry , January 23, 2017 at 11:23 am

Well said!

Jamie , January 23, 2017 at 9:25 am

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).

PKMKII , January 23, 2017 at 9:44 am

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.

Teacup , January 23, 2017 at 9:48 am

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' .

Portia , January 23, 2017 at 10:24 am

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

Teacup , January 23, 2017 at 12:04 pm

Must be a capital gains 'earner' . and a professional projectionist

Portia , January 23, 2017 at 12:19 pm

both ends see the other as a parasite

Ignacio , January 23, 2017 at 11:21 am

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.

LT , January 23, 2017 at 11:58 am

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.

schultzzz , January 23, 2017 at 12:05 pm

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?

Ben , January 23, 2017 at 12:31 pm

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.

MIB , January 23, 2017 at 1:12 pm

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

[Jan 11, 2017] Central banks did stop deflation. Which was all they really cared about. Everything else was theater.

Notable quotes:
"... "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 ..."
Jan 11, 2017 | www.nakedcapitalism.com
djrichard , January 10, 2017 at 12:40 pm

"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)

OpenThePodBayDoorsHAL , January 10, 2017 at 1:20 pm

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

craazyboy , January 10, 2017 at 2:07 pm

Post 2008 they decided banks had to securitize everything and sell it, then the financial system would be stable. Your portfolio – not so much.

RobertNYC , January 10, 2017 at 1:36 pm

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.

Yves Smith Post author , January 10, 2017 at 2:16 pm

1. What you should worry about is private debt to GDP, and that is below pre-crisis levels in the US:

http://www.tradingeconomics.com/united-states/private-debt-to-gdp

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:

http://www.nakedcapitalism.com/2016/09/the-private-debt-crisis.html

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.

Robert NYC , January 10, 2017 at 3:10 pm

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.

https://www.bloomberg.com/news/features/2016-05-30/the-untold-story-behind-saudi-arabia-s-41-year-u-s-debt-secret

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?

jsn , January 10, 2017 at 3:39 pm

This is a quick and informative read for 3 bucks, it addresses all your questions here:
https://www.amazon.com/Currency-Economics-Modern-Monetary-ebook/dp/B009XDGZLI/ref=sr_1_1?s=digital-text&ie=UTF8&qid=1352305630&sr=1-1&keywords=soft+currency+economics

Robert NYC , January 10, 2017 at 5:24 pm

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.

Mel , January 10, 2017 at 7:07 pm

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

djrichard , January 10, 2017 at 7:13 pm

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.

Yves Smith Post author , January 10, 2017 at 7:14 pm

MMT is not "a system". It is an empirical description of how fiat currencies work.

Saying you don't like MMT is like saying you don't like gravity.

steelhead23 , January 10, 2017 at 6:27 pm

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?

djrichard , January 10, 2017 at 3:03 pm

"but at some point this must and will end"

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.

Robert NYC , January 10, 2017 at 3:19 pm

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.

craazyboy , January 10, 2017 at 1:58 pm

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.

Someone tell Ben and Janet!!!!!!!!!!!!!!!!!

TosTrader , January 10, 2017 at 2:21 pm

"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.

Ranger Rick , January 10, 2017 at 11:47 am

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.

Ivy , January 10, 2017 at 12:08 pm

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.

[Jan 11, 2017] A fiat currency issuer can deficit spend without creating debt instruments

Jan 11, 2017 | www.nakedcapitalism.com
Yves Smith Post author , January 10, 2017 at 7:23 pm

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."

[Jan 11, 2017] The 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.

Jan 11, 2017 | www.nakedcapitalism.com
Jim Haygood , January 10, 2017 at 12:18 pm

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.

http://tinyurl.com/grgvnyl

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.

jsn , January 10, 2017 at 1:22 pm

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.

craazyboy , January 10, 2017 at 1:46 pm

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.

jsn , January 10, 2017 at 3:14 pm

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.

It would be interesting to see an audit!

RobertNYC , January 10, 2017 at 1:42 pm

"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.

jsn , January 10, 2017 at 3:17 pm

Personally, I'm looking forward to what happened next: the Regent toured France with a detachment Dragoons collecting gold from hoarders at bayonete point!

Tom Bradford , January 10, 2017 at 4:11 pm

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".

[Jan 11, 2017] Empire of chaos: 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.

Jan 11, 2017 | www.nakedcapitalism.com
Robert NYC , January 10, 2017 at 5:58 pm

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.

http://www.telegraph.co.uk/finance/financetopics/davos/12108569/World-faces-wave-of-epic-debt-defaults-fears-central-bank-veteran.html

Yves Smith Post author , January 10, 2017 at 7:31 pm

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.

RBHoughton , January 10, 2017 at 9:47 pm

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.

[Jan 11, 2017] January 10, 2017 at 12:17 pm

Jan 11, 2017 | www.nakedcapitalism.com

The whole "Wizard of Oz is a parable about monetary policy" thing turned out to have been made up by a high school teacher as a device for learning about the populist movement: https://grorarebookroom.wordpress.com/2014/02/01/mythbusting-the-wizard-of-oz-parable-on-populism/

djrichard , January 10, 2017 at 1:35 pm

See http://www.halcyon.com/piglet/Populism.htm which is another refutation of the Wizard of Oz as any kind of allegory to monetary theory.

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).

Matthew G. Saroff , January 10, 2017 at 12:18 pm

I agree with your basic assessment, but your analysis of OZ was created by high school history teacher Henry Littlefield in the 1960s as a metaphor :

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."

Yves Smith Post author , January 10, 2017 at 2:21 pm

Wikipedia points out:

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

https://en.wikipedia.org/wiki/Political_interpretations_of_The_Wonderful_Wizard_of_Oz

ekstase , January 10, 2017 at 6:50 pm

There's a fascinating interview with Yip Harburg, the lyricist for "The Wizard of Oz", from Democracy Now:
http://m.democracynow.org/stories/9873

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."

Art fights life, or something.

[Dec 11, 2016] TIPs and gold

www.nakedcapitalism.com

Jim Haygood December 10, 2016 at 8:47 am

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!

Arizona Slim December 10, 2016 at 10:28 am

Summer 2005 was when Tucson's housing bubble started hissing air. After years of tight inventory, there was a proliferation of properties for sale.

Some of those properties stayed on the market for years and many of them ended up in foreclosure.

Pat December 10, 2016 at 10:57 am

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.

Jim Haygood December 10, 2016 at 12:01 pm

Gold is anticorrelated to TIPS (Treasury Inflation Protected Securities) yields as shown in this chart:

https://marketrealist.imgix.net/uploads/2016/09/bondvsgold.png

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.

griffen December 10, 2016 at 5:45 pm

It's DOW 40,000 or bust. I'm holding out for that Weyland-Yutani merger to be announced any week now.

[Nov 19, 2016] We should not use the term capital when referring to credit/lending that is not related to economically real outputs

Notable quotes:
"... "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? ..."
Nov 19, 2016 | www.nakedcapitalism.com
Sound of the Suburbs November 19, 2016 at 8:27 am

You can only pillage the world once, though I think they are going for second helpings in Brazil right now.

tegnost November 19, 2016 at 11:13 am

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?

JF November 19, 2016 at 11:47 am

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.

Grebo November 19, 2016 at 1:19 pm

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.

fresno dan November 19, 2016 at 11:56 am

"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 .

Dave November 19, 2016 at 12:31 pm

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?

Three numbers hopefully to provide 'balance':

[Nov 19, 2016] Helicopter money by Stefan Gerlach

www.project-syndicate.org

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.

[Nov 16, 2016] If the unsecured credit lines that make the payments system function smoothly are liquidity, then are these credit lines also money?

Notable quotes:
"... ""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. ..."
Nov 16, 2016 | www.nakedcapitalism.com

financial matters November 16, 2016 at 7:50 am

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.

BecauseTradition November 16, 2016 at 8:55 am

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.

[Oct 28, 2016] 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.

Oct 28, 2016 | economistsview.typepad.com

RGC : , October 28, 2016 at 05:42 AM

Your Money

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.

(1)
http://www.brainyquote.com/quotes/authors/h/henry_ford_3.html
(2) http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

pgl -> RGC... , October 28, 2016 at 05:58 AM
"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.

RGC -> pgl... , October 28, 2016 at 06:23 AM
I said they incur some expenses.
pgl -> RGC... , October 28, 2016 at 07:18 AM
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.

RGC -> pgl... , October 28, 2016 at 07:29 AM
Should health insurance companies exist?

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.

pgl -> RGC... , October 28, 2016 at 05:59 AM
"banks make a lot of profit".

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.

RGC -> pgl... , October 28, 2016 at 06:27 AM
Jamie Dimon makes a bundle in comp, which reduces profit. Bankers are highly compensated for lending us our own money.

You defending banks now?

RGC -> RGC... , October 28, 2016 at 06:32 AM
Plus banks' access to public money means they get to blow up the economy periodically.
pgl -> RGC... , October 28, 2016 at 06:47 AM
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.
pgl -> RGC... , October 28, 2016 at 06:46 AM
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.
RGC -> pgl... , October 28, 2016 at 06:50 AM
And you are not refuting anything I said. What are the real issues?
pgl -> RGC... , October 28, 2016 at 07:19 AM
Yea I have. Which is pretty amazing since you have said nothing of substance.

What are the real issues? Do you even read the various posts our host puts up? Or do you just babble BS 24/7?

RGC -> pgl... , October 28, 2016 at 07:41 AM
What did you refute, specifically?
RGC -> pgl... , October 28, 2016 at 06:47 AM
But the product they are selling is your own money, and mine. They are basically legalized counterfeiters.
pgl -> RGC... , October 28, 2016 at 06:47 AM
You must love word salads.
anne -> pgl... , October 28, 2016 at 06:47 AM
https://en.wikipedia.org/wiki/Capital_asset_pricing_model

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.

pgl -> anne... , October 28, 2016 at 07:23 AM
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.

JohnH -> pgl... , October 28, 2016 at 07:56 AM
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!!!

Fred C. Dobbs -> RGC... , October 28, 2016 at 06:30 AM
It's a Wonderful Life movie clip:
Bailey vs Potter - Democrat vs Republi... https://youtu.be/n2G0n3035Ns via @YouTube

(from about 1:30)

It's A Wonderful Life Bank Run https://youtu.be/iPkJH6BT7dM via @YouTube

(from about 1:00)

See also: the Mae sisters, Fannie & Ginnie

https://en.wikipedia.org/wiki/Fannie_Mae

https://en.wikipedia.org/wiki/Government_National_Mortgage_Association


EMichael -> Fred C. Dobbs... , October 28, 2016 at 07:44 AM
Fred,


the "wonderful Life" thing is a perfect example for this topic.

kudos

EMichael -> RGC... , October 28, 2016 at 06:42 AM
The stupidity never stops.

Fantasy land bs.

Damn.

pgl -> EMichael... , October 28, 2016 at 06:48 AM
Notice when I tried to introduce some real economics to the discussion - he changed the subject.
EMichael -> pgl... , October 28, 2016 at 07:16 AM
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.

Which is why he stays in his own world.

EMichael -> EMichael... , October 28, 2016 at 07:16 AM
oops

"cannot work in the real world"

pgl -> EMichael... , October 28, 2016 at 07:24 AM
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."

http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

[Oct 23, 2016] Why money should not be considered to be a fuel for economics

Notable quotes:
"... 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? ..."
Oct 22, 2016 | www.nakedcapitalism.com
... ... ...

ReaderOfTeaLeaves made an important observation yesterday on a post by Bill Black , i n reply to a comment by another NC regular and sometimes guest blogger, Clive . It describes a set of seductively inaccurate metaphors used to depict banking, money, and finance. Needless to say, some of the recent coinages, like "sharing economy" are downright Orwellian yet taking hold, but the older ones, by being well worn tropes, are so routine that the implicit messaging gets nary a thought.

By ReaderOfTeaLeaves

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.

John Merryman October 22, 2016 at 7:21 am

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.

Never let a good crisis go to waste.

Edward Morbius October 22, 2016 at 8:54 pm

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.

PuzzleMonkey October 22, 2016 at 7:30 am

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.

scott 2 October 22, 2016 at 8:13 am

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?

BecauseTradition October 22, 2016 at 9:14 am

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.

Tinky October 22, 2016 at 9:28 am

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?

Pespi October 22, 2016 at 10:36 am

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.

craazyboy October 22, 2016 at 1:54 pm

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!

BecauseTradition October 22, 2016 at 11:48 am

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.

Tinky October 22, 2016 at 12:38 pm

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?

JTMcPhee October 22, 2016 at 12:55 pm

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…

John Zelnicker October 22, 2016 at 9:49 am

@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.

BecauseTradition October 22, 2016 at 10:08 am

Adding that deflation rewards risk-free money hoarding – a self-defeating strategy since progress requires taking risks.

OpenThePodBayDoorsHAL October 22, 2016 at 6:52 pm

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.

https://mises.org/library/deflating-deflation-myth

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.

OpenThePodBayDoorsHAL October 22, 2016 at 7:09 pm

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.

craazyboy October 22, 2016 at 7:19 pm

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.

Vatch October 22, 2016 at 8:15 pm

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.

craazyboy October 22, 2016 at 8:51 pm

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.)

OpenThePodBayDoorsHAL October 22, 2016 at 10:06 pm

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.

craazyboy October 22, 2016 at 10:24 pm

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.

Sluggeaux October 22, 2016 at 2:12 pm

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.

uncle tungsten October 22, 2016 at 10:07 pm

Ah! a new term is coined (pun intended):- fraudgineering always included in any sentence where the words "Wall Street" or a named bank is used.

Moneta October 22, 2016 at 8:32 am

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!

Moneta October 22, 2016 at 8:38 am

Services are a bigger measured part of our economy. Family members on farms would do all kinds of work or services but these were not recorded.

scott 2 October 22, 2016 at 8:57 am

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.

lyman alpha blob October 22, 2016 at 10:06 am

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.

John Zelnicker October 22, 2016 at 12:22 pm

@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.

TheCatSaid October 22, 2016 at 2:05 pm

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.

Steve H. October 22, 2016 at 8:37 am

Not sure if this is meta or not:

"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."

Howard S. Becker

JTMcPhee October 22, 2016 at 8:58 am

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…

griffen October 22, 2016 at 9:27 am

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.

Dave October 22, 2016 at 11:40 am

"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?

"The company store" is another one. Applepay?

"Papal indulgences" another. Hillary?

Word substitution is a fun game.

Dave October 22, 2016 at 11:48 am

Speaking of Big Brother, how can we forget "Thought leader"

diptherio October 22, 2016 at 12:24 pm

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…

Jeremy Grimm October 22, 2016 at 5:33 pm

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.

Steven October 22, 2016 at 12:28 pm

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.

Moneta October 22, 2016 at 1:27 pm

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.

redleg October 22, 2016 at 12:50 pm

All the analogues to fuel and engines, yet nobody takes the next step to Power. Power is the key to both engines and finance.

Hudson, Black, Keen and other non-mainstream people are exceptions, but is anyone listening to them besides this choir?

Edward Morbius October 22, 2016 at 8:51 pm

"Wealth, as Mr Hobbes says, is power." Adam Smith, Wealth of Nations . It's only the second discussion (after definition) of the term in the book.

Smith doesn't get everything right, but he's considerably more savvy and left-wing, bleeding-heart liberal than he's commonly given credit for.

Les Swift October 22, 2016 at 1:13 pm

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.

tongorad October 22, 2016 at 2:40 pm

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.

moneta October 22, 2016 at 2:44 pm

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.

Jeremy Grimm October 22, 2016 at 5:51 pm

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.

moneta October 22, 2016 at 6:13 pm

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.

Vatch October 22, 2016 at 8:25 pm

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!

Jeremy Grimm October 22, 2016 at 8:39 pm

I think you and I are on the same page.

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.

Orn October 22, 2016 at 1:17 pm

An alternate metaphor could be the slime mold .

knowbuddhau October 22, 2016 at 2:48 pm

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.

I like lyman alpha blob's mention of financial warfare, too. In 2010, forensic economists found confirmation of the "economic hit man hypothesis" by studying the effectiveness of the CIA's overseas efforts wrt US exports.
http://www.slate.com/articles/business/the_dismal_science/2010/05/industrial_espionage.html

If we agree that we need a most fundamental and profound change to our ways of being in the world, our use of metaphors is a great place to start.

Wade Riddick October 22, 2016 at 6:46 pm

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?

readerOfTeaLeaves October 22, 2016 at 7:16 pm

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 ;-)

[Sep 27, 2016] DeLong on helicopter money

Sep 27, 2016 | economistsview.typepad.com

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.

Some pundits like Krugman believe helicopter money won't be that effective "because the models tell him." We should try it and find out. Reply Tuesday, September 27, 2016 at 06:45 AM

reason -> Peter K.... , Tuesday, September 27, 2016 at 08:40 AM

"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?

pgl -> reason ... , Tuesday, September 27, 2016 at 09:08 AM
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.

Peter K. -> pgl... , Tuesday, September 27, 2016 at 01:05 PM
run a long stupid troll.

Go read some hack Republican analyses.

Peter K. -> reason ... , Tuesday, September 27, 2016 at 01:06 PM
DeLong is quoting Barro.
Paine -> Peter K.... , Tuesday, September 27, 2016 at 09:57 AM
Really it's Delong on the context that has produced a return to HM fantasies

I'm sure u agree

He doesn't endorse HM in this post does he ?

Peter K. -> Paine ... , Tuesday, September 27, 2016 at 01:09 PM
Sounds to me like he does:

"Now we face a choice:

[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.

[Sep 12, 2016] http://krugman.blogs.nytimes.com/2009/10/09/modified-goldbugism-at-the-wsj/

Sep 12, 2016 | blogs.nytimes.com

October 9, 2009

Modified Goldbugism At the WSJ
By Paul Krugman

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.

* http://online.wsj.com/article/SB10001424052748703746604574461473511618150.html

** http://bigpicture.typepad.com/comments/2008/03/malpass-ass.html

*** http://www.pkarchive.org/cranks/goldbug.html

**** http://braddelong.posterous.com/eichengreen-origins-and-nature

Reply Saturday, November 14, 2015 at 05:19 PM

anne said in reply to anne...

http://www.pkarchive.org/cranks/goldbug.html

November 22, 1996

The Gold Bug Variations
By Paul Krugman - Slate

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.

So where does gold enter the picture?...

Reply Saturday, November 14, 2015 at 05:21 PM

ax

[Apr 17, 2016] Towards a Theory of Shadow Money by Daniela Gabor

Notable quotes:
"... 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. ..."
April 16, 2016 | www.nakedcapitalism.com

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.

cnchal , April 16, 2016 at 4:10 am

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.

Robert Coutinho , April 16, 2016 at 7:32 am

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".

Jujeb , April 16, 2016 at 4:20 am

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.

abynormal , April 16, 2016 at 7:44 am

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

Stephen Verchinski , April 16, 2016 at 9:34 am

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.

ke, April 16, 2016 at 8:04 am

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.

Steve H. , April 16, 2016 at 9:27 am

– 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.

Watt4Bob , April 16, 2016 at 10:06 am

With regard to velocity;

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.

Jim Haygood , April 16, 2016 at 2:04 pm

Richard Thompson got it too:

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.

Watt4Bob , April 17, 2016 at 9:09 am

I'd flesh out that analogy a bit;

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.

Chauncey Gardiner , April 16, 2016 at 10:53 am

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.

washunate , April 16, 2016 at 11:38 am

Here's a simple theory: Shadow banking is government approved fraud.

cnchal, April 16, 2016 at 12:07 pm

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.

Paul Tioxon , April 16, 2016 at 2:20 pm

Motion seconded: Government sanctioned counterfeiting.

Keith , April 16, 2016 at 11:54 am

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.

susan the other , April 16, 2016 at 12:16 pm

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.

JTHcPhee , April 16, 2016 at 12:35 pm

…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

Paul Tioxon , April 16, 2016 at 12:38 pm

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!

craazyman , April 16, 2016 at 12:43 pm

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.

susan the other , April 16, 2016 at 2:18 pm

lovely to read you

Watt4Bob , April 17, 2016 at 8:58 am

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.

Jim Haygood , April 16, 2016 at 1:27 pm

'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.

cnchal , April 16, 2016 at 2:07 pm

Bagehot, eh.

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 .

Bas , April 16, 2016 at 1:30 pm

it's all been reduced to gambling with no meaningful value in "The House" to back it up. Money will disappear, like in Star Trek.

fresno dan , April 16, 2016 at 1:36 pm

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…

Jamie , April 16, 2016 at 4:46 pm

"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.

Sy Krass , April 16, 2016 at 10:41 pm

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?

HAHAHAHAHA!!!!!!!

financial matters , April 17, 2016 at 5:49 am

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.

Lambert Strether, April 17, 2016 at 7:22 am

This is reminscent of Gramsci's idea that the state and civil society are to be distinguished only for purposes of exposition.

ewmayer, April 17, 2016 at 4:45 pm

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.

[Mar 14, 2016] Theres Only One Buyer Keeping S P 500s Bull Market Alive

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. ..."
March 13, 2016 | Bloomberg Business

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.

[Jan 30, 2016] How Central Banks (and Even Keynes) Misled the Public About Banking and Money

Notable quotes:
"... 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… ..."
www.nakedcapitalism.com

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.

For me, the central analytical issue is the distinction between "payment" and "funding" .

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!

tricky rick , January 29, 2016 at 10:11 am

Chris Martenson and other "tin foil" folks have been laying this out in well documented studies for over a decade.

welcome too late to the party.

John Merryman , January 29, 2016 at 10:59 am

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.

Helmholtz Watson , January 29, 2016 at 11:06 am

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.

The truth right from the mouth of the worlds's oldest central bank. http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf

fresno dan , January 29, 2016 at 11:20 am

Yeah, I saw that. It is amazing that a supposedly foremost Princeton Nobel winning economist apparently doesn't understand where money comes from…

jsn , January 29, 2016 at 11:46 am

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?

larry , January 29, 2016 at 1:37 pm

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.

helmholtz watson , January 29, 2016 at 2:51 pm

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.

Christer Kamb , January 29, 2016 at 7:10 pm

Sorry Mr Watson but the swedish Riksbank is the world´s oldest central bank

fresno dan , January 29, 2016 at 11:18 am

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!

paulmeli , January 29, 2016 at 11:23 am

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 …

financial matters , January 29, 2016 at 11:31 am

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."

craazyman , January 29, 2016 at 11:31 am

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.

susan the other , January 29, 2016 at 12:28 pm

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.

susan the other , January 29, 2016 at 12:32 pm

ATP

craazyman , January 29, 2016 at 1:10 pm

very nice! you have always impressed me with your thoughtful and penetrating intelligence.

(even though you go off the wacko, foo-foo, hug-the-trees cliff sometimes.)

Clive , January 29, 2016 at 2:16 pm

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.

craazyman , January 29, 2016 at 2:45 pm

she's a full profeser of creative analysis. she hugs trees as an adjunct profeser of foo foo philosophy

craazyboy , January 29, 2016 at 4:16 pm

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???

Maude , January 29, 2016 at 11:33 am

You forgot one piece…

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.

Mustsign topost , January 29, 2016 at 12:08 pm

debt intermediation theory is this: consumer loans -> salary -> pension funds
kleptocracy is this: privatization -> state spending -> profit

Anon , January 29, 2016 at 12:09 pm

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.

diptherio , January 29, 2016 at 12:29 pm

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.

Anon , January 29, 2016 at 12:36 pm

diptherio:

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.

Skippy , January 29, 2016 at 6:28 pm

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.

Skippy , January 29, 2016 at 7:17 pm

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…

JeffC , January 29, 2016 at 9:29 pm

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.

JTMcPhee , January 29, 2016 at 4:57 pm

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?"

cnchal , January 29, 2016 at 10:50 pm

. . . but where does "wealth" originate

(MMT – Material Meets Tool X sales) – expenses = profit or loss. If it's profit, that is wealth. If it's loss that is hell.

nothing but the truth , January 29, 2016 at 7:59 pm

"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.

JTMcPhee , January 29, 2016 at 8:33 pm

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?

cnchal , January 29, 2016 at 11:32 pm

. . .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.

Helmholtz Watson , January 29, 2016 at 1:46 pm

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!

MaroonBulldog , January 29, 2016 at 6:25 pm

Q. How can that be?

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.

Blurtman , January 29, 2016 at 3:21 pm

Banks lend what they do not have.

MED , January 29, 2016 at 3:25 pm

For the TBTF banks, change the famous "money multiplier". up 10% per Billion

kevinearick , January 29, 2016 at 4:08 pm

Psychograpic Marketing, LSD & Mind Control

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?

Skippy , January 29, 2016 at 6:30 pm

From opti to me and from me to you….

http://nautil.us/issue/7/waste/blissed_out-fish-on-prozac

ke , January 29, 2016 at 8:52 pm

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.

Thank again

nothing but the truth , January 29, 2016 at 8:05 pm

keynes is describing a dollar based on gold standard.

your problem is that you refuse to see meaning in the real. you see meaning only in money. and money, now, is nothing. it is a fiction.

all these articles are symptoms of your cognitive dissonance. all your meaning is eventually money and money is eventually nothing.

and from this seems to come the idea that since money is nothing, reality can be created from nothing.

not so easy.

animalogic , January 29, 2016 at 9:35 pm

Fiat money is not a "nothing". But it can certainly become a nothing…if everyone loses belief it it.

Skippy , January 29, 2016 at 10:10 pm

How can one lose belief in each other – ?????

Darthbobber , January 30, 2016 at 12:15 am

"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.

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[Jan 04, 2016] Dollar Dominance Deconstructing the Myths and Untangling the Web

Notable quotes:
"... 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. ..."
Jan 04, 2016 | naked capitalism

washunate , January 4, 2016 at 10:43 am

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.

Synoia , January 4, 2016 at 10:50 am

The direct imperial threats include economic warfare, as displayed by the IMF and ECB. As demonstrated in Greece, Ukraine, and before Greece Ireland.

Synoia , January 4, 2016 at 10:47 am

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.

MyLessThanPrimeBeef , January 4, 2016 at 1:18 pm

Unless you entice, seduce, leave no other option for the workers but to borrow, at ever lower rates, thank God.

Then, you can export jobs overseas. Wait, that's how we have managed so far…that, and renting out rooms/beds/bathrooms in your apartment.

Left in Wisconsin , January 4, 2016 at 1:29 pm

"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.

[Dec 02, 2015] Proponents of the gold standard generally overstate the benefits of putting golden handcuffs on a central bank

pgl, December 02, 2015 at 05:48 AM

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.

anne said in reply to pgl...

The reference is necessary:

http://www.nytimes.com/2015/12/02/business/economy/the-good-old-days-of-the-gold-standard-not-really-historians-say.html

December 1, 2015

The Good Old Days of the Gold Standard? Not Really, Historians Say
By BINYAMIN APPELBAUM

[Sep 05, 2015] Fed Watch: If You Ever Wondered Whose Side The Federal Reserve Is On...

"...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%."
Sep 05, 2015 | Economist's View
Sep 05, 2015 | economistsview.typepad.com
Tim Duy:
If You Ever Wondered Whose Side The Federal Reserve Is On..., by Tim Duy: Catching up with Richmond Federal Reserve Jeffrey Lacker's speech. His dismissal of low wage growth numbers:
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.

Posted by Mark Thoma on Saturday, September 5, 2015 at 09:48 AM in Economics, Fed Watch, Monetary Policy | Permalink Comments (52)

pgl :

Let's unpack this spin:

"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.

http://www.businessinsider.com/why-china-has-become-so-big-in-africa-2015-1

pgl -> Dickeylee...

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:

http://theafricachannel.com/5-multinational-corporations-making-significant-investments-in-africa/

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?"

anne :

https://research.stlouisfed.org/fred2/graph/?g=1Jpv

January 30, 2015

Labor Share of Nonfarm Business Income and Real After-Tax Corporate
Profits Per Employee, 2000-2015

(Respectively indexed to 2000 and 2014)


Decline in labor share index:

100 - 89.4 = 10.6%


Increase in real dollar profits per employee:

15,139 - 6,218 = 8,921

8,921 / 6,218 = 143.5%

anne -> anne...

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%.

[Sep 05, 2015] RE: Inflation, the Fed, and the Big Picture (Links for 09-04-15)

"...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."
September 04, 2015 | Economist's View

RC AKA Darryl, Ron said...

RE: Inflation, the Fed, and the Big Picture

[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:]


https://www.project-syndicate.org/commentary/jackson-hole-banking-conference-inflation-by-carmen-reinhart-2015-09

...
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."

Anonymous said in reply to RC AKA Darryl, Ron...
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/qb110301.pdf

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.

[Sep 05, 2015] Deflation and Money

"...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"..."
Sep 05, 2015 | Economist's View
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.

http://macromarketmusings.blogspot.com/2015/09/revealed-preferences-fed-inflation.html

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?"

http://www.themoneyillusion.com/?p=30495

https://twitter.com/ObsoleteDogma/status/639877889979228160

Peter K. said in reply to Peter K....

"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

Egmont Kakarot-Handtke said...

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.

The correct formula for the market clearing price in the simplified consumption good industry is given here
https://commons.wikimedia.org/wiki/File:AXEC41.png

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 more differentiated and therefore better testable formula is given here
https://commons.wikimedia.org/wiki/File:AXEC39.png

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).

Egmont Kakarot-Handtke

References
Kakarot-Handtke, E. (2011). Reconstructing the Quantity Theory (I). SSRN Working Paper Series, 1895268: 1–28. URL http://ssrn.com/abstract=1895268.
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2489792.

Patrick said in reply to Egmont Kakarot-Handtke...

"if wage increases for the business sector as a whole lag behind productivity increases deflation occurs"

That certainly has the ring of truth to it.

The paradox of productivity?

Jason Smith said...

The relationship between money and prices is more complicated than a simple linear relationship can capture:

http://informationtransfereconomics.blogspot.com/2015/03/japan-inflation-update.html

spencer said...

Despite deflation in Japan, over the last five years real per capita GDP growth has been greater than in the US.

Of course you have to be careful of these types of comparisons when the Japanese population is actually falling.

anne said in reply to spencer...

https://research.stlouisfed.org/fred2/graph/?g=1LK4

August 4, 2014

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.

[Jul 30, 2015] How A Pork Bellies Trader And Milton Friedman Created The Greatest Trading Casino In World History

"...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."
economistsview.typepad.com
Jul 21, 2015 | Zero Hedge

"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."

*****

Source: The Great Deformation by David Stockman

falak pema

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.

hxc

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.

Check it out

The Perversion of Monetarism

MASTER OF UNIVERSE

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.

falak pema

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.

most-interesting-frog-world

Bear

"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.

[Jul 11, 2015] Gold Daily and Silver Weekly Charts - Some Group Is Sitting On These Markets

Jul 11, 2015 | jessescrossroadscafe.blogspot.com
"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.

Oh well. Interesting times.

Have a pleasant evening.

[Jun 29, 2015] The Standard Definition of Money is in Error by Yves Smith

June 29, 2015 | nakedcapitalism.com

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.

Originally published at Another Amateur Economist

The standard definition of money is in error.

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.

[Jun 19, 2015] Banks are Not Intermediaries of Loanable Funds – and Why This Matters by Yves Smith

June 19, 2015 | naked capitalism
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.

kumhof fig 1 17 jun

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

kumhof fig2 17 jun

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.

sardonic
June 19, 2015 at 11:05 am

This is not academese, it's the reality. Read the BoE explanation of the same in Money creation in the modern economy.

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:

http://www.alt-m.org/2015/06/04/ten-things-every-economist-should-know-about-the-gold-standard-2/

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.

http://www.federalreserve.gov/newsevents/press/orders/orders20080922a1.pdf

human, June 19, 2015 at 3:53 pm

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.

Benedict@Large, June 19, 2015 at 3:23 pm

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.

Benedict@Large, June 19, 2015 at 3:30 pm

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.

Angry Bear " The U.S. Inept Diplomacy, Indispensable Currency

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.

cross posted with Capital Ebbs and Flows

IMF profile of Hélène Rey

From a much longer IMF profile of Hélène Rey, professor of economics at the London Business School:

... 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 Market Valuation Exceeds Its Components' Actual Value

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  • 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.

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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.
            If 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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            • Re: (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) Homepage

            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.

          • Re:And OP is retarded. (Score:5, Interesting)

            by rwa2 (4391) * writes: on Monday May 18, 2015 @12:36PM (#49719179) Homepage Journal

            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?

    • Price to book? (Score:5, Insightful)

      by goombah99 (560566) writes: on Monday May 18, 2015 @11:21AM (#49718511)

      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.

    • Re:Does not understand the market, obviously. (Score:4, Insightful)

      by ScentCone (795499) writes: on Monday May 18, 2015 @11:22AM (#49718527)

      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.

[Apr 10, 2015] 'The Floating Kilogram' The Editor of the Sun Talks About His New Book On the Dollar Crisis

The New York Sun

By DAWN BENNETT, Adapted From Financial Myth Busting | April 5, 2015

http://www.nysun.com/national/the-floating-kilogram-the-editor-of-the-sun-talks/89117/

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.

Ms. Bennett: Seth, "The Floating Kilogram and other Essays on Money from The New York Sun." For any listeners not familiar with the Sun, can you bring them up to speed?

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.

[Apr 09, 2015] Notes on the Currency War - 'Old as Babylon and Evil as Hell'

Jan 01, 2013 | Jesse's Café Américain

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..."

Michèle Brand and Rémy Herrera, Dollar Imperialism 2015

"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."

Tacitus, Agricola

Ben Bernanke Was Right No Rate Normalization During My Lifetime

Zero Hedge

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.

As a reminder, this is what he said (via Reuters):

"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."

Yes, it really is.

[Mar 20, 2015] Lenin Was Right...

Mar 18, 2015 | Zero Hedge

Bear Markets Do Happen

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…

G-10-debt

Debt components to GDP, G-10 – click to enlarge.

Latina Lover

USSA , USSR, whats the difference?

[Mar 18, 2015] http://www.bbc.co.uk/news/business-31921011

bbc.co.uk

Warren , March 17, 2015 at 12:50 pm

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.

http://www.bbc.co.uk/news/business-31921011

marknesop , March 17, 2015 at 3:11 pm
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.

james, March 17, 2015 at 3:59 pm
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 –

http://www.moonofalabama.org/2015/03/the-end-of-the-us-dominated-international-money-system.html#comments

davidt, March 17, 2015 at 3:14 pm
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:

http://russia-insider.com/en/2015/03/17/4594

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.

http://us-russia.org/2982-why-the-minsk-2-settlement-of-the-ukrainian-crisis-will-hold.html

If there were an award for clear thinking then Sobell would have to be a prime candidate.

kat kan , March 17, 2015 at 5:14 pm
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.

davidt , March 17, 2015 at 6:17 pm
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.)

[Feb 27, 2015] Currency Wars

12 February 2015
"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."

Robert Wenzel, Cleveland Fed Accidentally Links to Paper Highly Critical of US Currency Market Interventions to Support Bretton Woods

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.

So try to keep this in perspective. These are very difficult times for those seeking safe havens. A major supplier of retail precious metals is publicly referring to a large number of their customers as 'crazy' even while there is a sea-change with central banks increasing their gold reserves (although it is clear the WGC is a bit blinded to China). Fed President Richard Fisher owns quite a bit of gold. Maybe he is crazy too.

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.

Have a pleasant evening.

[Jan 25, 2015] Within an individual economy fiat money has the enormous and – I think – key advantage of allowing for counter-cyclical fiscal policy

Tim Owen, January 25, 2015 at 3:54 pm

Funnily enough the IMF itself has admitted in its laconic way that austerity doesn't work:

http://www.theguardian.com/business/2013/jun/05/imf-underestimated-damage-austerity-would-do-to-greece

So I expect them to come out with a ringing endorsement of the new government.

..james, January 25, 2015 at 4:55 pm

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!

Oddlots, January 25, 2015 at 6:06 pm

(Roughly) Correct!

Syriza Wins and the NYT and WSJ Coverage Competes for Mendacity

http://neweconomicperspectives.org/2015/01/syriza-wins-nyt-wsj-coverage-competes-mendacity.html

"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.

Oddlots , January 25, 2015 at 6:09 pm

PS, if I wasn't clear I'm not really expecting a ringing endorsement from the IMF despite the white papers.

james@wpc , January 25, 2015 at 8:08 pm

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.

[Sep 28, 2014] It May Be Protracted, But It Is an Endgame Nonetheless

Jesse's Café Américain

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.

You can read about that here.

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.

Have a pleasant weekend.

[Feb 07, 2014] Investment and Insurance: Prospective Risk and Return in Various Precious Metal Investments

Jesse's Café Américain

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".

Nassim Taleb, Mathematical Definition, Mapping, and Detection of (Anti)Fragility


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.

[Mar 20, 2013] Gold Daily and Silver Weekly Charts - New Zealand Goes Cyprus-Style, RBNZ Responds

Jesse's Café Américain
"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."

Green Party Hits Out at NZ Government's Cyprus-Style Solution to Bank Failures

And the Reserve Bank of New Zealand responds:
"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."

Reserve Bank of New Zealand, Open Bank Resolution, 20 March 2013

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."

Antony C. Sutton

[Aug 19, 2012] In A Paper System, All Assets Are Backed by the Treasury Bond

08/17/2012

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

Guest Post: Overruled

Cross posted from MacroBusiness

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?

http://www.bloomberg.com/news/2011-04-16/draghi-sees-european-banks-raising-capital-within-a-year-1-.html

Blame it on the traders and ignore the agency of one. Obama should wear a habit.

[Jan 11, 2011] Resist Gold's Charms? by Tim

January 11, 2011

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.

Soros Gold Bubble at $1,375 as Miners Push Each Button to Tears -

BusinessWeek

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

[Dec 21, 2010] The Dark Side of the Gold Boom - BusinessWeek

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.

[Dec 21, 2010] Gold Buyers - Gold buyers and sellers should beware of shady dealers - Los Angeles Times

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."

[Dec 21, 2010] Jesse's Café Américain Gold Daily and Silver Weekly Charts - Bloomberg Apparently Does Not Like Gold

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.

Are ETFs Driving Up Gold Prices - Seeking Alpha

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.

FT.com - Comment - Opinion - America should open its vaults and sell gold

By Edwin Truman

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.

EDITOR'S CHOICE

beyondbrics: Bric Bullion series - Oct-12

In depth: Gold - Oct-12

Analysis: Gold: Value locked in - Sep-26

Interactive: What's driving gold? - Sep-24

FTfm: ETFs - Gold shines among the favoured - Sep-12

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.

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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...

Posted by Jesse at 11:11 AM

[Oct 04, 2010] On the Edge of History: Will Europe Join in Promoting the SDR as the Global Reserve Currency?

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...

Read the rest here.

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...

Read the rest here.

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.

Quote of the Day- Gold is "Hyper-Overbought"

Quote:

". . .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:

http://www.reuters.com/article/idUSN1837861720100518

From may 18, 2010

" "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.

http://wallstreetpit.com/28427-dennis-gartman-advises-investors-to-get-out-of-gold

taylorhr

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..

http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=Puts+to+Protect+your+Portfolio

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:

http://www.chartsrus.com/chart.php?image=http://www.sharelynx.com/chartsfixed/dowgold1900.gif

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.

http://stockcharts.com/c-sc/sc?s=$SPX:GLD&p=M&st=1975-01-01&en=(today)&i=t96081371127&r=8343

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:

http://mercenarytrader.com/2010/07/ignore-the-predictors-being-right-vs-making-money/

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…

Okay, spontaneous rant over… good weekend all…

The Lost Science of Money by Stephan Zarlenga

American Monetary Institute (AMI)- History of money, monetary ...

Review of a book by Stephen Zarlenga

INTERVIEW STEPHEN ZARLENGA INTERVIEW

Edward J. Dodson - Review of Stephen Zarlenga's The Lost Science of Money by Edward J. Dodson

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.

Gartman on the 'Mind Boggling' Gold Bubble -- Seeking Alpha

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...

This report at CNBC has a few more details:

"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.

shorl.com/frofrujostet...

S&P at 1100 is the thing of the moment, biggest runs on a bank is more than real.

Nov 16 03:52 PM |Report abuse| Link | Reply

as a person who has become financially independent SOLELY from allocating capital let me add some things here

Gold at these levels is not as a good a hedge in large cap multinationals which has moved in tandem with gold and provide cash flow

Nov 16 03:59 PM |Report abuse| Link | Reply

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.

Nov 16 04:04 PM |Report abuse| Link | Reply

Gold's Uptrend Is Driven by Leverage -- Seeking Alpha

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.

Thanks for the vids CB.

silvertrain - 16:03
#353834

Another vid here, although canada, still the same stuff..

http://watch.bnn.ca/#clip302139

Leo Kolivakis - 09:00

Schiff is an idiot and here is why:

Cheeky Bastard - 09:25

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.

Good luck

Rebel - 17:17

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.

huggy_in_london - 16:08

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.

akak - 15:23:

Leo, you are an idiot, and here is why:

"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.

wang - 14:56:

posted at WSB

Why gold could crash next week...
RobotTrader - Sat, May 15, 2010 - 12:31 PM

Frank Barbera ultra bearish, sees "heavy liquidation" in gold stocks
RobotTrader - Sat, May 15, 2010 - 12:21 PM

LeBalance - 15:18:

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.

The Fed and the nickel 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 here if 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. >

Like a Patient Etherized Upon a Table

Jesse's Café Américain

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.



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