Raising reserve requirements is a key component of the modern Jubilee plan. The idea of directly using reserve requirements does not occur to most Americans, simply because the Federal Reserve uses only open market operations to change liquidity levels.
But this week, China demonstrates the utility of reserve requirements as a tool to fight inflation (read more here).
In fact, China is demonstrating the real-world success of the Jubilee plan. After flooding the country with stimulus in the past year, the government is now counter-acting potential inflation by requiring banks to stockpile more money.
The Jubilee plan is slightly different, in that it would not randomly disburse stimulus. Rather, would unleash stimulus across the board by direct payoff of debt, simultaneously requiring banks to soak up the extra money by raising reserve requirements.
The total amount of money (currency and credit) in circulation would remain the same, but all debt payments would be eliminated, allowing the economy to restart itself without central government control.
Tuesday, January 12, 2010
Thursday, December 31, 2009
Why are We Facing a Jobless Recovery?
Most people view the economy in a primitive fashion, like a force of nature out of their control, as our ancestors viewed the fertility of the land. Unfortunately, this primitive conception of the economy is false in today's world. The industrial economy is a product of policy. Economic problems today require an informed political response, not just a "gee, sure hope it get's better next year" attitude.
For example, today we are being told that we face a jobless recovery, and we should expect to wait 5-10 years for unemployment to drop down to natural levels. But we are never told WHY this is so, why this recovery is so much worse than others.
Such obfuscation is not surprising, as the reason involves a deliberate exploitation of the masses by the parasitic financial elite. In plain terms, our governmental policy is to sacrifice the interests of the workers of America, for the sake of the interests of the bankers of America. Here's how:
It all starts with the price of land, residential and commercial property. In order for a general economic recovery to occur, those prices must fall. For job creation, quite simply, we need lower rents, which allows business formation, cost cutting, and economic expansion.
The big problem here is that if property values were allowed to fall, banks would be wiped out. Supporting property values props up banks, but keeps rents and costs high, preventing economic recovery.
But it is current economic policy to prevent banks from realizing their losses. Free market price discovery has been eliminated. Now, instead of mark-to-market, we have mark-to-fantasy, and instead of realizing losses on loans, we have extend-and-pretend. Debt is to be modified outward by rate reductions, deferral of reserves, deferral of amortization, or any method conceivable EXCEPT principal reduction.
This is a textbook example of how the parasitical banking class destroys the health of the larger economic body, as parasite bankers maintain their wealth while impoverishing the masses.
The solution is plain. Wipe out the debt, liquidate the banks, flush the parasites, and enable the real economy to get going again -- Jubilee! It is only a matter of political awareness and will.
For example, today we are being told that we face a jobless recovery, and we should expect to wait 5-10 years for unemployment to drop down to natural levels. But we are never told WHY this is so, why this recovery is so much worse than others.
Such obfuscation is not surprising, as the reason involves a deliberate exploitation of the masses by the parasitic financial elite. In plain terms, our governmental policy is to sacrifice the interests of the workers of America, for the sake of the interests of the bankers of America. Here's how:
It all starts with the price of land, residential and commercial property. In order for a general economic recovery to occur, those prices must fall. For job creation, quite simply, we need lower rents, which allows business formation, cost cutting, and economic expansion.
The big problem here is that if property values were allowed to fall, banks would be wiped out. Supporting property values props up banks, but keeps rents and costs high, preventing economic recovery.
But it is current economic policy to prevent banks from realizing their losses. Free market price discovery has been eliminated. Now, instead of mark-to-market, we have mark-to-fantasy, and instead of realizing losses on loans, we have extend-and-pretend. Debt is to be modified outward by rate reductions, deferral of reserves, deferral of amortization, or any method conceivable EXCEPT principal reduction.
This is a textbook example of how the parasitical banking class destroys the health of the larger economic body, as parasite bankers maintain their wealth while impoverishing the masses.
The solution is plain. Wipe out the debt, liquidate the banks, flush the parasites, and enable the real economy to get going again -- Jubilee! It is only a matter of political awareness and will.
Tuesday, December 22, 2009
Unavoidable Debt Trap Looms, According to Forbes
Clearly, the general awareness of the problem of debt is growing. Even Forbes is now proclaiming the inevitability of default. Forbes is only 1 or 2 layers away from the mainstream, so the idea has almost reached critical mass. More and more people are slowly realizing, the debt simply cannot be paid off, even if we wanted to.
Of course, to our banking class parasites, the point of the debt is not to pay it off, but to keep it floating, a perpetual yoke of slavery on the neck of the people. However, they have overplayed their hand, like all parasites, they cannot self-govern their own growth and now endanger the health of their host.
We are trapped between crushing debt payments that will literally devour the whole budget, crippling budget cuts that will destroy our governments, or onerous tax hikes that could destroy the economy.
Or..... Cancel the debt, destroy the parasites, and let the economy recover! It really is that simple. Repudiate the debt load, which will save our economy and way of life. In a word, JUBILEE!!!!
http://www.forbes.com/2009/12/18/government-budget-deficit-personal-finance-financial-advisor-network-treasury-debt.html
At all levels, federal, state, local and GSEs, the total public debt is now at 141% of GDP. That puts the United States in some elite company--only Japan, Lebanon and Zimbabwe are higher. That's only the start. Add household debt (highest in the world at 99% of GDP) and corporate debt (highest in the world at 317% of GDP, not even counting off-balance-sheet swaps and derivatives) and our total debt is 557% of GDP. Less than three years ago our total indebtedness crossed 500% of GDP for the first time."
Add the unfunded portion of entitlement programs and we're at 840% of GDP.
The world has not seen such debt levels in modern history. This debt is not serviceable. Imagine that total debt is 557% of GDP, without considering entitlements. The interest on the debt will consume all the tax revenues of the country in the not-too-distant future. Then there will be no way out but to create more debt in order to finance the old debt.
It assures a period of economic devastation. In a last, desperate attempt, politicians at the federal and local levels will raise taxes to astronomical heights to raise revenues. And that only assures destruction of the economy. Forget the fable of economic recovery. Unless there is a change in Washington by next year's election, there will be no way to turn back.
Of course, to our banking class parasites, the point of the debt is not to pay it off, but to keep it floating, a perpetual yoke of slavery on the neck of the people. However, they have overplayed their hand, like all parasites, they cannot self-govern their own growth and now endanger the health of their host.
We are trapped between crushing debt payments that will literally devour the whole budget, crippling budget cuts that will destroy our governments, or onerous tax hikes that could destroy the economy.
Or..... Cancel the debt, destroy the parasites, and let the economy recover! It really is that simple. Repudiate the debt load, which will save our economy and way of life. In a word, JUBILEE!!!!
http://www.forbes.com/2009/12/18/government-budget-deficit-personal-finance-financial-advisor-network-treasury-debt.html
At all levels, federal, state, local and GSEs, the total public debt is now at 141% of GDP. That puts the United States in some elite company--only Japan, Lebanon and Zimbabwe are higher. That's only the start. Add household debt (highest in the world at 99% of GDP) and corporate debt (highest in the world at 317% of GDP, not even counting off-balance-sheet swaps and derivatives) and our total debt is 557% of GDP. Less than three years ago our total indebtedness crossed 500% of GDP for the first time."
Add the unfunded portion of entitlement programs and we're at 840% of GDP.
The world has not seen such debt levels in modern history. This debt is not serviceable. Imagine that total debt is 557% of GDP, without considering entitlements. The interest on the debt will consume all the tax revenues of the country in the not-too-distant future. Then there will be no way out but to create more debt in order to finance the old debt.
It assures a period of economic devastation. In a last, desperate attempt, politicians at the federal and local levels will raise taxes to astronomical heights to raise revenues. And that only assures destruction of the economy. Forget the fable of economic recovery. Unless there is a change in Washington by next year's election, there will be no way to turn back.
Worker Co-Ops Gaining Traction in Cleveland
As I have written before (here), worker-owned businesses are the wave of the future, because they are a superior economic organization. This has been noted in a recent CNN article (here) discussing the application of the Spanish model in Cleveland. The advantages noted in this article include: educated and supported workers, reinvestment of profits into capital and human development, limitation of executive salaries, supply chain integration, and avoidance of external debt leverage.
Some Rust Belt planners and union leaders are feeling optimistic: they're taking inspiration from the Basque region of Spain, where a network of worker-owned cooperatives launched amid the rubble of the Spanish Civil War has grown to become the country's seventh-largest corporation, and among its most profitable.
The Mondragon Corp. (MCC), based in northern Spain, is a multilayered business group with 256 independent companies (more than 100 of which are worker-owned cooperatives) that employs more than 100,000 people. It has long been legendary among scholars and activists seeking to bolster workers' rights.
The Mondragon story began in 1941, when a Catholic priest, Jose Maria Arizmendiarrieta (often shortened to Arizmendi), found in the Basque town war-torn devastation where there had been a thriving manufacturing base. He opened a polytechnic school, which in 1956 spawned its first cooperative, a stove factory. Half a century later, the Mondragon enterprise encompasses firms making everything from machine tools to electronics to bicycles, along with a retail division, a university and a significant financial sector, with the large cooperative bank Caja Laboral at its core.
While many think of cooperatives as a small-scale hippie mainstay, the Mondragon Corp. is huge, hard-nosed business-wise and successful; in 2008, with Spain's economy in the doldrums, MCC's income rose 6%, to 16.8 billion euros. The Mondragon Corp. maintains its commitment to one-worker, one-vote democratic governance through a complex, carefully honed organizational structure in which the corporation serves as a kind of metacooperative for the individual companies. Through representatives and resources drawn from the larger network, it provides support for planning, research and generation funding for new businesses.
Several nonprofit and medical institutions in Cleveland have turned to the Mondragon model for a consortium of businesses that will provide needed services and bolster an impoverished community.
"There's a value in dealing with an informed workplace," says Kiel. In terms of problems that can arise, including safety, production and theft concerns, "if people feel a part of it, that makes solving the problem a lot easier."
He adds that the spread between the high and low salaries is limited so that the CEO earns no more than five times the lowest-earning entry-level employee. This follows the Mondragon template, which keeps the ratio down to 1 to 4 or 5
One hallmark of the Mondragon model is its use of capital. Rather than flowing into the pockets of executives and outside investors, a company's profits are distributed in a precise, democratic way; set aside as seed money for new cooperatives; distributed to regional nonprofits; or pooled into shared institutions like the university and research center. In other words, each individual cooperative gains long-term benefits from the financial assets of the whole.
The companies plan to develop more businesses and are researching possibilities "along the supply chain": trucking, retail, health and wellness, as well as a funding vehicle like Caja Laboral.
Arizmendi now employs 125 workers and annually generates $12 million in sales. Despite the economic downturn, the businesses remain strong and poised for growth. This in part owes to the collective decision-making model, says Hoover. "Worker-owned cooperatives are an innately conservative form. We didn't overleverage ourselves."
Some Rust Belt planners and union leaders are feeling optimistic: they're taking inspiration from the Basque region of Spain, where a network of worker-owned cooperatives launched amid the rubble of the Spanish Civil War has grown to become the country's seventh-largest corporation, and among its most profitable.
The Mondragon Corp. (MCC), based in northern Spain, is a multilayered business group with 256 independent companies (more than 100 of which are worker-owned cooperatives) that employs more than 100,000 people. It has long been legendary among scholars and activists seeking to bolster workers' rights.
The Mondragon story began in 1941, when a Catholic priest, Jose Maria Arizmendiarrieta (often shortened to Arizmendi), found in the Basque town war-torn devastation where there had been a thriving manufacturing base. He opened a polytechnic school, which in 1956 spawned its first cooperative, a stove factory. Half a century later, the Mondragon enterprise encompasses firms making everything from machine tools to electronics to bicycles, along with a retail division, a university and a significant financial sector, with the large cooperative bank Caja Laboral at its core.
While many think of cooperatives as a small-scale hippie mainstay, the Mondragon Corp. is huge, hard-nosed business-wise and successful; in 2008, with Spain's economy in the doldrums, MCC's income rose 6%, to 16.8 billion euros. The Mondragon Corp. maintains its commitment to one-worker, one-vote democratic governance through a complex, carefully honed organizational structure in which the corporation serves as a kind of metacooperative for the individual companies. Through representatives and resources drawn from the larger network, it provides support for planning, research and generation funding for new businesses.
Several nonprofit and medical institutions in Cleveland have turned to the Mondragon model for a consortium of businesses that will provide needed services and bolster an impoverished community.
"There's a value in dealing with an informed workplace," says Kiel. In terms of problems that can arise, including safety, production and theft concerns, "if people feel a part of it, that makes solving the problem a lot easier."
He adds that the spread between the high and low salaries is limited so that the CEO earns no more than five times the lowest-earning entry-level employee. This follows the Mondragon template, which keeps the ratio down to 1 to 4 or 5
One hallmark of the Mondragon model is its use of capital. Rather than flowing into the pockets of executives and outside investors, a company's profits are distributed in a precise, democratic way; set aside as seed money for new cooperatives; distributed to regional nonprofits; or pooled into shared institutions like the university and research center. In other words, each individual cooperative gains long-term benefits from the financial assets of the whole.
The companies plan to develop more businesses and are researching possibilities "along the supply chain": trucking, retail, health and wellness, as well as a funding vehicle like Caja Laboral.
Arizmendi now employs 125 workers and annually generates $12 million in sales. Despite the economic downturn, the businesses remain strong and poised for growth. This in part owes to the collective decision-making model, says Hoover. "Worker-owned cooperatives are an innately conservative form. We didn't overleverage ourselves."
Thursday, December 17, 2009
Ellen Brown Calls for National Debt Cancellation
Excellent article published yesterday by Ellen Brown, detailing the positive side of national debt cancellation. The banking class everywhere at all times attempts to load the commoners with heavy debt burdens. The commoners are starting to wake up.
Jubilee means freedom from exploitation!
http://www.truthout.org/1216097
Europe's small, debt-strapped countries could follow the lead of Argentina and simply walk away from their debts. That would shift the burden to the creditor countries, which could solve the problem merely by a change in accounting rules.
Local Currency for Local Development
Issuing and lending currency is the sovereign right of governments, and it is a right that Iceland and Latvia will lose if they join the EU, which forbids member nations to borrow from their own central banks. Latvia and Iceland both have natural resources that could be developed if they had the credit to do it; and with sovereign control over their local currencies, they could get that credit simply by creating it on the books of their own publicly-owned banks.
In fact, there is nothing extraordinary in that proposal. All private banks get the credit they lend simply by creating it on their books. Contrary to popular belief, banks do not lend their own money or their depositors' money. As the US Federal Reserve attests, banks lend new money, created by double-entry bookkeeping as a deposit of the borrower on one side of the bank's books and as an asset of the bank on the other.
Besides thawing frozen credit pipes, credit created by governments has the advantage that it can be issued interest-free. Eliminating the cost of interest can cut production costs dramatically.
According to a German study, interest composes 30 percent to 50 percent of everything we buy. Slashing interest costs can make projects such as low-cost housing, alternative energy development, and infrastructure construction not only sustainable but profitable for the government, while at the same time creating much-needed jobs.
Government-issued money to fund public projects has a long and successful history, going back at least to the early 18th century, when the American colony of Pennsylvania issued money that was both lent and spent by the local government into the economy. The result was an unprecedented period of prosperity, achieved without producing price inflation and without taxing the people.
The key is to use the newly-created money or credit for productive projects that increase goods and services, rather than for speculation or to pay off national debt in foreign currencies (the trap that Zimbabwe fell into). The national currency can be protected from speculators by imposing exchange controls, as Malaysia did in 1998; imposing capital controls, as Brazil and Taiwan are doing now; banning derivatives; and imposing a "Tobin tax," a small tax on trade in financial products.
Jubilee means freedom from exploitation!
http://www.truthout.org/1216097
Europe's small, debt-strapped countries could follow the lead of Argentina and simply walk away from their debts. That would shift the burden to the creditor countries, which could solve the problem merely by a change in accounting rules.
Local Currency for Local Development
Issuing and lending currency is the sovereign right of governments, and it is a right that Iceland and Latvia will lose if they join the EU, which forbids member nations to borrow from their own central banks. Latvia and Iceland both have natural resources that could be developed if they had the credit to do it; and with sovereign control over their local currencies, they could get that credit simply by creating it on the books of their own publicly-owned banks.
In fact, there is nothing extraordinary in that proposal. All private banks get the credit they lend simply by creating it on their books. Contrary to popular belief, banks do not lend their own money or their depositors' money. As the US Federal Reserve attests, banks lend new money, created by double-entry bookkeeping as a deposit of the borrower on one side of the bank's books and as an asset of the bank on the other.
Besides thawing frozen credit pipes, credit created by governments has the advantage that it can be issued interest-free. Eliminating the cost of interest can cut production costs dramatically.
According to a German study, interest composes 30 percent to 50 percent of everything we buy. Slashing interest costs can make projects such as low-cost housing, alternative energy development, and infrastructure construction not only sustainable but profitable for the government, while at the same time creating much-needed jobs.
Government-issued money to fund public projects has a long and successful history, going back at least to the early 18th century, when the American colony of Pennsylvania issued money that was both lent and spent by the local government into the economy. The result was an unprecedented period of prosperity, achieved without producing price inflation and without taxing the people.
The key is to use the newly-created money or credit for productive projects that increase goods and services, rather than for speculation or to pay off national debt in foreign currencies (the trap that Zimbabwe fell into). The national currency can be protected from speculators by imposing exchange controls, as Malaysia did in 1998; imposing capital controls, as Brazil and Taiwan are doing now; banning derivatives; and imposing a "Tobin tax," a small tax on trade in financial products.
Monday, December 14, 2009
Would U.S. Debt Default bring Armageddon?
Frankly, overblown rhetoric about the economy is perhaps the greatest obstacle facing economic and currency reformers. When a U.S. debt default is publicly declared by an Australian lawmaker to lead to Armageddon and the collapse of the world, it is hard to imagine a steeper wall to climb for Jubilee advocates.
To speak plainly, after a debt default, the main victims of economic collapse would be the banking classes, who profit obscenely from the current system of mass usury and financial manipulation, keeping massive debt loads piled on the backs of the common workers.
http://www.brisbanetimes.com.au/national/joyce-warns-of-us-armageddon-20091211-kmlu.html
THE OPPOSITION finance spokesman, Barnaby Joyce, believes the United States government could default on its debt, triggering an ''economic Armageddon'' which will make the recent global financial crisis pale into insignificance. Senator Joyce said yesterday he did not mean to alarm the public but there needed to be a debate about Australia's ''contingency plan'' for a sovereign debt default by the US or even by a local state government. ''A default by the US means complete economic collapse around the world and the question we have got to ask ourselves is where are we in that,'' Senator Joyce said.
Senator Joyce said that if the US recovered, global funds would flow back into North America. ''There will be only one way Australia will be able to keep funds here and that is by putting up interest rates, which will therefore bring real costs back to households,'' he said. ''That is the first scenario, which is extremely bad for Australia. The worse scenario is where the US doesn't repay its debt - the $2 trillion in debt it owes to the Chinese, the $1 trillion in debt it has to the Japanese and the $US1 trillion in debt to others - and then we are really nailed.
''The outcome is a shift away from the US dollar as the international trading currency and a shift to the Chinese yuan, and China becomes an immensely powerful player overnight. It's the real financial crisis, and the real financial crisis will mean this preamble we have just had pales into insignificance.''
Asked what sort of contingency plan he would advocate, Senator Joyce said it was like trying to prepare for a tidal wave but the local economy should have more self-reliance.
To speak plainly, after a debt default, the main victims of economic collapse would be the banking classes, who profit obscenely from the current system of mass usury and financial manipulation, keeping massive debt loads piled on the backs of the common workers.
http://www.brisbanetimes.com.au/national/joyce-warns-of-us-armageddon-20091211-kmlu.html
THE OPPOSITION finance spokesman, Barnaby Joyce, believes the United States government could default on its debt, triggering an ''economic Armageddon'' which will make the recent global financial crisis pale into insignificance. Senator Joyce said yesterday he did not mean to alarm the public but there needed to be a debate about Australia's ''contingency plan'' for a sovereign debt default by the US or even by a local state government. ''A default by the US means complete economic collapse around the world and the question we have got to ask ourselves is where are we in that,'' Senator Joyce said.
Senator Joyce said that if the US recovered, global funds would flow back into North America. ''There will be only one way Australia will be able to keep funds here and that is by putting up interest rates, which will therefore bring real costs back to households,'' he said. ''That is the first scenario, which is extremely bad for Australia. The worse scenario is where the US doesn't repay its debt - the $2 trillion in debt it owes to the Chinese, the $1 trillion in debt it has to the Japanese and the $US1 trillion in debt to others - and then we are really nailed.
''The outcome is a shift away from the US dollar as the international trading currency and a shift to the Chinese yuan, and China becomes an immensely powerful player overnight. It's the real financial crisis, and the real financial crisis will mean this preamble we have just had pales into insignificance.''
Asked what sort of contingency plan he would advocate, Senator Joyce said it was like trying to prepare for a tidal wave but the local economy should have more self-reliance.
Friday, November 13, 2009
Can the Whole World be Export-Driven?
News is all about the falling dollar causing panic across the world, as higher currencies undermine exporting efforts. Said the leader of Brazil's state development bank (source here): “We have to be careful that our exchange rate doesn’t appreciate too much as to deindustrialize the country. The capital goods industry has suffered tremendously.” Brazil's Finance Ministry says Brazil’s currency needs to weaken as much as 19 percent for sustainable economic growth. As another example, France’s Finance Minister also stated that her government favors a strong dollar as an appreciating euro threatens to hurt European exports.
Everyone wants to expor their way to prosperity, which begs the obvious question of how that could even be possible. Implicit is the obvious truth (obvious to everyone but brainwashed free-marketeers) that exports increase a country's wealth. Yet obviously, not everyone can be a net exporter!
The chief beneficiaries are, of course, Americans, for at least as long as the export-at-all-costs party lasts. Americans get access to the cheapest stuff on the planet, because everyone undercuts their own currency to keep their exports to America up.
Unfortunately, it also means that aforementioned and wisely despised deindustrialization occurs in America at the same time! woops
What are the foreigners even getting out of it? Rapidly depreciating dollars. The world is currently being flooded with dollars, pumping up developing economies. "An unprecedented net $47 billion flowed into equities in India, Indonesia, the Philippines, South Korea, Taiwan and Thailand in the last three quarters." and this: "Chile’s peso has strengthened 26 percent this year versus the dollar, the second-biggest gain among Latin American currencies after the 33 percent rise in the Brazilian real."
As long as US rates stay low, money will flow out of the US into other countries, in what is called the carry trade. Cheap imports flow in, dollars flow out.
And we stare years of chronic high-unemployment in the face! It's no wonder, is it??? The whole process is just wacky.
The only sustainable solution is balanced trade based on policies of local development.
Everyone wants to expor their way to prosperity, which begs the obvious question of how that could even be possible. Implicit is the obvious truth (obvious to everyone but brainwashed free-marketeers) that exports increase a country's wealth. Yet obviously, not everyone can be a net exporter!
The chief beneficiaries are, of course, Americans, for at least as long as the export-at-all-costs party lasts. Americans get access to the cheapest stuff on the planet, because everyone undercuts their own currency to keep their exports to America up.
Unfortunately, it also means that aforementioned and wisely despised deindustrialization occurs in America at the same time! woops
What are the foreigners even getting out of it? Rapidly depreciating dollars. The world is currently being flooded with dollars, pumping up developing economies. "An unprecedented net $47 billion flowed into equities in India, Indonesia, the Philippines, South Korea, Taiwan and Thailand in the last three quarters." and this: "Chile’s peso has strengthened 26 percent this year versus the dollar, the second-biggest gain among Latin American currencies after the 33 percent rise in the Brazilian real."
As long as US rates stay low, money will flow out of the US into other countries, in what is called the carry trade. Cheap imports flow in, dollars flow out.
And we stare years of chronic high-unemployment in the face! It's no wonder, is it??? The whole process is just wacky.
The only sustainable solution is balanced trade based on policies of local development.
Tuesday, November 10, 2009
Tokens as Alternative Money and Problems with Metallic Coins
What exactly is the difference between tokens and money? In many ways, none at all. Tokens are money. However, they are privately issued money. What we normally think of as money is just publicly-issued and government-controlled tokens.
For those wishing to start their own alternative currencies, keep in mind, there is nothing illegal about issuing your own private money supply, as long as your money does not look like government money (which would leave you open to charges of counterfeiting).
Tokens can also be seen as a subset of metalic money. When used for general trade, tokens were characterized by their composition from common metals like copper, rather than the standard precious metals used for official money like gold or silver.
The problem with using gold or silver for coins is that the metal itself has a value, and that value can change over time. Thus, if the value of the metal goes up, people will hoard the coin for its metal, rather than use the coin as money.
When people hoard coins for their valuable metal, the trade economy is affected by a shortage of money. As strange as it sounds, money shortages have plagued humankind since the dawn of history up into the modern era. Sometimes, when shortages of gold or silver money occur, people have often resorted to tokens (such as the fascinating case described here of privately-issued token usage in early modern England).
The use of multiple types of metal coins, such as in the system of bimetalism (using gold and silver) brings up the further problem of convertability. That is, in a multi-metal system, the coins have to be fixed in relation to each other (one gold piece equaling 17 silver pieces, for example). When one metal rises in price against the other, coins made of that metal will be hoarded, since their market ratio no longer equals their official exchange ratio.
Now, the advantage of tokens lies in their production from cheap and abundant metal. Tokens are also often stamped with money-denomination values below their metal value. That is, 100 dollars worth of copper might be used to create 200 dollars worth of tokens. This mass-production of cheap tokens helps meet the needs of daily commerce, alleviating the problems of money shortage.
A critical thinking question for the reader arises: what problem is created when coins are stamped with a greater value than their metal is worth?
The answer is: counterfeiting! If you can turn 100 dollars of metal into 200 dollars worth of coin, you can make a great profit by creating money. The production of paper money represents the ultimate spread between the cost of materials versus the value of the money produced, and so counterfeiting of paper money is a perpetual problem when it is used. Given our modern printing technology, the ability today to counterfeit paper money is much more widespread than the ability to counterfeit metal money.
The critical balance point which thwarts counterfeiting is when the cost of materials is exactly equal to the value of the money. Why counterfeit money, if the cost of the materials is equal to the value of money you'd produce? In that case, you wouldn't be making any money by counterfeiting, so why bother.
For anyone today considering the issue of an alternative currency, this balance point is key, since there is essentially no way to stop or punish counterfeiters when a private money supply is issued. The value of any currency issued should be carefully tied to the value of its underlying metal, thereby avoiding the twin problems of counterfeiting and hoarding.
Local artists can make tokens, like the Phoenix bux (pictured here). Or tokens can also be ordered from a number of private mints today, such as this one, which promises tokens of the same quality as government issued coins. The list of advantages of using tokens are parallel in many cases to the arguments made for using local alternative currencies, including promotion/advertisement/publicity, price discounting, seignorage (i.e. souvenir value), and captured/circulated/repeated business encouragment.
For those wishing to start their own alternative currencies, keep in mind, there is nothing illegal about issuing your own private money supply, as long as your money does not look like government money (which would leave you open to charges of counterfeiting).
Tokens can also be seen as a subset of metalic money. When used for general trade, tokens were characterized by their composition from common metals like copper, rather than the standard precious metals used for official money like gold or silver.
The problem with using gold or silver for coins is that the metal itself has a value, and that value can change over time. Thus, if the value of the metal goes up, people will hoard the coin for its metal, rather than use the coin as money.
When people hoard coins for their valuable metal, the trade economy is affected by a shortage of money. As strange as it sounds, money shortages have plagued humankind since the dawn of history up into the modern era. Sometimes, when shortages of gold or silver money occur, people have often resorted to tokens (such as the fascinating case described here of privately-issued token usage in early modern England).
The use of multiple types of metal coins, such as in the system of bimetalism (using gold and silver) brings up the further problem of convertability. That is, in a multi-metal system, the coins have to be fixed in relation to each other (one gold piece equaling 17 silver pieces, for example). When one metal rises in price against the other, coins made of that metal will be hoarded, since their market ratio no longer equals their official exchange ratio.
Now, the advantage of tokens lies in their production from cheap and abundant metal. Tokens are also often stamped with money-denomination values below their metal value. That is, 100 dollars worth of copper might be used to create 200 dollars worth of tokens. This mass-production of cheap tokens helps meet the needs of daily commerce, alleviating the problems of money shortage.
A critical thinking question for the reader arises: what problem is created when coins are stamped with a greater value than their metal is worth?
The answer is: counterfeiting! If you can turn 100 dollars of metal into 200 dollars worth of coin, you can make a great profit by creating money. The production of paper money represents the ultimate spread between the cost of materials versus the value of the money produced, and so counterfeiting of paper money is a perpetual problem when it is used. Given our modern printing technology, the ability today to counterfeit paper money is much more widespread than the ability to counterfeit metal money.
The critical balance point which thwarts counterfeiting is when the cost of materials is exactly equal to the value of the money. Why counterfeit money, if the cost of the materials is equal to the value of money you'd produce? In that case, you wouldn't be making any money by counterfeiting, so why bother.
For anyone today considering the issue of an alternative currency, this balance point is key, since there is essentially no way to stop or punish counterfeiters when a private money supply is issued. The value of any currency issued should be carefully tied to the value of its underlying metal, thereby avoiding the twin problems of counterfeiting and hoarding.
Local artists can make tokens, like the Phoenix bux (pictured here). Or tokens can also be ordered from a number of private mints today, such as this one, which promises tokens of the same quality as government issued coins. The list of advantages of using tokens are parallel in many cases to the arguments made for using local alternative currencies, including promotion/advertisement/publicity, price discounting, seignorage (i.e. souvenir value), and captured/circulated/repeated business encouragment.
Wednesday, November 4, 2009
Gold a Rising Force as Money
Gold is making a strong comeback as the international unit of account, as the world moves away from fiat paper dollars. It is actually quite amazing to watch monetary theory unfold before one's very eyes.
The fact is, fiat currencies are just fine for national/enclosed economies. It is only when trading between economies that a stable unit of account is a necessity. Gold, because of its relatively stable and constant supply, is the perfect solution to the need for this international unit of account.
Gold is undergoing a rapid international monetization to fullfill this role now, as the international community has decided to abandon the US dollar as reserve currency. As usual, the general public is generally clueless, because an Authority as not made an Official Announcement. But the game is on, albeit a secret game, played under the table, so as not to spook the markets in dollars and gold. Even played without Offical Announcement, the game is becoming obvious to the casual observer, with more open ackowledgements of central banks buying up gold and the price climbing a steep hill upward.
Obviously, central banks would prefer to purchase on dips, but there are no dips. The price is jump step climbing upward, relentlessly responding to demand, the demand which is trying to maintain itself as secretly and quietly as possible. There is an almost literal mad rush internationally right now to take physical possession of all gold reserves.
The abandonment of the dollar as the reserve currency is already starting to cause inflation in the US. That, along with continued record deficit spending, is going to ramp up inflation depite continued economic collapse and high unemployment. In other words, the worst of both worlds.
from http://news.goldseek.com/BullionVault/1257258074.php
Paul Mercier, a senior central banker [from the European Central Bank (ECB)] said official holders overall will no longer be net sellers of gold," said UBS analyst John Reade today, summing up the London Bullion Market Association's 2009 conference here in Edinburgh. "Given the Indian announcement overnight, that forecast's already true for this year. Central banks are now net buyers."
ECB markets manager, Mercier yesterday told the LBMA conference that although diminished from its early 20th-century role in the world's monetary system, gold continues to be an important asset in global reserves.
In private investor and institutional portfolios, "We've seen a move away from unallocated gold to allocated gold," said Neil Clift of J.P.Morgan Chase at a debate held at the LBMA's conference this morning. Commenting on the shift from unsecured credit accounts to physical positions held in secure custody, "[It means] the client owns their gold, there's no first lien over it, and they can come and take it away when they want."
"There will be a threat to the London market from overseas storage if we see the ETFs continue to grow, as we expect they will," Clift said, noting that Asian and Middle Eastern investors increasingly want exchange-traded products that vault in or near their home state – and are also priced in their domestic currency, rather than US Dollars.
Commenting on the much-discussed issue of bringing the different bodies representing London's bullion market together into some more formal organization – and which is likely to see "cleared forwards" for London gold offered by a formal exchange very shortly – "I think it's fantastic for the bullion market that the [Chicago Mercantile Exchange] is now accepting gold as collateral on other positions," said Key."We can expect to see other exchanges accepting gold as collateral over the next year, alongside dollars, currency, T-bonds."
The fact is, fiat currencies are just fine for national/enclosed economies. It is only when trading between economies that a stable unit of account is a necessity. Gold, because of its relatively stable and constant supply, is the perfect solution to the need for this international unit of account.
Gold is undergoing a rapid international monetization to fullfill this role now, as the international community has decided to abandon the US dollar as reserve currency. As usual, the general public is generally clueless, because an Authority as not made an Official Announcement. But the game is on, albeit a secret game, played under the table, so as not to spook the markets in dollars and gold. Even played without Offical Announcement, the game is becoming obvious to the casual observer, with more open ackowledgements of central banks buying up gold and the price climbing a steep hill upward.
Obviously, central banks would prefer to purchase on dips, but there are no dips. The price is jump step climbing upward, relentlessly responding to demand, the demand which is trying to maintain itself as secretly and quietly as possible. There is an almost literal mad rush internationally right now to take physical possession of all gold reserves.
The abandonment of the dollar as the reserve currency is already starting to cause inflation in the US. That, along with continued record deficit spending, is going to ramp up inflation depite continued economic collapse and high unemployment. In other words, the worst of both worlds.
from http://news.goldseek.com/BullionVault/1257258074.php
Paul Mercier, a senior central banker [from the European Central Bank (ECB)] said official holders overall will no longer be net sellers of gold," said UBS analyst John Reade today, summing up the London Bullion Market Association's 2009 conference here in Edinburgh. "Given the Indian announcement overnight, that forecast's already true for this year. Central banks are now net buyers."
ECB markets manager, Mercier yesterday told the LBMA conference that although diminished from its early 20th-century role in the world's monetary system, gold continues to be an important asset in global reserves.
In private investor and institutional portfolios, "We've seen a move away from unallocated gold to allocated gold," said Neil Clift of J.P.Morgan Chase at a debate held at the LBMA's conference this morning. Commenting on the shift from unsecured credit accounts to physical positions held in secure custody, "[It means] the client owns their gold, there's no first lien over it, and they can come and take it away when they want."
"There will be a threat to the London market from overseas storage if we see the ETFs continue to grow, as we expect they will," Clift said, noting that Asian and Middle Eastern investors increasingly want exchange-traded products that vault in or near their home state – and are also priced in their domestic currency, rather than US Dollars.
Commenting on the much-discussed issue of bringing the different bodies representing London's bullion market together into some more formal organization – and which is likely to see "cleared forwards" for London gold offered by a formal exchange very shortly – "I think it's fantastic for the bullion market that the [Chicago Mercantile Exchange] is now accepting gold as collateral on other positions," said Key."We can expect to see other exchanges accepting gold as collateral over the next year, alongside dollars, currency, T-bonds."
Tuesday, October 13, 2009
Jubilee as Protection against Fractional Reserve Banking
Imagine you had a $100 in your account, and your family needed some money. They all promise to pay you back, so you write a check for $400 to mom, $300 to dad, $200 to bro, and $100 to sis.
Inconceivable, right? Not if you call yourself a bank! Then it is perfectly legitimate. Welcome to the world of fractional reserve banking.
Fractional banking means that private parties can create money from scratch, then loan it out. Oh, yeah, AND require repayment on interest. On money they never had in the first place!
The money is made-up, but the debt is quite real! If you can't pay back their made-up money, with interest, they might just have the right to garnish your wages.
When looking at the big picture, the entire edifice of modern banking is a huge exploitation machine, run by the parasitic banking classes. Their method of operations is to create as much loan money as possible, because that means more profit for them. Thus, as you can see, it is the banks who are the primary drivers of unsustainable consumerism, perpetually encouraging and enabling debt burdens.
There is literally no end point, no natural limit to the amount of debt that banks will foist upon the commoners. The logic of competitive capitalism dictates the cut-throat competition to spread loan growth. The banking industry, just like biological parasites, will grow out of control until their host is destroyed. This is what Greenspan was referring to when he famously said his faith in capitalism was shaken: he naively assumed banks would regulate themselves to avoid self-destructive loan growth. The problem is, individual banks might want to restrict their own growth, but the banking system as a whole cannot. Banks who issue more debt simply crowd out and take over banks who issue less, thus ensuring out-of-control debt growth for the whole system.
The Jubilee cycle is like a regular innoculation and treatment, killing off the parasitic infestation of debt parasites. When bankers know that debt will automatically be forgiven, they will control their own debt-issuance. Why would they give out loans when they know the debt will be erased? At the beginning of the Jubilee cycle, long term loans, up to 50 years, are possible. As time gets closer to the Jubilee Year, loan terms are shortened. Naturally, banks would be far less likely to provide loans at all, as the risk of total loss is great if the debtor strings repayment out.
Under the fractional reserve system, banks are able to hoard wealth and power in a naked power grab. Jubilee offers protection against that power.
Now, some might suggest that we regulate banks, perhaps even eliminate fractional reserve banking altogether. Here is the problem:
As we know from history, money holders will attempt fractional reserve lending, getting away with it as much as they can. The proposal to regulate banks on that scale involves a massive state regulatory apparatus. As we know, bankers are expert at corrupting regulators, so even with the expense of a full regulatory regime, we cannot expect to ever truly eliminate fractional banking.
The Jubilee cycle would accomplish the best of all worlds: minimal government establishment, while leading banks to restrain themselves in accordinance with their own self-interests.
Inconceivable, right? Not if you call yourself a bank! Then it is perfectly legitimate. Welcome to the world of fractional reserve banking.
Fractional banking means that private parties can create money from scratch, then loan it out. Oh, yeah, AND require repayment on interest. On money they never had in the first place!
The money is made-up, but the debt is quite real! If you can't pay back their made-up money, with interest, they might just have the right to garnish your wages.
When looking at the big picture, the entire edifice of modern banking is a huge exploitation machine, run by the parasitic banking classes. Their method of operations is to create as much loan money as possible, because that means more profit for them. Thus, as you can see, it is the banks who are the primary drivers of unsustainable consumerism, perpetually encouraging and enabling debt burdens.
There is literally no end point, no natural limit to the amount of debt that banks will foist upon the commoners. The logic of competitive capitalism dictates the cut-throat competition to spread loan growth. The banking industry, just like biological parasites, will grow out of control until their host is destroyed. This is what Greenspan was referring to when he famously said his faith in capitalism was shaken: he naively assumed banks would regulate themselves to avoid self-destructive loan growth. The problem is, individual banks might want to restrict their own growth, but the banking system as a whole cannot. Banks who issue more debt simply crowd out and take over banks who issue less, thus ensuring out-of-control debt growth for the whole system.
The Jubilee cycle is like a regular innoculation and treatment, killing off the parasitic infestation of debt parasites. When bankers know that debt will automatically be forgiven, they will control their own debt-issuance. Why would they give out loans when they know the debt will be erased? At the beginning of the Jubilee cycle, long term loans, up to 50 years, are possible. As time gets closer to the Jubilee Year, loan terms are shortened. Naturally, banks would be far less likely to provide loans at all, as the risk of total loss is great if the debtor strings repayment out.
Under the fractional reserve system, banks are able to hoard wealth and power in a naked power grab. Jubilee offers protection against that power.
Now, some might suggest that we regulate banks, perhaps even eliminate fractional reserve banking altogether. Here is the problem:
As we know from history, money holders will attempt fractional reserve lending, getting away with it as much as they can. The proposal to regulate banks on that scale involves a massive state regulatory apparatus. As we know, bankers are expert at corrupting regulators, so even with the expense of a full regulatory regime, we cannot expect to ever truly eliminate fractional banking.
The Jubilee cycle would accomplish the best of all worlds: minimal government establishment, while leading banks to restrain themselves in accordinance with their own self-interests.
Thursday, October 8, 2009
The Necessity of the Jubilee Cycle in the Modern Economy
As detailed in my last article, the modern economic condition of primarily credit money creates a new economic dynamic:
Under traditional paper money schemes, the excessive issuance of money results in hyperinflation.
Under modern credit money schemes, the excessive issuance of money results in Minski moments of economic collapse because of unsustainable debt levels.
The ancient Jubilee cycle, extinguishing all debt every 50 years, is perfectly suited to this new modern condition. The Jubilee cycle would be the perfect restrictor and regulator of the Minski debt-collapse cycle, and is thus a necessity for economic stability in the modern world.
Many monetary theorists and reformers are looking backwards, and recommending that we reign in the Minski cycle by eliminating the fractional reserve banking system. However correct this proposal is on the theoretical level, it is impractical because time and knowledge cannot be undone. A similar critique faces those who would return us to the gold standard: it was tried, and abandoned, time has moved on. As much as we would like to return to a Constitutional system of limited government, Pandora's box has already been opened.
A debt-cancellation Jubilee is the best solution to our current economic situation, which was caused by excessive debt. The Jubilee system of periodic debt cancellation is the only way to keep it from happening again and again. The Jubilee cycle would be the bedrock of sustainable economic development, which is yet another long-range necessity which must be faced by forward-looking economic leaders.
Under traditional paper money schemes, the excessive issuance of money results in hyperinflation.
Under modern credit money schemes, the excessive issuance of money results in Minski moments of economic collapse because of unsustainable debt levels.
The ancient Jubilee cycle, extinguishing all debt every 50 years, is perfectly suited to this new modern condition. The Jubilee cycle would be the perfect restrictor and regulator of the Minski debt-collapse cycle, and is thus a necessity for economic stability in the modern world.
Many monetary theorists and reformers are looking backwards, and recommending that we reign in the Minski cycle by eliminating the fractional reserve banking system. However correct this proposal is on the theoretical level, it is impractical because time and knowledge cannot be undone. A similar critique faces those who would return us to the gold standard: it was tried, and abandoned, time has moved on. As much as we would like to return to a Constitutional system of limited government, Pandora's box has already been opened.
A debt-cancellation Jubilee is the best solution to our current economic situation, which was caused by excessive debt. The Jubilee system of periodic debt cancellation is the only way to keep it from happening again and again. The Jubilee cycle would be the bedrock of sustainable economic development, which is yet another long-range necessity which must be faced by forward-looking economic leaders.
Wednesday, October 7, 2009
The Dangers and Advantages of Credit Creation
Excellent article by Peter Warburton over at Gold Eagle, http://www.gold-eagle.com/gold_digest_01/warburton041801.html, that, although written in 2001, deals with many issues we are facing today. The central problem he addresses, especially as he came from a monetarist perspective, is the lack of connection between money expansion and inflation, the very issue at the center of the inflation/deflation debate today.
Warburton accounts for this puzzling phenomenon as due to the role of credit. The rise of the credit-based economy has radically changed the economic landscale since the 1980s. As he puts it, "On the one hand, it has enabled the monetary aggregates to grow much more slowly than the credit aggregates, helping to keep inflation lower. On the other hand, the non-bank credit avalanche has enabled a furious pace of fixed investment in physical assets that has promoted structural global excess capacity in virtually all manufactured products and exerted downward pressure on product prices."
In other words, credit is inherently non-inflationary, and it allows economic activity to the point of overproduction and oversupply, which is actually disinflationary.
Even though he was writting in 2001, Wharburton exactly describes the conditions of 2009, noting that monetary expansions are mainly caused by banking stress, as the troubled banks hoard the cash: "The more obvious are the system’s weaknesses, the greater is the fear of collapse and the larger the demand for liquidity within the financial markets. In these stressful episodes, it is the financial markets themselves that are the principal driving force behind the monetary expansion. Hence, there is relatively little monetary impact on the product and labour markets, that is, on prices and wages."
Thus, we have massive expansion of the monetary base without inflation, because the banks are just sitting on the money.
Wharburton posits that inflation due to monetary expansion is not to be found on the consumer price level, because it affects other sectors, especially in the value of the currency itself. The real price paid for over-expansion of credit is overproduction and malinvestment. The final outcome is debt deflation: "In the limit, the construction of excess capacity gives rise to debt default, as the idle portion of capacity does not earn an income and cannot service the debt that financed its construction." The result: "central banks preside over the creation of additional liquidity for the financial system in order to hold back the tide of debt defaults that would otherwise occur." Again, we witnessed this precisely as described.
The real cost of this credit destruction is paid by the currency: "The latent losses in the credit system, emanating from non-performing loans and defaulting bonds, represent a charge against the value of the currency, as surely as if the edges of the notes and coins had been trimmed away. " The main obstacle to realizing it, is that the debasement of any one currency is kept hidden by the fact that all national paper currencies are being debased in the same fashion.
Jubilee Analysis:
Credit creation is a form of resource allocation, functionally equivalent to money. In other words, a credit line allows you to purchase real labor and resources, in direct competition with cash purchasers. Thus, credit creation can drive up prices just like cash creation can. The advantage of credit creation over cash creation is the avoidance of hyper-inflationary effects, as credit is created and extinguished. The downside is the tendency towards malinvestment and debt-deflation when credit levels become too high.
This is THE fundamental issue flying right over the heads of the Hard Money types. The majority of money is not centrally issued. Sure, our currency is issued by the feds, but most money is functionally created by banks in the form of credit. The only way to eliminate the issuance of credit money by banks is to eliminate the system of fractional reserve banking.
Warburton accounts for this puzzling phenomenon as due to the role of credit. The rise of the credit-based economy has radically changed the economic landscale since the 1980s. As he puts it, "On the one hand, it has enabled the monetary aggregates to grow much more slowly than the credit aggregates, helping to keep inflation lower. On the other hand, the non-bank credit avalanche has enabled a furious pace of fixed investment in physical assets that has promoted structural global excess capacity in virtually all manufactured products and exerted downward pressure on product prices."
In other words, credit is inherently non-inflationary, and it allows economic activity to the point of overproduction and oversupply, which is actually disinflationary.
Even though he was writting in 2001, Wharburton exactly describes the conditions of 2009, noting that monetary expansions are mainly caused by banking stress, as the troubled banks hoard the cash: "The more obvious are the system’s weaknesses, the greater is the fear of collapse and the larger the demand for liquidity within the financial markets. In these stressful episodes, it is the financial markets themselves that are the principal driving force behind the monetary expansion. Hence, there is relatively little monetary impact on the product and labour markets, that is, on prices and wages."
Thus, we have massive expansion of the monetary base without inflation, because the banks are just sitting on the money.
Wharburton posits that inflation due to monetary expansion is not to be found on the consumer price level, because it affects other sectors, especially in the value of the currency itself. The real price paid for over-expansion of credit is overproduction and malinvestment. The final outcome is debt deflation: "In the limit, the construction of excess capacity gives rise to debt default, as the idle portion of capacity does not earn an income and cannot service the debt that financed its construction." The result: "central banks preside over the creation of additional liquidity for the financial system in order to hold back the tide of debt defaults that would otherwise occur." Again, we witnessed this precisely as described.
The real cost of this credit destruction is paid by the currency: "The latent losses in the credit system, emanating from non-performing loans and defaulting bonds, represent a charge against the value of the currency, as surely as if the edges of the notes and coins had been trimmed away. " The main obstacle to realizing it, is that the debasement of any one currency is kept hidden by the fact that all national paper currencies are being debased in the same fashion.
Jubilee Analysis:
Credit creation is a form of resource allocation, functionally equivalent to money. In other words, a credit line allows you to purchase real labor and resources, in direct competition with cash purchasers. Thus, credit creation can drive up prices just like cash creation can. The advantage of credit creation over cash creation is the avoidance of hyper-inflationary effects, as credit is created and extinguished. The downside is the tendency towards malinvestment and debt-deflation when credit levels become too high.
This is THE fundamental issue flying right over the heads of the Hard Money types. The majority of money is not centrally issued. Sure, our currency is issued by the feds, but most money is functionally created by banks in the form of credit. The only way to eliminate the issuance of credit money by banks is to eliminate the system of fractional reserve banking.
Tuesday, October 6, 2009
Dollar Replacement Rumbles Begin
Wow, what a night. The dollar falls sharply, with gold up up up, all due to the DENIED rumor of Gulf state movement to leave the dollar. The Independent yesterday released a bombshell of a report detailing a secret plot to abandon the dollar in the oil trade (http://www.independent.co.uk/news/business/news/the-demise-of-the-dollar-1798175.html). The process is supposed to take 9 years, but markets reacted sharply in the following 24 hours!
The most amazing part of the story is the American press's complete lack of coverage of it. With today's movement in the dollar and gold, it seems they will have to cover it. We shall see.
Reuters India reports:
"...analysts said that while individual countries would find it relatively easy to stop using the dollar in settling oil trades, as Iran has already done, replacing the currency in which oil is priced would require a massive effort. The newspaper story did not make clear how the change would work, and many analysts doubted it would occur any time soon."
Frankly, this is assurance without substance. Why would it require massive effort? It could be done tomorrow! We are approaching the borderline between orderly and disorderly collapse of the dollar, meaning, how long will it take?
Every major non-NATO country has already come out and said they desire dollar replacement, and the Gulf states have already publicly stated their desire for a regional currency, so the latest denials ring hollow:
The most amazing part of the story is the American press's complete lack of coverage of it. With today's movement in the dollar and gold, it seems they will have to cover it. We shall see.
Reuters India reports:
"...analysts said that while individual countries would find it relatively easy to stop using the dollar in settling oil trades, as Iran has already done, replacing the currency in which oil is priced would require a massive effort. The newspaper story did not make clear how the change would work, and many analysts doubted it would occur any time soon."
Frankly, this is assurance without substance. Why would it require massive effort? It could be done tomorrow! We are approaching the borderline between orderly and disorderly collapse of the dollar, meaning, how long will it take?
Every major non-NATO country has already come out and said they desire dollar replacement, and the Gulf states have already publicly stated their desire for a regional currency, so the latest denials ring hollow:
But top officials of Saudia Arabia and Russia, speaking on the sidelines of International Monetary Fund meetings in Istanbul, denied there were such talks. The two countries are the world's largest and second-largest oil exporters. Asked by reporters about the newspaper story, Saudi Arabia's central bank chief Muhammad al-Jasser said: "Absolutely incorrect." He repeated the same response when asked whether Saudi Arabia was in such talks. Kuwait's oil minister made similar remarks, while Russia's deputy finance minister Dmitry
Pankin said: "We did not discuss this at all." Algerian Finance Minister Karim Djoudi told Reuters: "Oil producing countries need to stabilise revenues but...I don't see a need for oil trade to be denominated differently."
Friday, October 2, 2009
Chartilist Monetary Theory Insanity
There is no doubt that operating under fiat currency introduces a new monetary theory that most people have not grasped, but the Chartilists have apparently jumped off the deep edge, as they have come up with a new theory of money that recommend larger government, zero interest rates, and expanding deficits.
Their basic argument appears to be that after the passing of the gold standard era in 1971, governments are no longer revenue-constrained, and thus, government money is free and goverment debt is just fine, better than fine, really, since government debt drives down interest rates and provides savings. To them, opposition to more government involvement and expanded deficits just boils down to "an ideological obsession that government is bad and private markets are good."
It seems we have run into another species of the modern Greenbackers, who believe that government money is now free, with the main difference being the Chartilists are based out of Australia. Frankly, these people are positively dangerous. I am tempted to attribute their lack of realistic thinking to the fact that they are leftists, and liberalism is defined as the substitution of fantasy for reality.
See, for example, this: "Imagine if the government saw through all the smokescreens and announced they were no longer issuing debt and would just continue to credit bank accounts as necessary to support full employment? The neo-liberals would scream inflation … but would soon run out of steam with that line of attack."
Also, this gem: "Why will inflation rise? With capacity utilisation rates so low around the world and spare labour capacity what will generate a widespread inflation? Perhaps oil prices? But that will be due to an olipolistic cartel (OPEC) and nothing to do with the deficits." (source quotes here: http://bilbo.economicoutlook.net/blog/?p=5219#more-5219)
The fundamental issue can be boiled down to the question: since fiat-currency issuing governments can print their own money, why collect taxes at all, why not just issue new money to pay for government expenditures? The proposition sounds simple and self-evident, but glosses over some very deep problems.
The most fundamental problem is this: a) money that is created without an accompanying creation of real wealth is inflationary and b) government action does not create wealth. Thus, governments that issue new money to cover current expenses quickly spiral off into an inflationary tailspin. Money created to fund a service is inflationary because once the service is performed, the money still remains and so we have an ever-expanding money supply.
Compare that with a pure credit clearing system, a la Thomas Greco, wherein mutual credit is spontaneously created and extinguished in a balanced fashion with every economic transaction. Such credit clearing is non-inflationary, since credit is created then extinguished. If money had to be created for each transaction instead of credit, the volume of money would quickly rise exponentially. This process accounts for such historical inflations as occured in colonial Canada when, in response to a coin shortage, playing cards became money (described here: http://www.micheloud.com/FXM/MH/canada.htm).
Thus, to balance government expenditures, taxes must be extracted in an equal amount. Any excess of government expenditure above the amount removed through taxation is, by definition, inflationary. That is the problem with government deficits. Deficit spending is inherently inflationary, as they introduce money into the system without the creation of wealth.
Now, some might object, government could theoretically introduce money to pay for wealth creation activities. That point is true, it could. But it doesn't. That is not that nature or function of modern government. We don't have a wing of government devoted to creating economic wealth, although the Chinese do, and it is working fantastically for them.
Our governments, like China's, could indeed create entire industries from scratch with fiat money, and produce no inflation. Such industries would be an economic positive if they competed with foreign industries, or created industries that otherwise did not exist at all. But the fact is, most of our government programs today fund only welfare programs, which are transfers of wealth, not wealth creating.
It is a standard Keynesian idea that in times of economic downturn, government ramp up spending to replace shrinking private spending. The idea makes perfect sense, and works wonderfully, when targetted on wealth-creating industry and not connected to the fact of high and increasing debt.
When stimulus money merely goes to filling budget gaps, while increasing the debt load, the treatment is worse than the disease, because the economic condition post-stimulus will be worse than it was pre-stimulus.
Their basic argument appears to be that after the passing of the gold standard era in 1971, governments are no longer revenue-constrained, and thus, government money is free and goverment debt is just fine, better than fine, really, since government debt drives down interest rates and provides savings. To them, opposition to more government involvement and expanded deficits just boils down to "an ideological obsession that government is bad and private markets are good."
It seems we have run into another species of the modern Greenbackers, who believe that government money is now free, with the main difference being the Chartilists are based out of Australia. Frankly, these people are positively dangerous. I am tempted to attribute their lack of realistic thinking to the fact that they are leftists, and liberalism is defined as the substitution of fantasy for reality.
See, for example, this: "Imagine if the government saw through all the smokescreens and announced they were no longer issuing debt and would just continue to credit bank accounts as necessary to support full employment? The neo-liberals would scream inflation … but would soon run out of steam with that line of attack."
Also, this gem: "Why will inflation rise? With capacity utilisation rates so low around the world and spare labour capacity what will generate a widespread inflation? Perhaps oil prices? But that will be due to an olipolistic cartel (OPEC) and nothing to do with the deficits." (source quotes here: http://bilbo.economicoutlook.net/blog/?p=5219#more-5219)
The fundamental issue can be boiled down to the question: since fiat-currency issuing governments can print their own money, why collect taxes at all, why not just issue new money to pay for government expenditures? The proposition sounds simple and self-evident, but glosses over some very deep problems.
The most fundamental problem is this: a) money that is created without an accompanying creation of real wealth is inflationary and b) government action does not create wealth. Thus, governments that issue new money to cover current expenses quickly spiral off into an inflationary tailspin. Money created to fund a service is inflationary because once the service is performed, the money still remains and so we have an ever-expanding money supply.
Compare that with a pure credit clearing system, a la Thomas Greco, wherein mutual credit is spontaneously created and extinguished in a balanced fashion with every economic transaction. Such credit clearing is non-inflationary, since credit is created then extinguished. If money had to be created for each transaction instead of credit, the volume of money would quickly rise exponentially. This process accounts for such historical inflations as occured in colonial Canada when, in response to a coin shortage, playing cards became money (described here: http://www.micheloud.com/FXM/MH/canada.htm).
Thus, to balance government expenditures, taxes must be extracted in an equal amount. Any excess of government expenditure above the amount removed through taxation is, by definition, inflationary. That is the problem with government deficits. Deficit spending is inherently inflationary, as they introduce money into the system without the creation of wealth.
Now, some might object, government could theoretically introduce money to pay for wealth creation activities. That point is true, it could. But it doesn't. That is not that nature or function of modern government. We don't have a wing of government devoted to creating economic wealth, although the Chinese do, and it is working fantastically for them.
Our governments, like China's, could indeed create entire industries from scratch with fiat money, and produce no inflation. Such industries would be an economic positive if they competed with foreign industries, or created industries that otherwise did not exist at all. But the fact is, most of our government programs today fund only welfare programs, which are transfers of wealth, not wealth creating.
It is a standard Keynesian idea that in times of economic downturn, government ramp up spending to replace shrinking private spending. The idea makes perfect sense, and works wonderfully, when targetted on wealth-creating industry and not connected to the fact of high and increasing debt.
When stimulus money merely goes to filling budget gaps, while increasing the debt load, the treatment is worse than the disease, because the economic condition post-stimulus will be worse than it was pre-stimulus.
Steve Keen Proves the People's Bailout Works Best
As I have been arguing all along, the only effective solution to debt deflation is cancellation of debt, and stimulus needs to go directly to the people, not to the banks. Perhaps Steve Keen cogitated over the comments I left on his blog, as he created a computer model to test the theory. Low and behold, his model proved the People's Bailout is correct: money given to banks is far less effective, even in theory, than money given directly to citizens.
As he puts it at his post http://www.debtdeflation.com/blogs/2009/09/19/it̢۪s-hard-being-a-bear-part-five-rescued/:
I’ve recently developed a genuinely monetary, credit-driven model of the economy, and one of its first insights is that Obama has been sold a pup on the right way to stimulate the economy: he would have got far more bang for his buck by giving the stimulus to the debtors rather than the creditors.
The model shows that you get far more “bang for your buck” by giving the money to firms, rather than banks. Unemployment falls in both case below the level that would have applied in the absence of the stimulus, but the reduction in unemployment is far greater when the firms get the stimulus, not the banks: unemployment peaks at over 18 percent without the stimulus, just over 13 percent with the stimulus going to the banks, but under 11 percent with the stimulus being given to the firms.
The time path of the recession is also greatly altered. The recession is shorter with the stimulus, but there’s actually a mini-boom in the middle of it with the firm-directed stimulus, versus a simply lower peak to unemployment with the bank-directed stimulus.
When a credit crunch strikes, the pipes pumping the bank reserves to the firms shrink dramatically, while the pipe going in the opposite direction expands, and all other pipes remain the same size.
If you then fill up the bank reserves reservoir—by the government pumping the extra $100 billion into it—that money will only trickle into the economy slowly. If however you put that money into the firms’ bank accounts, it would flow at an unchanged rate to the rest of the economy—the workers—while flowing more quickly to the banks as well, reducing debt levels.
So giving the stimulus to the debtors is a more potent way of reducing the impact of a credit crunch—the opposite of the advice given to Obama by his neoclassical advisers.
Obama has been sold a pup by neoclassical economics: not only did neoclassical theory help cause the crisis, by championing the growth of private debt and the asset bubbles it financed; it also is undermining efforts to reduce the severity of the crisis.
This is unfortunately the good news: the bad news is that this model only considers an economy undergoing a “credit crunch”, and not also one suffering from a serious debt overhang that only a direct reduction in debt can tackle. That is our actual problem, and while a stimulus will work for a while, the drag from debt-deleveraging is still present. The economy will therefore lapse back into recession soon after the stimulus is removed.
As he puts it at his post http://www.debtdeflation.com/blogs/2009/09/19/it̢۪s-hard-being-a-bear-part-five-rescued/:
I’ve recently developed a genuinely monetary, credit-driven model of the economy, and one of its first insights is that Obama has been sold a pup on the right way to stimulate the economy: he would have got far more bang for his buck by giving the stimulus to the debtors rather than the creditors.
The model shows that you get far more “bang for your buck” by giving the money to firms, rather than banks. Unemployment falls in both case below the level that would have applied in the absence of the stimulus, but the reduction in unemployment is far greater when the firms get the stimulus, not the banks: unemployment peaks at over 18 percent without the stimulus, just over 13 percent with the stimulus going to the banks, but under 11 percent with the stimulus being given to the firms.
The time path of the recession is also greatly altered. The recession is shorter with the stimulus, but there’s actually a mini-boom in the middle of it with the firm-directed stimulus, versus a simply lower peak to unemployment with the bank-directed stimulus.
When a credit crunch strikes, the pipes pumping the bank reserves to the firms shrink dramatically, while the pipe going in the opposite direction expands, and all other pipes remain the same size.
If you then fill up the bank reserves reservoir—by the government pumping the extra $100 billion into it—that money will only trickle into the economy slowly. If however you put that money into the firms’ bank accounts, it would flow at an unchanged rate to the rest of the economy—the workers—while flowing more quickly to the banks as well, reducing debt levels.
So giving the stimulus to the debtors is a more potent way of reducing the impact of a credit crunch—the opposite of the advice given to Obama by his neoclassical advisers.
Obama has been sold a pup by neoclassical economics: not only did neoclassical theory help cause the crisis, by championing the growth of private debt and the asset bubbles it financed; it also is undermining efforts to reduce the severity of the crisis.
This is unfortunately the good news: the bad news is that this model only considers an economy undergoing a “credit crunch”, and not also one suffering from a serious debt overhang that only a direct reduction in debt can tackle. That is our actual problem, and while a stimulus will work for a while, the drag from debt-deleveraging is still present. The economy will therefore lapse back into recession soon after the stimulus is removed.
Social Security Going Negative, Now
Add another log to the "inevitable inflation" fire: Social Security going negative now, not later. Because of our current debt deflation depression, revenues have fallen far, far faster than anticipated. Not only are revenues falling, many people are transferring their unemployment problem onto the Social Security system, as unemployment gets translated into early retirement and disability payments. The SS tax is not going to bring in enough to cover current SS payments, as soon as next year officially, probably right now in reality.
Remember, the SS Trust Fund is not a fund, and you certainly can't trust it. It is just an accounting trick. The SS tax money has been going into the general fund, helping mask the deficit, for years. The SS Trust Fund is simply a Treasury promise to pay.
Ok, so how will they pay, now that the SS tax is no longer sufficient to meet the SS payments? Raise the tax? Lower benefits? Those would take political will. Most likely: just print the money, driving up the debt and adding to the deficit, which is INHERENTLY INFLATIONARY!
It boggles my mind how the press stories continue to obfuscate and misinform. The AP article says, "The deficits — $10 billion in 2010 and $9 billion in 2011 — won't affect payments to retirees because Social Security has accumulated surpluses from previous years totaling $2.5 trillion."
They continue to push the mistaken idea that there is a surplus of money somewhere, a build up of cash that is waiting to be drawn down. The whole thing is a complete scam, abetted by people's economic and accounting ignorance. The article says, " Without a new fix, the $2.5 trillion in Social Security's trust funds will be exhausted in 2037. Those funds have actually been spent over the years on other government programs. They are now represented by government bonds, or IOUs, that will have to be repaid as Social Security draws down its trust fund."
So, how much sense does it make that the government can give a bond to another wing of government? It only seems to make sense as a linguistic sentence, it has no economic reality behind it whatsoever. Real translation: the money was taken in, it was spent, it is gone, there is no such thing as a trust fund. There is only a promise to pay, that is all, with no actual money to do the paying.
That is the psychology of hyperinflation. The refusal to cut budgets, the refusal to face reality. The money will be printed, there is no doubt.
http://www.google.com/hostednews/ap/article/ALeqM5h6BfoloJOnV0TeI7eIHC1ZWuBxygD9AVS0202
Remember, the SS Trust Fund is not a fund, and you certainly can't trust it. It is just an accounting trick. The SS tax money has been going into the general fund, helping mask the deficit, for years. The SS Trust Fund is simply a Treasury promise to pay.
Ok, so how will they pay, now that the SS tax is no longer sufficient to meet the SS payments? Raise the tax? Lower benefits? Those would take political will. Most likely: just print the money, driving up the debt and adding to the deficit, which is INHERENTLY INFLATIONARY!
It boggles my mind how the press stories continue to obfuscate and misinform. The AP article says, "The deficits — $10 billion in 2010 and $9 billion in 2011 — won't affect payments to retirees because Social Security has accumulated surpluses from previous years totaling $2.5 trillion."
They continue to push the mistaken idea that there is a surplus of money somewhere, a build up of cash that is waiting to be drawn down. The whole thing is a complete scam, abetted by people's economic and accounting ignorance. The article says, " Without a new fix, the $2.5 trillion in Social Security's trust funds will be exhausted in 2037. Those funds have actually been spent over the years on other government programs. They are now represented by government bonds, or IOUs, that will have to be repaid as Social Security draws down its trust fund."
So, how much sense does it make that the government can give a bond to another wing of government? It only seems to make sense as a linguistic sentence, it has no economic reality behind it whatsoever. Real translation: the money was taken in, it was spent, it is gone, there is no such thing as a trust fund. There is only a promise to pay, that is all, with no actual money to do the paying.
That is the psychology of hyperinflation. The refusal to cut budgets, the refusal to face reality. The money will be printed, there is no doubt.
http://www.google.com/hostednews/ap/article/ALeqM5h6BfoloJOnV0TeI7eIHC1ZWuBxygD9AVS0202
Wednesday, September 23, 2009
The Art of Not Seeing the Inflation Right in Front of Your Eyes
It is remarkable to me that analysts like the widely-read Mike Shedlock continue to miss the inflation that is going on all around us. It's like a passenger on a boat remarking on how slow the boat is going, when the engines are running 101 mph against a 100 mph current. [Of course, he also misses the obvious destruction unleashed by so-called free trade and is only just now hedging over to the side of debt-forgiveness, so it is probably accurate to say he is more clever than intelligent.]
Even the CPI, which is a misleading piece of junk when it comes to measuring total economy-wide inflation, is showing inflation. And this is in the face of the greatest destruction of household wealth in history, a worldwide industrial collapse, a worldwide credit collapse, and the highest levels of unemployment since the Great Depression. And inflation only took a couple months vacation!
The consumer price index peaked in August 2008 and bottomed in December 2008 (source). From then to August 2009, just a bit over half a year, the cpi has risen 2.7%.
To put this in perspective, from December 2000 to December 2006, the average increase in the CPI was 2.6% per year. So how is it that even during an historic collapse in consumer credit, household wealth, and employment, we are seeing higher than normal inflation on the consumer level???
And let's remeber, the CPI doesn't even measure the inflationary investment environment, aka bubblenomics, such as the bubble in stocks or the bubble in government bonds, or the previous inflation in home values prior to 2008.
Combine the above facts with the slow death spiral of the US dollar and the surging rate of federal debt spending, not to mention the monetization of the debt. The upcoming inflation is not going to be pretty.
Even the CPI, which is a misleading piece of junk when it comes to measuring total economy-wide inflation, is showing inflation. And this is in the face of the greatest destruction of household wealth in history, a worldwide industrial collapse, a worldwide credit collapse, and the highest levels of unemployment since the Great Depression. And inflation only took a couple months vacation!
The consumer price index peaked in August 2008 and bottomed in December 2008 (source). From then to August 2009, just a bit over half a year, the cpi has risen 2.7%.
To put this in perspective, from December 2000 to December 2006, the average increase in the CPI was 2.6% per year. So how is it that even during an historic collapse in consumer credit, household wealth, and employment, we are seeing higher than normal inflation on the consumer level???
And let's remeber, the CPI doesn't even measure the inflationary investment environment, aka bubblenomics, such as the bubble in stocks or the bubble in government bonds, or the previous inflation in home values prior to 2008.
Combine the above facts with the slow death spiral of the US dollar and the surging rate of federal debt spending, not to mention the monetization of the debt. The upcoming inflation is not going to be pretty.
Thursday, September 17, 2009
Worker Owned Businesses - the Wave of the Future
Interesting spotlight on worker-owned businesses in the CNN Small Business section (here).
In theory, the worker-owned business (WOB) should be superior to a non-WOB. For one, the WOB would have a more motivated employee base.
More importantly even than that, the WOB is simply an economically superior entity. Because profits are not being siphoned off to an ownership group, the WOB should also be able to operate at lower margins. For the WOB, the bare minimum cost is employee salaries, but for the non-WOB, the bare minimum is employee salaries plus ownership profits. In tough times, the WOB becomes more competitive because it can lower employee salaries and still operate at full power. A non-WOB has to fire employees, which leads to lower overall output, forcing the understaffed business to operate at a competitive disadvantage.
So, why don't we see more WOBs? Ignorance and capital barriers are the main forces preventing WOBs from proliferating. Ignorance, simply because most people have never heard or thought of such a business arrangement. Capital barriers, because most people who would like the idea of a WOB are too poor to set one up.
Some might say that greed is a barrier to WOBs, but that is not true. It is true that most people who have the money to start a business are dreaming of their own personal enrichment. However, the power of greed can be harnessed to advantage WOBs as well, specifically, the greed of the disemplowered worker.
The WOB cannot be sold to the general public on the basis of overcoming greed or other utopian ideals. Such economic utopianism has failed time and time again. The establishment of the WOB is an act of greed by the workers who establish it, and that fact should be recognized. The purpose of the WOB is to leverage its inherent advantages to wipe other non-WOBs out of the market.
Even the barrier of capital is somewhat of an illusion. A business that requires 20K to capitalize is out of reach for the average worker. But say that business requires 10 employees -- that is really just a capital barrier of 2K per employee, which is not out of reach.
In the end, the establishment of a WOB is mainly prevented by ignorance, ignorance of its possibility and ignorance of how to accomplish it.
It is no accident that business textbooks do not list the WOB as one of the basic business entity forms. That is part of the conspiracy of intentional ignorance that keeps people enslaved. The artificial constraint of possibilities is the ultimate method of thought control, effectively preventing people from even contemplating certain lines of thought.
The victory of WOB is substantially enabled simply by publicizing their possibility. By making intelligent but dispossessed people aware of their possibility, the natural creativity of humankind is unleashed, making their implementation an inevitability.
In theory, the worker-owned business (WOB) should be superior to a non-WOB. For one, the WOB would have a more motivated employee base.
More importantly even than that, the WOB is simply an economically superior entity. Because profits are not being siphoned off to an ownership group, the WOB should also be able to operate at lower margins. For the WOB, the bare minimum cost is employee salaries, but for the non-WOB, the bare minimum is employee salaries plus ownership profits. In tough times, the WOB becomes more competitive because it can lower employee salaries and still operate at full power. A non-WOB has to fire employees, which leads to lower overall output, forcing the understaffed business to operate at a competitive disadvantage.
So, why don't we see more WOBs? Ignorance and capital barriers are the main forces preventing WOBs from proliferating. Ignorance, simply because most people have never heard or thought of such a business arrangement. Capital barriers, because most people who would like the idea of a WOB are too poor to set one up.
Some might say that greed is a barrier to WOBs, but that is not true. It is true that most people who have the money to start a business are dreaming of their own personal enrichment. However, the power of greed can be harnessed to advantage WOBs as well, specifically, the greed of the disemplowered worker.
The WOB cannot be sold to the general public on the basis of overcoming greed or other utopian ideals. Such economic utopianism has failed time and time again. The establishment of the WOB is an act of greed by the workers who establish it, and that fact should be recognized. The purpose of the WOB is to leverage its inherent advantages to wipe other non-WOBs out of the market.
Even the barrier of capital is somewhat of an illusion. A business that requires 20K to capitalize is out of reach for the average worker. But say that business requires 10 employees -- that is really just a capital barrier of 2K per employee, which is not out of reach.
In the end, the establishment of a WOB is mainly prevented by ignorance, ignorance of its possibility and ignorance of how to accomplish it.
It is no accident that business textbooks do not list the WOB as one of the basic business entity forms. That is part of the conspiracy of intentional ignorance that keeps people enslaved. The artificial constraint of possibilities is the ultimate method of thought control, effectively preventing people from even contemplating certain lines of thought.
The victory of WOB is substantially enabled simply by publicizing their possibility. By making intelligent but dispossessed people aware of their possibility, the natural creativity of humankind is unleashed, making their implementation an inevitability.
Friday, September 11, 2009
Why is Treasury Demand Still Strong
Many of us have been waiting for the market for US debt to collapse, but the demand seems to be increasing? What is going on?
In short, the banks need somewhere to park all the excess reserve money they have on hand. The last thing they want to do is invest it in the real economy during a deflation. They are just riding it out, holding cash, as the real economy crashes. At some point, they will swoop back in, picking up dollars for dimes.
Why do they have so much reserve money now? Government bailouts! Lovely pattern isn't it? A pattern sometimes known as the clusterfuck...
Government bails out banks, banks use the money to buy government debt. Economy continues to grind down and future prospects continue to darken.
Welcome to Screw-ville, baby, population: YOU!
http://www.bloomberg.com/apps/news?pid=20601087&sid=aEZxetP0Q2Zw
Treasury Bond Auctions Show Insatiable Debt Demand
Sept. 11 (Bloomberg) -- The U.S. Treasury Department’s auctions this week of $70 billion in notes and bonds shows the unprecedented amount of debt being sold to finance the record budget deficit is failing to curb investor demand.
Fixed-income investors can’t see a recovery strong enough to spur central banks to raise interest rates anytime soon, especially with the Obama administration forecasting that unemployment in the U.S. -- the world’s largest economy -- will rise above 10 percent in the first quarter.
“The auction shows investors are not afraid of inflation going forward,” said Ira Jersey, an interest-rate strategist in New York at primary dealer RBC Capital Markets. “There was a lot of cash on the sidelines that needed to go to work.”
In short, the banks need somewhere to park all the excess reserve money they have on hand. The last thing they want to do is invest it in the real economy during a deflation. They are just riding it out, holding cash, as the real economy crashes. At some point, they will swoop back in, picking up dollars for dimes.
Why do they have so much reserve money now? Government bailouts! Lovely pattern isn't it? A pattern sometimes known as the clusterfuck...
Government bails out banks, banks use the money to buy government debt. Economy continues to grind down and future prospects continue to darken.
Welcome to Screw-ville, baby, population: YOU!
http://www.bloomberg.com/apps/news?pid=20601087&sid=aEZxetP0Q2Zw
Treasury Bond Auctions Show Insatiable Debt Demand
Sept. 11 (Bloomberg) -- The U.S. Treasury Department’s auctions this week of $70 billion in notes and bonds shows the unprecedented amount of debt being sold to finance the record budget deficit is failing to curb investor demand.
Fixed-income investors can’t see a recovery strong enough to spur central banks to raise interest rates anytime soon, especially with the Obama administration forecasting that unemployment in the U.S. -- the world’s largest economy -- will rise above 10 percent in the first quarter.
“The auction shows investors are not afraid of inflation going forward,” said Ira Jersey, an interest-rate strategist in New York at primary dealer RBC Capital Markets. “There was a lot of cash on the sidelines that needed to go to work.”
Global Trade, Debt, and Stimulus: a short Explanation
The Chinese run a large trade surplus with the US. This leads them to have a huge stockpile of dollars. This allows them to peg their own currency to whatever dollar value they want. Since they do all their foreign trade in dollars, there is simply no international market for their domestic currency, so international traders are simply shut out. (For other countries who do trade their currencies on the international market, lacking a supply of dollars means that currency traders could make runs on their currency, and the buying and selling of it would be out of their control.)
The surplus of extra dollars leaves the Chinese with a question of what to do with those dollars. In the past, they were content to invest in US debt securities, in effect, expanding their supply of dollars. However, stockpiling dollars is good for the Chinese in absolute terms, because dollars are the international trade currency. Thus, with extra dollars, they can buy anything else in the world.
When the international collapse in trade happened last year, many analysts thought China would be hit hard, because they are so export-dependent. However, they responded to the collapse in export trade with an almost unbelievably large dose of domestic spending. This is where their dollar stockpile came in, because they were able to stimulate their own economy by spending all the dollars they had stockpiled buying raw materials.
Oil, copper, rare elements, whatever they wanted, they were able to buy, using their dollars. They have also been investing heavily in gold, although not for use in industrial stimulus, but as a hedge against dollar collapse.
They could then pay their citizens in their own currency to do the work. Printing out their own money for domestic projects was not necessarily inflationary. For one, it was partially just holding the line, fighting deflation and unemployment from the collapse in international trade. For another, it can’t cause a currency devaluation, because their currency is not traded internationally.
The same process, printing out your own money, does not work for making international payments. Foreigners will see that you are diluting your money, and the exchange rate will fall. This defeats the purpose of printing more money in the first place, since it now costs more for the same trade.
For this reason, many times throughout world history, two types of money are used, one for domestic trade, one for international trade. For example, the US went off the gold standard for domestic dollars in 1933, but didn’t go off the gold standard for international dollars until 1971. It is also the reason why the world is clamoring for a new international trade currency now. International trade needs an absolute standard of measure, to prevent countries from screwing the system by printing more of their own currency (such as they see the US doing now).
So, with their stimulus money, the Chinese have been stockpiling raw materials and using them to put their people to work on infrastructure projects. This is true capital investment, and increases their wealth-creating capacity for the future, as well as putting people to work today.
Our stimulus money is not based on a trade surplus, but is simply based on diluting the dollar through deficit spending and monetization of government debt. Nor is our stimulus money providing the basis for future wealth creation or even repairing old infrastructure. Our stimulus money is simply covering budget shortfalls and continuing welfare payments. Thus, we will be in a worse position when the stimulus ends, having the same economic condition, but then with a higher debt load.
Looking forward, the US economy is in between a rock and a hard place. Keeping the dollar as the international reserve currency means that the US will continue to have its industrial base undercut by cheaper foreign competition and be the target for mass immigration because of the overvalued dollar. When the change finally happens, and the dollar is removed as international reserve, the US faces a massive inflation, from the return of dollars to domestic use and currency devaluation. The longer we wait, the worse the economic collapse will be when it does happen, since we will have to rebuild our industrial economy from scratch.
The only solution to that guaranteed eventuality is to take aggressive proactive steps, sooner rather than later. For example, the US should take decisive steps to safeguard its industrial base now, while the dollar is strong, rather than later, after currency collapse. The US should also cease all inflationary policies (such as deficit spending and monetization of debt), which are literally driving the world away from the dollar reserve standard. An even more radical approach would involve repudiation of the national debt, leaving the rest of the world holding the bag of worthless paper, and reinvesting in America’s industrial powerbase through protection from imports and outsourcing/off shoring.
In short, Americans should start thinking of themselves a people, rather than just as expendable units of profit manipulation in an international economy.
The surplus of extra dollars leaves the Chinese with a question of what to do with those dollars. In the past, they were content to invest in US debt securities, in effect, expanding their supply of dollars. However, stockpiling dollars is good for the Chinese in absolute terms, because dollars are the international trade currency. Thus, with extra dollars, they can buy anything else in the world.
When the international collapse in trade happened last year, many analysts thought China would be hit hard, because they are so export-dependent. However, they responded to the collapse in export trade with an almost unbelievably large dose of domestic spending. This is where their dollar stockpile came in, because they were able to stimulate their own economy by spending all the dollars they had stockpiled buying raw materials.
Oil, copper, rare elements, whatever they wanted, they were able to buy, using their dollars. They have also been investing heavily in gold, although not for use in industrial stimulus, but as a hedge against dollar collapse.
They could then pay their citizens in their own currency to do the work. Printing out their own money for domestic projects was not necessarily inflationary. For one, it was partially just holding the line, fighting deflation and unemployment from the collapse in international trade. For another, it can’t cause a currency devaluation, because their currency is not traded internationally.
The same process, printing out your own money, does not work for making international payments. Foreigners will see that you are diluting your money, and the exchange rate will fall. This defeats the purpose of printing more money in the first place, since it now costs more for the same trade.
For this reason, many times throughout world history, two types of money are used, one for domestic trade, one for international trade. For example, the US went off the gold standard for domestic dollars in 1933, but didn’t go off the gold standard for international dollars until 1971. It is also the reason why the world is clamoring for a new international trade currency now. International trade needs an absolute standard of measure, to prevent countries from screwing the system by printing more of their own currency (such as they see the US doing now).
So, with their stimulus money, the Chinese have been stockpiling raw materials and using them to put their people to work on infrastructure projects. This is true capital investment, and increases their wealth-creating capacity for the future, as well as putting people to work today.
Our stimulus money is not based on a trade surplus, but is simply based on diluting the dollar through deficit spending and monetization of government debt. Nor is our stimulus money providing the basis for future wealth creation or even repairing old infrastructure. Our stimulus money is simply covering budget shortfalls and continuing welfare payments. Thus, we will be in a worse position when the stimulus ends, having the same economic condition, but then with a higher debt load.
Looking forward, the US economy is in between a rock and a hard place. Keeping the dollar as the international reserve currency means that the US will continue to have its industrial base undercut by cheaper foreign competition and be the target for mass immigration because of the overvalued dollar. When the change finally happens, and the dollar is removed as international reserve, the US faces a massive inflation, from the return of dollars to domestic use and currency devaluation. The longer we wait, the worse the economic collapse will be when it does happen, since we will have to rebuild our industrial economy from scratch.
The only solution to that guaranteed eventuality is to take aggressive proactive steps, sooner rather than later. For example, the US should take decisive steps to safeguard its industrial base now, while the dollar is strong, rather than later, after currency collapse. The US should also cease all inflationary policies (such as deficit spending and monetization of debt), which are literally driving the world away from the dollar reserve standard. An even more radical approach would involve repudiation of the national debt, leaving the rest of the world holding the bag of worthless paper, and reinvesting in America’s industrial powerbase through protection from imports and outsourcing/off shoring.
In short, Americans should start thinking of themselves a people, rather than just as expendable units of profit manipulation in an international economy.
Wednesday, September 9, 2009
Economics of the Higher Education System: Ponzi Exploitation
College education exhibits the same structure as any other economic ponzi scheme: masses recycling of suckers through the bottom levels funnels big profits to those at the top of the pyramid. The really funny thing is, because it is the EDUCATIONAL industry, its main beneficiaries have effectively created the perfect mass brainwashing to support their scheme. People think they are supporting a necessary and benevolent educational system, rather then being exploited by a superfluous and destructive ponzi scheme.
--Lecture halls are the most visibly obvious place the masses are fleeced out of their money. These are the pedagogical profit centers for the universities, where the real money is made, like soda sales in a fast food restaurant.
--State legislative buildings are the hidden location where the masses are fleeced. State universities have most of their budget covered by legislative decree, extracted directly from tax dollars.
--The federal government completes the loop of economic exploitation through loan guarantees, extending the credit that pumps up the bubble.
When the credit flow is stopped, as it soon will be, the bubble will pop. The federal government delayed the day of reckoning this year through mass bailout money. State universities across the nation were facing huge budget cuts this year, but were largely spared big cutbacks by accounting tricks and the bailout money. The federal government, of course, covered those bailouts with borrowed money, expanding the federal debt. The problem is, the budget cuts which will be necessary next year and the year after, are going to be even worse, and the federal government will not be able to continue its bailouts.
The higher ed industry is also being undermined by the internet and a dawning race to bottom in cost competition. The internet is doing for education what it did for newspapers and music, threatening entire institutional paradigms by undercutting revenue streams. The latest headline-grabbing educational company is offering fully accredited college credits for $99 a month, and guess how they do it? Foreign outsourcing! Why not? This is the logic of the contemporary capitalist world. As long as the overvalued dollar persists, hiring Indian tutors and professors to grade online classes is cheaper than having Americans teach the classes.
The genie was let out of the bottle with the rise of private for-profit universities, who were the first to capitalize on the bubbly educational profit stream. Theoretically, you could offer a college degree via the internet for really cheap. However, in the actual market, online companies have been able to sell the products based largely on their convenience and availability, rather than on their cost.
Because the market is being pumped up with guaranteed government-backed credit, for the last decade there was little need for cost competition and a number of highly profitable private universities have arisen. Government subsidy sets the bar for costs, and everyone just charges up to that level. This is no economic theory, this is empirical fact: when government raises student loan amounts, for-profit universities simply raise tuition costs. Just like in the health-care market, when government picks up the check, costs simply spiral upward. Only when the credit flow is stopped do we see a downward trend in prices.
However, the dawning issue facing higher education is market saturation. When a market is saturated, price competition begins in earnest, even when the market is pumped up by credit. Higher education is approaching that saturation point, when everyone has access to classes offered by a wide range of companies, including the traditional universities themselves who are moving online. In economic terms, the supply of education is growing greater than the demand for education.
Under these conditions of market saturation and intense competition, price competition kicks in, which we are seeing exhibited spectacularly in such companies as StraigherLine, offering college credit for $99 a month. So far, StraigherLine is offering only a handful of lower-level classes, but there is no theoretical limit on classes that can be offered at that price.
StraigherLine’s main impediment to this point is simply regulation, but keep in mind, there is no regulation regarding the outsourcing of teaching. While StraigherLine is hampered by having to jump over the regulatory wall to get accreditation, there is no such impediment faced by they universities which are already accredited.
In short, any already-accredited online university could right now make the switch to a foreign faculty and slash its costs and prices. This is really just a matter of time. It is not just about increasing corporate profits. The fact is, under the new market-saturated conditions, many institutions will be fighting for their financial survival.
The more students take bargain-basement classes like that, not just the cash cow courses at the big universities, but the very survival of local colleges is threatened. At that price, even community colleges, as heavily subsidized by taxes as they are, are undercut by price competition. The irony is, students are often forced into online classes because classes at their local colleges are cancelled because of low enrollment, created a self-perpetuating cycle of low enrollment and cancelled classes driving students into online environments. If the local college can’t enroll enough students to pay the faculty salary for a class, the class has to be cancelled, but an online university paying teachers in India faces no such constraints. Another irony there, as community college are already exploitation machines, seeing that upwards of 80% of their classes are already “outsourced” to part-time faculty (which means a third of the salary with no benefits).
Thus, the current higher education system is strained by three forces: outsourcing of cheap classes, collapse in enrollment in the most profitable classes, and collapse of government subsidies. State budget cuts will be traumatic, but a loss of federal loan guarantees would be absolutely catastrophic, and I mean literally the collapse of higher education as we know it, the downsizing to maybe a tenth of its current size, without exaggeration. The upcoming collapse in debt financing at the federal level pretty much guarantees this end result.
Tis a consummation devoutly to be wished. Most higher education is simply a drain on society, not to mention a subsidy for anti-American post-modernist ideology. The costs of education should be born by industry and business, if it is required by them for vocational reasons. Vanity degrees should be paid for exclusively by the wealthy students who use them.
The best consequence of the coming deflation of the educational bubble will be the end of the credentialism hamster wheel that sucks up so much time for the average professional American these days. One of the prime reasons people feel so much busier and stressed today is that people are forced to constantly go to school, soaking up hours of their leisure and family time. Credentialism and its constant pressure to upgrade educational levels is a major source of stress today, one that we can frankly do without.
Friday, September 4, 2009
Father of Legal Tender - Elbridge Gerry Spaulding
Article in today's NY Times (http://www.nytimes.com/2009/09/04/business/economy/04norris.htm) attempts to equate Bernanke to E.G. Spaulding, the man who financed the US government during the Civil War by firing up the printing presses. In funny part is, Spaulding didn't even support his own actions, except for the necessity of specifically WAR TIME funding, and to say he was a proponent of fiat paper money is completely false.
The Times article is basically a propaganda piece suggesting that money printing by government is not bad. Well, I guess it’s all relative, right? The article presents some of the doom and gloom statements of that debate that did not pan out, even flatly dismissing the inflation problem, which as predicted, did occur. By suggesting by extension that today’s naysayers are equally wrong, that Bernanke has a chance at historical vindication when this is all said and done, the Times produces a lame pro-Bernanke publicity piece. [As for Bernanke, it has been proven conclusively that he is an intellectual idiot who completely fails in every prediction he makes, demonstrating his lack of mastery of what is really going on with the economy. His only successful function is enriching the banking class at the public’s expense, so it is no surprise that the Times, the voice of that banking class, lauds him.]
The article pays homage to Spaulding, an important factor in the victory of the Union in the War for Southern Independence (what he called the Great Rebellion and we call the Civil War), while totally misleading us about what Spaulding really did and what he stood for. The article calls him the father of fiat currency, a man who was willing to throw out the economic orthodoxy of his day. He article falsely states: “Contrary to the expectations, paper money did not set off sharp inflation over time, and when the paper money eventually was made convertible into gold, there were no lines of people wanting to trade in paper for bullion.”
The facts of history debunk this. In fact, the greenbacks were indirectly backed by gold for the first half of the war. When its gold backing wavered in the first half of 1864, inflation spiked over 100%, and in the end, the dollar went back on gold, which was used to pay off all wartime debts including the redemption of the war time greenbacks! Such blatant and easily verified factual errors calls into question both the competence and honesty of the Times.
After it was all said and done, Spaulding wrote a book documenting it all for posterity, and God bless him for it. Spaulding’s book, History of the Legal Tender Paper Money Issued During the Great Rebellion, published in 1869, is an absolute treasure trove of speeches and letters, the very substance of the money argument at the time. It is full of weighty economic theorizing on matters of money, economics, and government finance. Some of the language is a bit archaic, as we no longer use some of their financial terms, but it is always elegant, and merely sampling the book pays off intellectual gold.
One thing that may surprise the average reader today is that the central terms of the debate were not whether the government should issue lots of paper money to pay for the war effort. That was generally granted by all, save the northern banking class of the day, which wanted the government to pay for the war through bonds sold on the open market (a scheme roundly denounced as most assuredly designed for the enrichment of the bankers, not for the good of the Union).
Rather, the most tendentious issue of the day was the establishment of the newly issued federal script as legal tender. At the time, there was no legal tender, no money that you had to accept in payment by force of law. Regional notes competed in an open market, and inferior notes would suffer discounting. Greenback advocates like Spaulding did not want their federal notes to suffer competition, while holders of solid regional notes did not want to have honor these obviously inflationary greenbacks at face value, which legal tender laws would require.
Another fascinating aspect of the war-time greenback effort was an ingenious bond conversion program they developed. For the first year of their issue, each newly issued federal note had the following statement engraved on it: “This note is a legal tender for all debts, public and private, except duties on imports and interest on public debt, and is exchangeable for US six percent bonds, redeemable at the pleasure of the United States after a period of five years.”
On the one hand, this bond conversion option was seen as a compensation for people forced to accept the notes. It was openly acknowledged that the legal tender issuance of federal notes was a loan to the federal government forced on the public. The bond conversion option was like a bonus to offset the rightful discounting that could have been taken in the absence of legal tender law.
The bond conversion option was also intended, in modern terms, to soak up liquidity. This convertibility would prevent any great inflation, as Spaulding wrote, “for the reason that as soon as this currency became redundant in the hands of the people, and not bearing interest, they would invest it in the six percent bonds” (pg 188).
The interest on those government bonds was to be paid in coin, meaning gold, every six months, while the bond’s principle would be paid in gold within 20 years. In other words, these greenabacks were not really debt-free fiat money, as Ellen Brown would have them. They were still on the gold standard!
Spaulding stated explicitly on this matter: “There was no very great danger that the currency would become excessively inflated so long as every person holding greenbacks, not bearing interest, could exchange them at his own will into gold-bearing bonds at six per cent interest per annum” (pg 192).
The bond conversion aspect of federal notes was, however, suspended after the first year of their issuance, in March 1863. Spaulding does not explain why, although presumably, the government simply no longer wanted to pay interest on their forced loan. After that time, it was up to the discretion of the Treasury Secretary how much interest he would pay, if any at all. After that change in the greenback, after it had been removed from the gold anchor, inflation kicked in. Spaulding was against giving that power to the Secretary, calling it a mistake, and blamed it for “the inflations, fluctuations, and changes now so apparent” (pg 194). An inflation spike of 100% took hold in the first six months of 1864. By mid July, these US notes were worth only 35 cents on the dollar.
After the war was over, Spaulding was an enthusiastic proponent of paying back the national debt in gold and silver. The way he saw it, abandonment of the gold standard during war was necessary because those war loans paid for destruction, meaning an unproductive purpose. As he put it, “Every dollar expended took out of existence a dollar of value for which the Government gave its promise to pay. Every dollar of property thus destroyed led us farther and farther away from the specie standard, and has to be produced again by labor before the value is restored” (211-2). Eventually, the debt was paid back in gold, as Spaulding called for.
To cite this man as anything but a gold-standard enthusiast is completely dishonest.
The Times article is basically a propaganda piece suggesting that money printing by government is not bad. Well, I guess it’s all relative, right? The article presents some of the doom and gloom statements of that debate that did not pan out, even flatly dismissing the inflation problem, which as predicted, did occur. By suggesting by extension that today’s naysayers are equally wrong, that Bernanke has a chance at historical vindication when this is all said and done, the Times produces a lame pro-Bernanke publicity piece. [As for Bernanke, it has been proven conclusively that he is an intellectual idiot who completely fails in every prediction he makes, demonstrating his lack of mastery of what is really going on with the economy. His only successful function is enriching the banking class at the public’s expense, so it is no surprise that the Times, the voice of that banking class, lauds him.]
The article pays homage to Spaulding, an important factor in the victory of the Union in the War for Southern Independence (what he called the Great Rebellion and we call the Civil War), while totally misleading us about what Spaulding really did and what he stood for. The article calls him the father of fiat currency, a man who was willing to throw out the economic orthodoxy of his day. He article falsely states: “Contrary to the expectations, paper money did not set off sharp inflation over time, and when the paper money eventually was made convertible into gold, there were no lines of people wanting to trade in paper for bullion.”
The facts of history debunk this. In fact, the greenbacks were indirectly backed by gold for the first half of the war. When its gold backing wavered in the first half of 1864, inflation spiked over 100%, and in the end, the dollar went back on gold, which was used to pay off all wartime debts including the redemption of the war time greenbacks! Such blatant and easily verified factual errors calls into question both the competence and honesty of the Times.
After it was all said and done, Spaulding wrote a book documenting it all for posterity, and God bless him for it. Spaulding’s book, History of the Legal Tender Paper Money Issued During the Great Rebellion, published in 1869, is an absolute treasure trove of speeches and letters, the very substance of the money argument at the time. It is full of weighty economic theorizing on matters of money, economics, and government finance. Some of the language is a bit archaic, as we no longer use some of their financial terms, but it is always elegant, and merely sampling the book pays off intellectual gold.
One thing that may surprise the average reader today is that the central terms of the debate were not whether the government should issue lots of paper money to pay for the war effort. That was generally granted by all, save the northern banking class of the day, which wanted the government to pay for the war through bonds sold on the open market (a scheme roundly denounced as most assuredly designed for the enrichment of the bankers, not for the good of the Union).
Rather, the most tendentious issue of the day was the establishment of the newly issued federal script as legal tender. At the time, there was no legal tender, no money that you had to accept in payment by force of law. Regional notes competed in an open market, and inferior notes would suffer discounting. Greenback advocates like Spaulding did not want their federal notes to suffer competition, while holders of solid regional notes did not want to have honor these obviously inflationary greenbacks at face value, which legal tender laws would require.
Another fascinating aspect of the war-time greenback effort was an ingenious bond conversion program they developed. For the first year of their issue, each newly issued federal note had the following statement engraved on it: “This note is a legal tender for all debts, public and private, except duties on imports and interest on public debt, and is exchangeable for US six percent bonds, redeemable at the pleasure of the United States after a period of five years.”
On the one hand, this bond conversion option was seen as a compensation for people forced to accept the notes. It was openly acknowledged that the legal tender issuance of federal notes was a loan to the federal government forced on the public. The bond conversion option was like a bonus to offset the rightful discounting that could have been taken in the absence of legal tender law.
The bond conversion option was also intended, in modern terms, to soak up liquidity. This convertibility would prevent any great inflation, as Spaulding wrote, “for the reason that as soon as this currency became redundant in the hands of the people, and not bearing interest, they would invest it in the six percent bonds” (pg 188).
The interest on those government bonds was to be paid in coin, meaning gold, every six months, while the bond’s principle would be paid in gold within 20 years. In other words, these greenabacks were not really debt-free fiat money, as Ellen Brown would have them. They were still on the gold standard!
Spaulding stated explicitly on this matter: “There was no very great danger that the currency would become excessively inflated so long as every person holding greenbacks, not bearing interest, could exchange them at his own will into gold-bearing bonds at six per cent interest per annum” (pg 192).
The bond conversion aspect of federal notes was, however, suspended after the first year of their issuance, in March 1863. Spaulding does not explain why, although presumably, the government simply no longer wanted to pay interest on their forced loan. After that time, it was up to the discretion of the Treasury Secretary how much interest he would pay, if any at all. After that change in the greenback, after it had been removed from the gold anchor, inflation kicked in. Spaulding was against giving that power to the Secretary, calling it a mistake, and blamed it for “the inflations, fluctuations, and changes now so apparent” (pg 194). An inflation spike of 100% took hold in the first six months of 1864. By mid July, these US notes were worth only 35 cents on the dollar.
After the war was over, Spaulding was an enthusiastic proponent of paying back the national debt in gold and silver. The way he saw it, abandonment of the gold standard during war was necessary because those war loans paid for destruction, meaning an unproductive purpose. As he put it, “Every dollar expended took out of existence a dollar of value for which the Government gave its promise to pay. Every dollar of property thus destroyed led us farther and farther away from the specie standard, and has to be produced again by labor before the value is restored” (211-2). Eventually, the debt was paid back in gold, as Spaulding called for.
To cite this man as anything but a gold-standard enthusiast is completely dishonest.
Thursday, September 3, 2009
Currency Reform: a Modest Proposal
Currency reform is a deep-level concept. Few people understand economics, let alone money or how it works, so it is a conversation that lacks traction. Nontheless, currency underlies everything, it is the foundation of the economy, and people seem to get that. They intuitively shy from any major changes or tinkering with the money system, since the potential effects are potentially so large, and are therefore easily opposed with catastrophic imagery.
I believe Ron Paul's campaign suffered from this problem, as he was easily painted as a fringe candidate because of his strident gold standard advocacy. The fact is, such a big change as establishing a gold standard frightens the average person.
I propose that any currency reform must be accomplished in small stages, not only to avoid scaring the average citizen, but also to avoid hardening the opposition of the monetary powers-that-be. There are only a handful of monetary reform camps, and I believe they could all be accomodated in a non-threatening way, which would foster genuine currency improvement for society.
--The Ron Paul libertarian wing seeks to return the US dollar to gold backing.
--The modern-day Greenbackers (such as Ellen Brown) seek an end to the private money supply, ending the Fed, but keeping paper money and giving its control directly to the government, to issue debt-free.
--Community currency advocates (such as Thomas Greco) seek to end federally-mandated legal tender currency, fostering a return to community control of currency, and a free market competition among currencies.
The monopolistic imposition of any one of these monetary reform regimes would likely be impossible to accomplish, as the change would be too great, opposition to general, and support too fragmented.
Rather, I propose implementing all three, simultaneously. Well, naturally, the proposals would need to be scaled back, since they are contradictory in many ways, but the idea is to implement alternative currency schemes, based on those principles, to compete with each other. Thus, it would not be a wholesale repeal of legal tender, a la Greco and the Wildcat Banking Era, but it would expand legal tender to a small number of recognized issues.
Consider the following actions being taken simultaneously, or rolled out successively:
-Greenbacks spent into circulation by the Treasury for federal expenditures
-new Treasury notes issued which are fully backed by gold and silver
-Two regional banks chartered to issue private currencies
Thus, a limited version of currency competition. Nothing threatening the collapse of the current system, just available alternates, an expansion of monetary freedom. Who could oppose that?
Let the best currency win!
I believe Ron Paul's campaign suffered from this problem, as he was easily painted as a fringe candidate because of his strident gold standard advocacy. The fact is, such a big change as establishing a gold standard frightens the average person.
I propose that any currency reform must be accomplished in small stages, not only to avoid scaring the average citizen, but also to avoid hardening the opposition of the monetary powers-that-be. There are only a handful of monetary reform camps, and I believe they could all be accomodated in a non-threatening way, which would foster genuine currency improvement for society.
--The Ron Paul libertarian wing seeks to return the US dollar to gold backing.
--The modern-day Greenbackers (such as Ellen Brown) seek an end to the private money supply, ending the Fed, but keeping paper money and giving its control directly to the government, to issue debt-free.
--Community currency advocates (such as Thomas Greco) seek to end federally-mandated legal tender currency, fostering a return to community control of currency, and a free market competition among currencies.
The monopolistic imposition of any one of these monetary reform regimes would likely be impossible to accomplish, as the change would be too great, opposition to general, and support too fragmented.
Rather, I propose implementing all three, simultaneously. Well, naturally, the proposals would need to be scaled back, since they are contradictory in many ways, but the idea is to implement alternative currency schemes, based on those principles, to compete with each other. Thus, it would not be a wholesale repeal of legal tender, a la Greco and the Wildcat Banking Era, but it would expand legal tender to a small number of recognized issues.
Consider the following actions being taken simultaneously, or rolled out successively:
-Greenbacks spent into circulation by the Treasury for federal expenditures
-new Treasury notes issued which are fully backed by gold and silver
-Two regional banks chartered to issue private currencies
Thus, a limited version of currency competition. Nothing threatening the collapse of the current system, just available alternates, an expansion of monetary freedom. Who could oppose that?
Let the best currency win!
China Establishes their own Gold Market, Preparing to Monetize Gold
Clearly, gold is returning to its role as money, the ultimate store of value and settlement medium. The Chinese are deftly, and quietly, preparing to exit the dollar-denominated international system by establishing their own regional gold market. There is even overt mention of monetizing the gold, which, in plain language, means a return to the gold standard as an objective unit of international settlement.
All the talk of the slow, almost impossible process of displacing the US dollar as international reserve currency would be rendered moot instantaneously if China backed a currency with gold. The dollar would be obliterated overnight if the Chinese introduced a trade currency pegged to gold.
Is it a coincidence that gold has spiked in the last 36 hours (hovering just below $1000/oz.)???
HONG KONG (MarketWatch) -- Hong Kong is pulling all its physical gold holdings from depositories in London, transferring them to a high-security depository newly built at the city's airport, in a move that won praise from local traders Thursday. The facility, industry professionals said, would support Hong Kong's emergence as a Swiss-style trading hub for bullion and would lessen London's status as a key settlement-and-storage center.
"Having a central government-sponsored vault would create a situation where you could conceivably look at Hong Kong as being a hub, where metal could be traded for the region," said Sunil Kashyap, managing director at Scotia Capital in Hong Kong, adding that the facility was the first with official government backing in the region.
The Hong Kong Monetary Authority, which functions as the territory's unofficial central bank, will transfer its gold reserves stored in other vaults to the depository later this year, the Hong Kong government said in an earlier statement. The 3,660-square-foot depository, located at the city's main Chek Lap Kok Airport, will serve as a "storage facility for local and overseas government institutions," according to the government statement.
Traders said the new depository facility could also foster new financial products, such as exchange-traded funds based on precious metals.
Martin Hennecke, a financial advisor with the Hong Kong-based Tyche Group Ltd., said that could be appealing to regional central banks unnerved after watching the global financial system teeter on verge of implosion last year.
"Central banks are increasingly aware of the importance of having gold reserves at time of financial crisis and having it easily available at their own disposal," he said.
Meanwhile, local newspaper reports said the Hong Kong Mercantile Exchange had signed an agreement to use the depository for its physical settlement and storage needs.
Marketing efforts will be launched to convince Asian central banks to transfer their gold reserves to the Hong Kong facility, according to reports citing Raymond Lai, finance director with the Hong Kong Airport Authority. Efforts will also be made to reach out to commodity exchanges, banks, precious-metals refiners and ETF providers, the reports said. Management firm Value Partners planned to launch an ETF gold fund that will use Hong Kong instead of London as a repository for the gold backing the fund, local reports said Thursday.
http://www.marketwatch.com/story/hong-kong-recalls-gold-reserves-from-london-2009-09-03
All the talk of the slow, almost impossible process of displacing the US dollar as international reserve currency would be rendered moot instantaneously if China backed a currency with gold. The dollar would be obliterated overnight if the Chinese introduced a trade currency pegged to gold.
Is it a coincidence that gold has spiked in the last 36 hours (hovering just below $1000/oz.)???
HONG KONG (MarketWatch) -- Hong Kong is pulling all its physical gold holdings from depositories in London, transferring them to a high-security depository newly built at the city's airport, in a move that won praise from local traders Thursday. The facility, industry professionals said, would support Hong Kong's emergence as a Swiss-style trading hub for bullion and would lessen London's status as a key settlement-and-storage center.
"Having a central government-sponsored vault would create a situation where you could conceivably look at Hong Kong as being a hub, where metal could be traded for the region," said Sunil Kashyap, managing director at Scotia Capital in Hong Kong, adding that the facility was the first with official government backing in the region.
The Hong Kong Monetary Authority, which functions as the territory's unofficial central bank, will transfer its gold reserves stored in other vaults to the depository later this year, the Hong Kong government said in an earlier statement. The 3,660-square-foot depository, located at the city's main Chek Lap Kok Airport, will serve as a "storage facility for local and overseas government institutions," according to the government statement.
Traders said the new depository facility could also foster new financial products, such as exchange-traded funds based on precious metals.
Martin Hennecke, a financial advisor with the Hong Kong-based Tyche Group Ltd., said that could be appealing to regional central banks unnerved after watching the global financial system teeter on verge of implosion last year.
"Central banks are increasingly aware of the importance of having gold reserves at time of financial crisis and having it easily available at their own disposal," he said.
Meanwhile, local newspaper reports said the Hong Kong Mercantile Exchange had signed an agreement to use the depository for its physical settlement and storage needs.
Marketing efforts will be launched to convince Asian central banks to transfer their gold reserves to the Hong Kong facility, according to reports citing Raymond Lai, finance director with the Hong Kong Airport Authority. Efforts will also be made to reach out to commodity exchanges, banks, precious-metals refiners and ETF providers, the reports said. Management firm Value Partners planned to launch an ETF gold fund that will use Hong Kong instead of London as a repository for the gold backing the fund, local reports said Thursday.
http://www.marketwatch.com/story/hong-kong-recalls-gold-reserves-from-london-2009-09-03
Thursday, August 20, 2009
China's Boom or Bust: the Paradox of Easy Money
The Chinese perpetual growth machine chugs along, leaving many commentators shaking their heads (The Coming Chinese Meltdown at PrudentBear), and some nodding in approval (such as The Secret of China's Economic Miracle by Ellen Brown.
According to my analysis, typical economists do not understand the benefits of the state controlled banking system (that China has and Ellen Brown recommends), but free money advocates like Ellen Brown do not understand the dangers of government control.
The benefit of state banking are clear and persuasive: control over credit, done for the public benefit, allows a remarkable immunity to the laws of finance that govern private banking systems. Bad loans piling up seems to be a huge problem, right? Not so much to the Chinese. When the bank is the government, just write them off, and start lending again.
The Chinese system is remarkably like the core action of my Jubilee People's Bailout, and is living proof that it works. Instead of letting bad debts and tight money constrict the real economy, just write the debts off and supply more money. Viola, economic growth continues! It really is that easy. The Chinese are proving it right now in the sheer incredible volume of loans that the government is forcing, literally requiring by law, banks to issue into the productive economy. Hence, Chinese growth continues even as the rest of the world contracts, despite supposed Chinese reliance on exports.
The problem with this permanently state-run system is the issue of malinvestments and waste. The free market is necessary because it gives real signals about available resources. If the government continually pumps the system full of money, those profit and loss signals are lost. In a free economy, the business cycle is a natural response to too much malinvestment, as prices collapse, companies fold, and everyone tightens their belt and retools into profitable areas. If government floods the economy with cash at every sight of problems, malinvestments are never cleared out, meaning true and sustainable profitability is never reached.
With its tight controls on capital flow and currency trading, along with state planning and bailouts, the Chinese economy today is much like the old Soviet economy. The big difference is that the Soviet block was firewalled off from the economy of the free world. China today is like a parasite on the free world's economy, sucking in the world's resources in the effort to delay the day of reckoning that eventually befell the Soviet system. The problem for us is, this time, we are not firewalled off, so our markets and way of life have become hostage to Chinese malinvestment and economic reality-denial.
According to my analysis, typical economists do not understand the benefits of the state controlled banking system (that China has and Ellen Brown recommends), but free money advocates like Ellen Brown do not understand the dangers of government control.
The benefit of state banking are clear and persuasive: control over credit, done for the public benefit, allows a remarkable immunity to the laws of finance that govern private banking systems. Bad loans piling up seems to be a huge problem, right? Not so much to the Chinese. When the bank is the government, just write them off, and start lending again.
The Chinese system is remarkably like the core action of my Jubilee People's Bailout, and is living proof that it works. Instead of letting bad debts and tight money constrict the real economy, just write the debts off and supply more money. Viola, economic growth continues! It really is that easy. The Chinese are proving it right now in the sheer incredible volume of loans that the government is forcing, literally requiring by law, banks to issue into the productive economy. Hence, Chinese growth continues even as the rest of the world contracts, despite supposed Chinese reliance on exports.
The problem with this permanently state-run system is the issue of malinvestments and waste. The free market is necessary because it gives real signals about available resources. If the government continually pumps the system full of money, those profit and loss signals are lost. In a free economy, the business cycle is a natural response to too much malinvestment, as prices collapse, companies fold, and everyone tightens their belt and retools into profitable areas. If government floods the economy with cash at every sight of problems, malinvestments are never cleared out, meaning true and sustainable profitability is never reached.
With its tight controls on capital flow and currency trading, along with state planning and bailouts, the Chinese economy today is much like the old Soviet economy. The big difference is that the Soviet block was firewalled off from the economy of the free world. China today is like a parasite on the free world's economy, sucking in the world's resources in the effort to delay the day of reckoning that eventually befell the Soviet system. The problem for us is, this time, we are not firewalled off, so our markets and way of life have become hostage to Chinese malinvestment and economic reality-denial.
Monday, August 10, 2009
GDP as Mass Mind Control
The role of GDP as mind control was recently highlighted by the market’s reaction to the release of the second quarter numbers. Traders cheered and markets bumped up, as the fall was revealed to be only 1.0%, contrasted with the fall of 6.4% for the first quarter. Commentators are already calling the end of the recession, predicting a positive GDP for quarter three.
As the People’s Economist, it is my job to examine and explain the reality behind the mass of abstract economic shibboleths, and today I will explain the common sense reality behind GPD numbers.
The definition of our GDP is actually really simple: the sum total, measured in dollars at market prices, of all good and services produced on US soil.
[note: Some of you old-timers may remember hearing announcements about GNP, but that was discarded in favor of GDP at the start of the era of globalization in the 1980s. Why GDP is the preferred measuring tool for the pro-globalists include such gems as the fact that GDP includes illegal immigrants and foreign factories in America, whereas GNP would exclude them.]
The weird fact is, GDP can be constantly rising while we all get poorer and more miserable. For example, the expansion of police forces is paid in dollars, as are the salaries of correctional officers. So, is the arrest and imprisonment of masses of people a good thing? It contributes to GDP!
Obviously, since GDP is the sum of all cash transactions, GDP is highly dependent on inflationary money creation. So, it is basically axiomatic that if the government stimulates the economy with lots of printed-money bailouts, GDP will go up.
The central role of government expenditures on GDP showed up in a big way in the 2nd quarter numbers just released. To wit: “Real federal government consumption expenditures and gross investment increased 10.9% in the second quarter, in contrast to a decrease of 4.3% in the first. National defense increased 13.3%, in contrast to a decrease of 5.1%. Nondefense increased 6.0%, in contrast to a decrease of 2.5%. Real state and local government consumption expenditures and gross investment increased 2.4%, in contrast to a decrease of 1.5%.” So, all this government spending was skyrocketing while personal consumption and investment was still plummeting: “negative contributions from nonresidential fixed investment, personal consumption expenditures (PCE), residential fixed investment, private inventory investment, and exports.” So, government spending helps GDP, but does it really help our economy?
Now, Chris over at Casey Research [here], expressed the traditional libertarian understanding of the matter, which is that all government spending is inferior: “You see, GDP records the dollar amount of goods and services produced in the economy during a given period. But it equates government spending with private spending. And it ignores the wealth and potential growth destroyed by taxation.”
Chris is definitely correct that government spending out of taxation is almost always an economic loser. At best, the government adds a middle-man layer of expense, at worst, government is sponsoring complete malinvestment. As a general rule, there is no doubt, Chris’ instincts are correct: government spending is worse than private spending for creating wealth. Government spending primarily creates paychecks for government workers and other economic parasites.
However, Chris’ analysis is inappropriate in this case, because government is not spending out of taxation. In fact, the government is spending out of debt, which complicates the analysis. Spending out of debt means that government is simply creating money and spending it into the economy. Thus, it avoids the inefficiency problem that accompanies the diversion of tax money (although it does perpetuate malinvestment).
Regarding stimulus money created by government, the main question is, what is it used for? Money used as capital investment could prepare the economy for future growth. But money used for current welfare simply delays the day of reckoning. Money used for make-work employment also simply delays the day of reckoning.
Money used to fund welfare and make-work has additional problems because it is climbing up an economic hill, fighting economic gravity, so to speak.
For one, it encourages and perpetuates malinvestment. Wealth-destroying activities can be sustained indefinitely as long as money continues to flow into them. That is what malinvestment is by definition: a money losing activity. In the normal course of events, malinvestments get shut down, but government money can keep them going indefinitely, transferring the negative cost to society as a whole.
The second reason stimulus is fighting economic gravity is because it is financed by debt. Future debt repayment will suck economic juice out of future recovery. Thus, welfare and make-work stimulus makes the eventual day of reckoning worse, by adding the weight of debt to future economic activity, which will have to snuff out malinvestment regardless, but may snuff out marginally profitable activities if the debt load is too heavy.
A third reason stimulus is fighting an uphill battle is its inflationary effects. Newly created dollars decrease the value of existing dollars. This temporarily privileges government economic actions, but undermines everything else.
Thus, in order to be economically justified, today’s stimulus can’t be used just to cover current costs. Stimulus has to create sustainable economic growth, strong enough to overcome the debt payment drag and its own inflationary effects.
We can all see that today’s government stimulus is NOT meeting the criteria of targeting economic growth. In fact, stimulus money is mainly being used to plug budget gaps in the government and banking sectors. It is exactly analogous to using a credit card to pay your monthly bills. Eventually, unless structural changes are made, the bill will come due, and you have not increased your income, but only added to your debt.
Any dollar spending is good for GDP. In the real world, pumping money into unsustainable money-losing malinvestments is a bad thing, but it makes GDP bigger! GDP hides these fantasy gains, making them look like a positive thing. GPD numbers also directly reward inflationary debt spending.
Its all a form of mass mind control, so that our government/economic leaders can proclaim the economy has turned around. In reality, we are all poorer as malinvestments continue and our purchasing power is undermined, but GDP hides the spreading poverty.
Many alternative-oriented thinkers have attempted to calculate alternatives to GDP which take account of hidden costs, but there are only two real, non-falsifiable, and non-manipulatable statistics that speak to our rising or falling standard of living: average time off and retirement age. Less time off and later retirement ages mean we are getting poorer, no matter what other statistical garbage is invented.
A truly advancing economy means that we have to work less, and can quit working sooner. Anything else is strictly a statistical mind control technique like GDP.
The collapse of the one-earner family, and the evaporation of pension/retirement benefits, are testimony to our increasing poverty as a people. It is a preventable tragedy that money-based illusions like GDP keep people from recognizing the negative consequences of our economic policies.
As the People’s Economist, it is my job to examine and explain the reality behind the mass of abstract economic shibboleths, and today I will explain the common sense reality behind GPD numbers.
The definition of our GDP is actually really simple: the sum total, measured in dollars at market prices, of all good and services produced on US soil.
[note: Some of you old-timers may remember hearing announcements about GNP, but that was discarded in favor of GDP at the start of the era of globalization in the 1980s. Why GDP is the preferred measuring tool for the pro-globalists include such gems as the fact that GDP includes illegal immigrants and foreign factories in America, whereas GNP would exclude them.]
The weird fact is, GDP can be constantly rising while we all get poorer and more miserable. For example, the expansion of police forces is paid in dollars, as are the salaries of correctional officers. So, is the arrest and imprisonment of masses of people a good thing? It contributes to GDP!
Obviously, since GDP is the sum of all cash transactions, GDP is highly dependent on inflationary money creation. So, it is basically axiomatic that if the government stimulates the economy with lots of printed-money bailouts, GDP will go up.
The central role of government expenditures on GDP showed up in a big way in the 2nd quarter numbers just released. To wit: “Real federal government consumption expenditures and gross investment increased 10.9% in the second quarter, in contrast to a decrease of 4.3% in the first. National defense increased 13.3%, in contrast to a decrease of 5.1%. Nondefense increased 6.0%, in contrast to a decrease of 2.5%. Real state and local government consumption expenditures and gross investment increased 2.4%, in contrast to a decrease of 1.5%.” So, all this government spending was skyrocketing while personal consumption and investment was still plummeting: “negative contributions from nonresidential fixed investment, personal consumption expenditures (PCE), residential fixed investment, private inventory investment, and exports.” So, government spending helps GDP, but does it really help our economy?
Now, Chris over at Casey Research [here], expressed the traditional libertarian understanding of the matter, which is that all government spending is inferior: “You see, GDP records the dollar amount of goods and services produced in the economy during a given period. But it equates government spending with private spending. And it ignores the wealth and potential growth destroyed by taxation.”
Chris is definitely correct that government spending out of taxation is almost always an economic loser. At best, the government adds a middle-man layer of expense, at worst, government is sponsoring complete malinvestment. As a general rule, there is no doubt, Chris’ instincts are correct: government spending is worse than private spending for creating wealth. Government spending primarily creates paychecks for government workers and other economic parasites.
However, Chris’ analysis is inappropriate in this case, because government is not spending out of taxation. In fact, the government is spending out of debt, which complicates the analysis. Spending out of debt means that government is simply creating money and spending it into the economy. Thus, it avoids the inefficiency problem that accompanies the diversion of tax money (although it does perpetuate malinvestment).
Regarding stimulus money created by government, the main question is, what is it used for? Money used as capital investment could prepare the economy for future growth. But money used for current welfare simply delays the day of reckoning. Money used for make-work employment also simply delays the day of reckoning.
Money used to fund welfare and make-work has additional problems because it is climbing up an economic hill, fighting economic gravity, so to speak.
For one, it encourages and perpetuates malinvestment. Wealth-destroying activities can be sustained indefinitely as long as money continues to flow into them. That is what malinvestment is by definition: a money losing activity. In the normal course of events, malinvestments get shut down, but government money can keep them going indefinitely, transferring the negative cost to society as a whole.
The second reason stimulus is fighting economic gravity is because it is financed by debt. Future debt repayment will suck economic juice out of future recovery. Thus, welfare and make-work stimulus makes the eventual day of reckoning worse, by adding the weight of debt to future economic activity, which will have to snuff out malinvestment regardless, but may snuff out marginally profitable activities if the debt load is too heavy.
A third reason stimulus is fighting an uphill battle is its inflationary effects. Newly created dollars decrease the value of existing dollars. This temporarily privileges government economic actions, but undermines everything else.
Thus, in order to be economically justified, today’s stimulus can’t be used just to cover current costs. Stimulus has to create sustainable economic growth, strong enough to overcome the debt payment drag and its own inflationary effects.
We can all see that today’s government stimulus is NOT meeting the criteria of targeting economic growth. In fact, stimulus money is mainly being used to plug budget gaps in the government and banking sectors. It is exactly analogous to using a credit card to pay your monthly bills. Eventually, unless structural changes are made, the bill will come due, and you have not increased your income, but only added to your debt.
Any dollar spending is good for GDP. In the real world, pumping money into unsustainable money-losing malinvestments is a bad thing, but it makes GDP bigger! GDP hides these fantasy gains, making them look like a positive thing. GPD numbers also directly reward inflationary debt spending.
Its all a form of mass mind control, so that our government/economic leaders can proclaim the economy has turned around. In reality, we are all poorer as malinvestments continue and our purchasing power is undermined, but GDP hides the spreading poverty.
Many alternative-oriented thinkers have attempted to calculate alternatives to GDP which take account of hidden costs, but there are only two real, non-falsifiable, and non-manipulatable statistics that speak to our rising or falling standard of living: average time off and retirement age. Less time off and later retirement ages mean we are getting poorer, no matter what other statistical garbage is invented.
A truly advancing economy means that we have to work less, and can quit working sooner. Anything else is strictly a statistical mind control technique like GDP.
The collapse of the one-earner family, and the evaporation of pension/retirement benefits, are testimony to our increasing poverty as a people. It is a preventable tragedy that money-based illusions like GDP keep people from recognizing the negative consequences of our economic policies.
Friday, August 7, 2009
Storm Clouds Gather as Fed Secretly Monetizes Debt
Scary stuff follows. Keep in mind, the only thing propping up national GDP, and the financial system as we know it, is the Fed monetizing the debt.
http://market-ticker.org/archives/1304-BLATANT-Monetization-Uncovered.html
"...
Well now we know what happened: The Fed pretty clearly pre-arranged, either explicitly or by "suggestion", that the Primary Dealers take up the auction with the promise that The Fed would immediately monetize half what the Primary Dealer's took!
Folks, this is beyond bad - it is pernicious and outrageous conduct by The Federal Reserve in conspiracy with the Primary Dealers, both of which are now desperately trying to prop up the US Government Bond Market through subterfuge rather than just buying up the bond issue from Treasury when originally put to the market!
If you think the economy and credit markets are "on the mend" why would The Fed do something like this? It would not be necessary unless The Fed was told (by those very same Primary Dealers) that they were going to be unable or unwilling to take down any more Treasury Debt.
Folks, let me be clear: The United States HAS OFFICIALLY HIT THE TREASURY DEBT WALL and The Fed and Treasury are engaged in subterfuge and conspiracy in an attempt to hide this from the market.
There is no other explanation for what just happened.
...
When it sinks in to the market's consciousness - we had two failed Treasury Auctions last week, both 5 and 7 year, yet we intend to try to borrow ANOTHER $400 billion next quarter and nearly $100 billion this coming week - the consequences could be extremely severe."
http://market-ticker.org/archives/1304-BLATANT-Monetization-Uncovered.html
"...
Well now we know what happened: The Fed pretty clearly pre-arranged, either explicitly or by "suggestion", that the Primary Dealers take up the auction with the promise that The Fed would immediately monetize half what the Primary Dealer's took!
Folks, this is beyond bad - it is pernicious and outrageous conduct by The Federal Reserve in conspiracy with the Primary Dealers, both of which are now desperately trying to prop up the US Government Bond Market through subterfuge rather than just buying up the bond issue from Treasury when originally put to the market!
If you think the economy and credit markets are "on the mend" why would The Fed do something like this? It would not be necessary unless The Fed was told (by those very same Primary Dealers) that they were going to be unable or unwilling to take down any more Treasury Debt.
Folks, let me be clear: The United States HAS OFFICIALLY HIT THE TREASURY DEBT WALL and The Fed and Treasury are engaged in subterfuge and conspiracy in an attempt to hide this from the market.
There is no other explanation for what just happened.
...
When it sinks in to the market's consciousness - we had two failed Treasury Auctions last week, both 5 and 7 year, yet we intend to try to borrow ANOTHER $400 billion next quarter and nearly $100 billion this coming week - the consequences could be extremely severe."
Tuesday, August 4, 2009
Excess Reserves, the Federal Deficit and Fed Manipulation
Amazing statistic: excess reserves in our banking system are up to $744 billion. This is from an average of $1.7 billion from 2002-2007. That is an increase of 43,645 percent! Excess reserves are defined as cash kept by banks on deposit with the Fed, above the minimum reserve requirements.
So, there is a ton of money sloshing around in our banking system. Where did the excess reserves come from? An increase in the personal savings rate, combined with all the federal stimulus money given to banks.
But the banks aren't putting it out in loans! What are they doing with it? Investing in paper securities, esp. government bonds. “Government financing needs are extraordinary right now,” said Tony Crescenzi of Pacific Investment Management Co., which oversees the world’s biggest bond fund. “At some point banks will shift from investing in securities toward making loans, but we haven’t seen that yet.” [quote from Bloomberg here]
Do you see the circularity in this? Banks are bailed out by the Fed. The banks then use that money to purchase government debt. You increase your savings rate, which the banks then use to fund the expansion of the federal deficit. Federal spending is sucking in capital.
Meanwhile, our economy is continuing to grind down from deflation. Commercial and industrial loan growth is decreasing at an anual rate of 4.5%, mirroring the collapse in economic output. Consumer prices fell 1.4% in June from a year earlier, the biggest drop since 1950.
And here is the Fed's role in this scam: the steepness of the yield curve, or the difference between short- and long-term rates, is giving banks incentive to borrow for almost nothing in the overnight lending markets and invest the proceeds in Treasuries.
Keep in mind, while the long-term rate is somewhat market driven, the Fed directly controls the short term rate. In other words, the Fed is intentionally manufacturing the financial flow into government debt.
Listen to this quote from William Dudley, the president of the New York Federal Reserve Bank: a recovery “will be considerably slower than usual,” and “credit availability will be constrained for some time to come.”
Ok, explain me this: with a massive amount of excess cash sitting in bank vaults, why is credit availability constrained???
Do you see what is going on here? Banks are simply hoarding the cash, watching the real economy collapse in a deflation, as they stay liquid and highly profitable by recycling government debt.
Banks love the guaranteed results of government debt during an economic collapse when real investments are liquidating. Cash is king during a deflation, so banks want to be as liquid as possible, to be able to scoop up cheap assets when the markets bottom out. So they are hoarding cash! It is that simple.
The Fed, the federal government, and the banks in general, are sucking the lifeblood out of the real economy, engineering an economic collapse, while guaranteeing banking profits through government debt which is paid by the citizens. The citizens' real economy is royally screwed, and the citizens get to pay for the destruction.
At this point, I am forced to agree with Obama's racist pastor Jeremiah Wright: "God damn America!" This is the devil's work, nothing less.
So, there is a ton of money sloshing around in our banking system. Where did the excess reserves come from? An increase in the personal savings rate, combined with all the federal stimulus money given to banks.
But the banks aren't putting it out in loans! What are they doing with it? Investing in paper securities, esp. government bonds. “Government financing needs are extraordinary right now,” said Tony Crescenzi of Pacific Investment Management Co., which oversees the world’s biggest bond fund. “At some point banks will shift from investing in securities toward making loans, but we haven’t seen that yet.” [quote from Bloomberg here]
Do you see the circularity in this? Banks are bailed out by the Fed. The banks then use that money to purchase government debt. You increase your savings rate, which the banks then use to fund the expansion of the federal deficit. Federal spending is sucking in capital.
Meanwhile, our economy is continuing to grind down from deflation. Commercial and industrial loan growth is decreasing at an anual rate of 4.5%, mirroring the collapse in economic output. Consumer prices fell 1.4% in June from a year earlier, the biggest drop since 1950.
And here is the Fed's role in this scam: the steepness of the yield curve, or the difference between short- and long-term rates, is giving banks incentive to borrow for almost nothing in the overnight lending markets and invest the proceeds in Treasuries.
Keep in mind, while the long-term rate is somewhat market driven, the Fed directly controls the short term rate. In other words, the Fed is intentionally manufacturing the financial flow into government debt.
Listen to this quote from William Dudley, the president of the New York Federal Reserve Bank: a recovery “will be considerably slower than usual,” and “credit availability will be constrained for some time to come.”
Ok, explain me this: with a massive amount of excess cash sitting in bank vaults, why is credit availability constrained???
Do you see what is going on here? Banks are simply hoarding the cash, watching the real economy collapse in a deflation, as they stay liquid and highly profitable by recycling government debt.
Banks love the guaranteed results of government debt during an economic collapse when real investments are liquidating. Cash is king during a deflation, so banks want to be as liquid as possible, to be able to scoop up cheap assets when the markets bottom out. So they are hoarding cash! It is that simple.
The Fed, the federal government, and the banks in general, are sucking the lifeblood out of the real economy, engineering an economic collapse, while guaranteeing banking profits through government debt which is paid by the citizens. The citizens' real economy is royally screwed, and the citizens get to pay for the destruction.
At this point, I am forced to agree with Obama's racist pastor Jeremiah Wright: "God damn America!" This is the devil's work, nothing less.
Friday, July 31, 2009
Chinese Industrial Policy of Piracy
Capitalism divorced from any ethics or morality, this is the Chinese way.
Sun Danyong, the 25-year-old suicide victim who worked at contract cellphone maker Foxconn International's massive gray and white factory complex in Dongguan, had 16 prototypes of Apple's new fourth-generation iPhone in his possession, according to the Taiwanese company. When one went missing, Foxconn's security guards raided his apartment, according to a report in the People's Daily. The phone didn't turn up. A likely answer, according to security experts, is that the device ended up in the hands of Shenzhen's notoriously entrepreneurial counterfeiters.
"The copying of prototypes certainly happens a lot in the electronics and IT industries," said Dane Chamorro, a regional general manager with Control Risks, a corporate investigations consulting firm. "You don't have to steal them, you just have to borrow one for a day." In an earlier interview with the New York Times, Foxconn's general manager for China said that Mr. Sun had previously lost products "several times" before getting them back again.
Apple computer, whose popular iPhone is widely copied in China, isn't the only foreign handset maker to suffer at the hands of counterfeiters. Knock-offs of Samsung, Nokia and Motorola products are all sold openly throughout China.
According to U.S. Customs and Border Protection, 81 percent of all counterfeit goods seized at the U.S. border were from China. The value of those goods rose 40 percent in 2008, to $221.7 million.
"Mainland China is the riskiest place for foreign firms to introduce their leading-edge technologies," said Steve Vickers, president of Hong Kong-based FTI-International Risk. "It remains a major problem."
A recent visit to the Golconda Cyber Plaza, a sprawling electronics mall in Shenzhen, suggests the scale of the challenge. Hundreds of vendors were showing off their knock-off mobile phones, including counterfeit Nokia and Samsung handsets, and the latest Apple iPhone, which was selling for about US$63, far cheaper than the US$579 charged on Apple's Hong Kong online store. "The iPhone quality is good and quite steady," said Li Jinhui, a salesperson with Shenzhen Guanghui Communication, one of the phone sellers, pointing at one of the counterfeit phones on display. "The real phone price is too expensive, so many people buy this instead."
The copying takes several forms. In some cases, companies copy phones already on the market. In others, local suppliers of foreign companies run extra shifts and sell the surplus goods on the side. Then there are the designs that get stolen even before production. This last form may be the most damaging, since it undermines costly efforts to build anticipation about upcoming products.
Theives have become adept at exploiting weak points in companies' security arrangements. According to Nicholas Blank, an associate managing director with security firm Kroll, the typical Chinese factory is protected only by guards who check the IDs of employees entering the facility.
"Unfortunately, in most of these schemes where intellectual property is stolen from a factory, it's not someone breaking in," said Blank. "It's usually an employee or a contractor who already has access to the facility." Even where internal security is more elaborate, counterfeiters may be able to identify which employees have access to product samples and bribe them. "If you wanted to know what a company's next design would be, you can pretty well target those in the OEM organizations who are holding the prototypes," said Chamorro. "It's not rocket science to throw money at them."
China's legal system hasn't helped matters. Intellectual property cases are hard to bring and even harder to enforce, according to attorneys. One problem is that China's criminal code specifies a minimum value for seized goods in order to trigger criminal action -- seizures worth less than 50,000 yuan ($7,330) aren't prosecuted by the police. Counterfeiters have responded by limiting the size and value of their shipments.
Another worry is that anti-piracy enforcement may have weakened during China's economic slowdown. According to a report by the International Anticounterfeiting Coalition, coalition members have been told by local police that they were under instructions not to pursue criminal cases against counterfeiters. "Overall, we've seen a deterioration," said one Hong Kong-based lawyer who declined to be named. "There's a lot of concern that the government has openly told local forces not to pursue as many cases because of the impact it might have on jobs and social stability."
http://www.reuters.com/article/newsOne/idUSTRE56T0BL20090730
Sun Danyong, the 25-year-old suicide victim who worked at contract cellphone maker Foxconn International's massive gray and white factory complex in Dongguan, had 16 prototypes of Apple's new fourth-generation iPhone in his possession, according to the Taiwanese company. When one went missing, Foxconn's security guards raided his apartment, according to a report in the People's Daily. The phone didn't turn up. A likely answer, according to security experts, is that the device ended up in the hands of Shenzhen's notoriously entrepreneurial counterfeiters.
"The copying of prototypes certainly happens a lot in the electronics and IT industries," said Dane Chamorro, a regional general manager with Control Risks, a corporate investigations consulting firm. "You don't have to steal them, you just have to borrow one for a day." In an earlier interview with the New York Times, Foxconn's general manager for China said that Mr. Sun had previously lost products "several times" before getting them back again.
Apple computer, whose popular iPhone is widely copied in China, isn't the only foreign handset maker to suffer at the hands of counterfeiters. Knock-offs of Samsung, Nokia and Motorola products are all sold openly throughout China.
According to U.S. Customs and Border Protection, 81 percent of all counterfeit goods seized at the U.S. border were from China. The value of those goods rose 40 percent in 2008, to $221.7 million.
"Mainland China is the riskiest place for foreign firms to introduce their leading-edge technologies," said Steve Vickers, president of Hong Kong-based FTI-International Risk. "It remains a major problem."
A recent visit to the Golconda Cyber Plaza, a sprawling electronics mall in Shenzhen, suggests the scale of the challenge. Hundreds of vendors were showing off their knock-off mobile phones, including counterfeit Nokia and Samsung handsets, and the latest Apple iPhone, which was selling for about US$63, far cheaper than the US$579 charged on Apple's Hong Kong online store. "The iPhone quality is good and quite steady," said Li Jinhui, a salesperson with Shenzhen Guanghui Communication, one of the phone sellers, pointing at one of the counterfeit phones on display. "The real phone price is too expensive, so many people buy this instead."
The copying takes several forms. In some cases, companies copy phones already on the market. In others, local suppliers of foreign companies run extra shifts and sell the surplus goods on the side. Then there are the designs that get stolen even before production. This last form may be the most damaging, since it undermines costly efforts to build anticipation about upcoming products.
Theives have become adept at exploiting weak points in companies' security arrangements. According to Nicholas Blank, an associate managing director with security firm Kroll, the typical Chinese factory is protected only by guards who check the IDs of employees entering the facility.
"Unfortunately, in most of these schemes where intellectual property is stolen from a factory, it's not someone breaking in," said Blank. "It's usually an employee or a contractor who already has access to the facility." Even where internal security is more elaborate, counterfeiters may be able to identify which employees have access to product samples and bribe them. "If you wanted to know what a company's next design would be, you can pretty well target those in the OEM organizations who are holding the prototypes," said Chamorro. "It's not rocket science to throw money at them."
China's legal system hasn't helped matters. Intellectual property cases are hard to bring and even harder to enforce, according to attorneys. One problem is that China's criminal code specifies a minimum value for seized goods in order to trigger criminal action -- seizures worth less than 50,000 yuan ($7,330) aren't prosecuted by the police. Counterfeiters have responded by limiting the size and value of their shipments.
Another worry is that anti-piracy enforcement may have weakened during China's economic slowdown. According to a report by the International Anticounterfeiting Coalition, coalition members have been told by local police that they were under instructions not to pursue criminal cases against counterfeiters. "Overall, we've seen a deterioration," said one Hong Kong-based lawyer who declined to be named. "There's a lot of concern that the government has openly told local forces not to pursue as many cases because of the impact it might have on jobs and social stability."
http://www.reuters.com/article/newsOne/idUSTRE56T0BL20090730
Arizona Government Selling Capitol Buildings
Nothing is more emblematic of the real effects of the financial contraction cycle than the latest proposal by the Arizona government to sell their own government buildings.
In a monetary contraction, real wealth, starting with real estate, is vacuumed up by the financial elite. As I have detailed elsewhere, that is exactly the purpose and function of monetary contractions: a well-executed plan by the wealthy to gather more wealth. Normal people lose their possessions by going into debt during the credit run-up. Arizona is proving it can happen to governments too.
Living beyond your means, relying on the bankers to bridge your budget with their loans, this is the mechanism of slavery. A sale/lease-back such as Arizona is proposing is just a loan by another name, as they try to sneak around legal limits on their ability to get loans.
Thank you, Arizona, for making the process of wealth contract by bankers at teh expense of the people so obvious and notorious.
In a monetary contraction, real wealth, starting with real estate, is vacuumed up by the financial elite. As I have detailed elsewhere, that is exactly the purpose and function of monetary contractions: a well-executed plan by the wealthy to gather more wealth. Normal people lose their possessions by going into debt during the credit run-up. Arizona is proving it can happen to governments too.
Living beyond your means, relying on the bankers to bridge your budget with their loans, this is the mechanism of slavery. A sale/lease-back such as Arizona is proposing is just a loan by another name, as they try to sneak around legal limits on their ability to get loans.
Thank you, Arizona, for making the process of wealth contract by bankers at teh expense of the people so obvious and notorious.
Dream with Bernanke!!!!
This morning I had a dream with Bernanke. Yeah, weird, I know.
We were in a room in some big city apartment building with some other people for a publicity thing, a big-wig mingling with the commoners kind of photo-op. So I asked him real respectful like, why he gave all the bailout money to the banks rather than directly to the people.
He just laughed and went into the next room.
We were in a room in some big city apartment building with some other people for a publicity thing, a big-wig mingling with the commoners kind of photo-op. So I asked him real respectful like, why he gave all the bailout money to the banks rather than directly to the people.
He just laughed and went into the next room.
Friday, July 24, 2009
The Paradox of International Trade Deficits
Many people still have the idea that a trade deficit is an unqualified negative, but since we went off the gold standard, that unqualified judgment no longer really applies.
Back in the days of the gold standard, an imbalance of trade would be settled in gold. So, a country operating a trade deficit would be chronically bleeding gold. In fact, that exact thing was happening to America in the early 1970s, leading Nixon to take the dollar off of its international gold standard .
The situation today is much different. The deficit country gives slips of paper to the surpluss country, in return for real goods. Who is really getting rich in that scenario? Obviously, its better to get stuff and give paper. The surplus trade partner is just plain dumb in the first place for accepting a non-objective currency as a settlement of account.
They are even dumber for then reinvesting those dollars in dollar-denominated debt. Seriously, would you give a loan to someone expecting repayment in a paper currency they can print out at will? It is asking to be taken advantage of, quite frankly.
The only rational thing to do with a paper currency from a foreign issuer is to immediately plow it back into real goods and services.
This analysis merely highlights how irrational Chinese economic policy has been. Actually, to be clear, it is only irrational from the perspective of maximizing value. It is not irrational, it makes perfect sense actually, in light of their true policy objective: full employment. The Chinese are willing to sacrifice a great deal to maintain full employment.
The problem for us is that by hitching our economies together, our economy is distorted by their irrational economic objectives. We get tons of cheap Chinese junk and a bloated financial sector, but lose real productive jobs.
Worst of all, we are subsidizing the unsustainable, inefficient, and destructive production goals of the Chinese government. In classical economic terms, this is called malinvestment.
It makes no economic sense to keep people employed by making half of them construct houses and the other half tear them down. But under a command economy, such economically destructive processes go on all the time. In fact, the Chinese already have a large overcapacity of housing supply, but that doesn't stop them from building more under the direction of central planners.
In the Soviet days, their planned economy was isolated, firewalled off from the free world. Today, ours is linked to theirs. On the one hand, we benefit from all the cheap goods they give to us for paper dollars, on the other hand, we suffer from inflated commodity prices and the loss of jobs, and we encourage an unsustainable and destructive economic system.
Back in the days of the gold standard, an imbalance of trade would be settled in gold. So, a country operating a trade deficit would be chronically bleeding gold. In fact, that exact thing was happening to America in the early 1970s, leading Nixon to take the dollar off of its international gold standard .
The situation today is much different. The deficit country gives slips of paper to the surpluss country, in return for real goods. Who is really getting rich in that scenario? Obviously, its better to get stuff and give paper. The surplus trade partner is just plain dumb in the first place for accepting a non-objective currency as a settlement of account.
They are even dumber for then reinvesting those dollars in dollar-denominated debt. Seriously, would you give a loan to someone expecting repayment in a paper currency they can print out at will? It is asking to be taken advantage of, quite frankly.
The only rational thing to do with a paper currency from a foreign issuer is to immediately plow it back into real goods and services.
This analysis merely highlights how irrational Chinese economic policy has been. Actually, to be clear, it is only irrational from the perspective of maximizing value. It is not irrational, it makes perfect sense actually, in light of their true policy objective: full employment. The Chinese are willing to sacrifice a great deal to maintain full employment.
The problem for us is that by hitching our economies together, our economy is distorted by their irrational economic objectives. We get tons of cheap Chinese junk and a bloated financial sector, but lose real productive jobs.
Worst of all, we are subsidizing the unsustainable, inefficient, and destructive production goals of the Chinese government. In classical economic terms, this is called malinvestment.
It makes no economic sense to keep people employed by making half of them construct houses and the other half tear them down. But under a command economy, such economically destructive processes go on all the time. In fact, the Chinese already have a large overcapacity of housing supply, but that doesn't stop them from building more under the direction of central planners.
In the Soviet days, their planned economy was isolated, firewalled off from the free world. Today, ours is linked to theirs. On the one hand, we benefit from all the cheap goods they give to us for paper dollars, on the other hand, we suffer from inflated commodity prices and the loss of jobs, and we encourage an unsustainable and destructive economic system.
Thursday, July 23, 2009
Credit Contractions and the Consolidation of Wealth
The wealthy love credit contractions and they use their banks to facilitate them. Here why and how:
It is an axiom of human psychology that people will fall victim to easy credit. I chalk it up mainly to the inevitable fact that young people with the keenest need for status displays have the least available savings. For that and no doubt other reasons, people are happy to go into debt to get something today rather than wait until they have saved to afford it.
Easy credit serves to consolidate wealth in the bankers’ hands in two ways. For one, there is a systemic shortage of dollars to pay off loans. Because we operate under a debt-based money system, collectively, there is not enough money. In short, money is created is based on the value of loan collateral, but there is no extra money created for the interest payments.
Thus, there is a mathematical shortage of money relative to outstanding debt owed, which guarantees a constant percentage of loan failures. A loan failure means a permanent transfer of wealth into banking hands.
This constant transfer of wealth into banking hands is a low-level phenomenon under the normal conditions of an expanding credit supply, but undergoes a massive spike upward when credit conditions tighten, which is the second reason why the wealthy love credit contractions.
The conditions of easy credit create a greater demand for credit, because the easy credit drives up prices. For example, if housing has to be paid for in cash, there will be less ability to afford houses, i.e., lower demand. On the other hand, if housing can be 100% financed with loans, more people will be in the market for housing, the greater demand driving up prices. The higher prices then mean that fewer can afford the prices, driving up the need for credit. Rising prices then drag in speculators hoping to ride the upward tide of prices. Thus, as you can see, easy credit and higher prices form a feedback loop, producing what are commonly known as price bubbles.
The wealthy love price bubbles because they know exactly when they are going to pop. They know this not because they have psychic powers or are economic geniuses, but because they themselves cause the bubble to pop. The wealthy pop the bubble themselves by removing their own investments, known as profit taking.
Profit taking is happy enough for them, but it gets even better, because after taking their profits, they also tighten credit availability. Tighter credit, combined with their initial burst of selling, produces a bubble collapse. Masses of common people are left sitting on devalued collateral but overvalued loans, resulting in mass defaults and panic sales at low prices.
Now, of course the wealthy love getting to repossess and resell the collateral, but even more than that, they love swooping in and buying up the goods at ultra-cheap prices from distressed sellers.
It is really the simplest game in the world for the banking class: pump up prices with easy credit, take profits, pop bubble, acquire cheap assets, repeat.
But you object, banks get hurt in the process too, don’t they? Well, the big ones don’t, not at all, they are “too big to fail”, remember? But even more importantly, you are confusing banks with the banking class. Sure, some banks fail, but that is part of the process of tightening credit and lowering asset values. A bank may “fail” but the bankers are still getting rich. A bank is just a legal fiction, so the bankers are not actually going broke when a bank fails. Their personal assets are squirreled away and safe, sitting in cash and other valuable goods. Remember, they are the ones who know exactly when to cash out, because they caused the bubble collapse themselves.
When you are rich enough, you are not riding the market, you are moving the market. The common investors are just along for the ride, hoping for the scraps that fly down from the feast. Additionally, this banking class is in contact with one another, so they have the ultimate insider information. Because they themselves move the market, and are in close contact with others who do the same, their trades will always occur before the masses. Its like the built-in house advantage at the casino. Just enough commoners make money to keep the whole operation going, but it is the house that is always getting rich.
Unfortunately, our debt-money system is structured so that you are forced to play at their game. They create the money, so they get the goods, it’s really that simple.
For the common people, the main solution is to get the base of our money supply off the debt system. People will always be going into debt to banks, but the government should be putting debt-free money into the economy to counteract the money shortage.
Government can also prevent asset bubbles by regulating interest rates and bank charges, as well as guaranteeing consumer rights (rather than bank rights). These government actions would not regulate bank credit creation directly (which would be almost impossible), but would effectively control bank credit creation by squeezing its profitability.
Government can also go into the banking business itself. Much government revenue would be created through interest charges, and even loan failures would go to the public good. Competition with government would also drive down the costs associated of the private bankers and decrease their overall power. Government directly banking could also be used to finance crucial government infrastructure functions, debt free, saving us all money.
It is an axiom of human psychology that people will fall victim to easy credit. I chalk it up mainly to the inevitable fact that young people with the keenest need for status displays have the least available savings. For that and no doubt other reasons, people are happy to go into debt to get something today rather than wait until they have saved to afford it.
Easy credit serves to consolidate wealth in the bankers’ hands in two ways. For one, there is a systemic shortage of dollars to pay off loans. Because we operate under a debt-based money system, collectively, there is not enough money. In short, money is created is based on the value of loan collateral, but there is no extra money created for the interest payments.
Thus, there is a mathematical shortage of money relative to outstanding debt owed, which guarantees a constant percentage of loan failures. A loan failure means a permanent transfer of wealth into banking hands.
This constant transfer of wealth into banking hands is a low-level phenomenon under the normal conditions of an expanding credit supply, but undergoes a massive spike upward when credit conditions tighten, which is the second reason why the wealthy love credit contractions.
The conditions of easy credit create a greater demand for credit, because the easy credit drives up prices. For example, if housing has to be paid for in cash, there will be less ability to afford houses, i.e., lower demand. On the other hand, if housing can be 100% financed with loans, more people will be in the market for housing, the greater demand driving up prices. The higher prices then mean that fewer can afford the prices, driving up the need for credit. Rising prices then drag in speculators hoping to ride the upward tide of prices. Thus, as you can see, easy credit and higher prices form a feedback loop, producing what are commonly known as price bubbles.
The wealthy love price bubbles because they know exactly when they are going to pop. They know this not because they have psychic powers or are economic geniuses, but because they themselves cause the bubble to pop. The wealthy pop the bubble themselves by removing their own investments, known as profit taking.
Profit taking is happy enough for them, but it gets even better, because after taking their profits, they also tighten credit availability. Tighter credit, combined with their initial burst of selling, produces a bubble collapse. Masses of common people are left sitting on devalued collateral but overvalued loans, resulting in mass defaults and panic sales at low prices.
Now, of course the wealthy love getting to repossess and resell the collateral, but even more than that, they love swooping in and buying up the goods at ultra-cheap prices from distressed sellers.
It is really the simplest game in the world for the banking class: pump up prices with easy credit, take profits, pop bubble, acquire cheap assets, repeat.
But you object, banks get hurt in the process too, don’t they? Well, the big ones don’t, not at all, they are “too big to fail”, remember? But even more importantly, you are confusing banks with the banking class. Sure, some banks fail, but that is part of the process of tightening credit and lowering asset values. A bank may “fail” but the bankers are still getting rich. A bank is just a legal fiction, so the bankers are not actually going broke when a bank fails. Their personal assets are squirreled away and safe, sitting in cash and other valuable goods. Remember, they are the ones who know exactly when to cash out, because they caused the bubble collapse themselves.
When you are rich enough, you are not riding the market, you are moving the market. The common investors are just along for the ride, hoping for the scraps that fly down from the feast. Additionally, this banking class is in contact with one another, so they have the ultimate insider information. Because they themselves move the market, and are in close contact with others who do the same, their trades will always occur before the masses. Its like the built-in house advantage at the casino. Just enough commoners make money to keep the whole operation going, but it is the house that is always getting rich.
Unfortunately, our debt-money system is structured so that you are forced to play at their game. They create the money, so they get the goods, it’s really that simple.
For the common people, the main solution is to get the base of our money supply off the debt system. People will always be going into debt to banks, but the government should be putting debt-free money into the economy to counteract the money shortage.
Government can also prevent asset bubbles by regulating interest rates and bank charges, as well as guaranteeing consumer rights (rather than bank rights). These government actions would not regulate bank credit creation directly (which would be almost impossible), but would effectively control bank credit creation by squeezing its profitability.
Government can also go into the banking business itself. Much government revenue would be created through interest charges, and even loan failures would go to the public good. Competition with government would also drive down the costs associated of the private bankers and decrease their overall power. Government directly banking could also be used to finance crucial government infrastructure functions, debt free, saving us all money.
Tuesday, July 21, 2009
The Black Magic of Debt Money Creation
Anything with market value can be monetized to create money. The most common example we can all relate to is housing. Here is how it works:
You give the bank your house, they give you money. You are then allowed to buy your house back from them, on a slow repayment plan. In short, they give you dollars up front, then you slowly give back the dollars to get your house back (except you give back about three times the number of original dollars, because of the interest charged).
This house for dollars scheme is one example of debt dollars. The dollars are based on a debt, the amount owed on a house. You supply the house, they supply the money. Where did they get the money? They created it.
Now, by creating it, I don’t mean they printed the dollars. In our modern system, that is not necessary. They simply created an account balance for you. On their accounting, they have a house as an asset, and you have money as your asset, so it balances out.
Hopefully, now you can better understand the meaning of economic statements like the following:
"Note that although the system of fractional-reserve banking creates money, it does not create wealth. When a bank loans out some of its reserves, it gives borrowers the ability to make transactions and therefore increases the supply of money. The borrowers are also undertaking a debt obligation to the bank, however, so the loan does not make them wealthier. In other words, the creation of money by the banking system increases the economy's liquidity, not its wealth." (N. Gregory Mankiw, Ph D., Professor of Economics at Harvard University, Macroeconomics, Fifth Edition, pg 485)
This easy creation of money by banks is the real reason why the rich always get richer. They create credit dollars, and they get to buy real assets like houses. As mentioned, they don’t even have to print actual paper dollars, they simply create money as an accounting balance. They get the house, you get the account balance. Of course, if you fail to scrounge dollars from other sources, they keep your house.
Nice little scam, really, but it’s only for the rich. In order to gain this money creating power, you have to prove you are sufficiently wealthy to start with. That’s because the rules state that banks have to have a minimum capital level before they can get chartered as a bank. Gotta have money to make money, as they say!
Housing was the traditional basis for a lot of money creation, but in today’s world, banks have found something even better: government cash flow. Now we all know that governments have a regular cash flow coming in from taxes. Bankers figured out that they can create money based on the promise of future cash flow. Creating money based on future money, it sounds kind of shady, doesn’t it? Here is how it works:
Any institution that generates cash flow can take out a loan, right? Except, long ago, they discovered the best way to get a loan is not go begging for money from individual sources, but to make the money sources come to them! They do this by issuing bonds. They advertise that they are in the market for some money, and they will take a loan from whoever gives them the best deal. Various people with money bid against each other, lowering the cost of the loan, until finally someone wins. The winner then buys the loan contract, which is called a bond. Both private companies and government bodies can gather money this way, by issuing bonds.
Bankers like bonds, because, as slips of paper, they are more easily bought and sold than real estate. If they didn’t want to hold the bond, they found they could sell the bond to someone else. Remember, at the root of the bond is a company or government paying off a loan. Whoever buys the bond gets that loan repayment money, so a market developed buying and selling bonds.
At some point the bankers realized that they could monetize bonds the same way they monetized real estate. Say you own a bond, and you sell it to the bank. You give them the bond, they give you money. As long as the bond has a market value, that process is just as legit as selling your house for money, right? It seems a bit shady because it has entered the realm of abstraction: creating money to exchange for the promise of other money.
This enters us into the ethereal realm of financial products, all the way up to the credit default swaps and derivatives which became notorious during the financial panic of 2008. As long as there was a market value for something, some creative banker could monetize it, creating money to pay for it, in an ever-growing mountain of credit leverage.
The dollar is often called debt money because it is based on the monetization of US government debt bonds. The US Federal Reserve is the source font of dollar creation, because it monetizes the bonds of the US government. The Fed Reserve is also responsible for releasing actual paper cash into the economy, but that is a separate issue. Interestingly, the US Mint releases coin cash into the economy in yet a third money creating process.
But at its most basic level, the Fed Reserve creates credit money by monetizing government debt. The Fed then provides that credit money to banks to distribute into the economy at large. That creates the base source of the money supply. The market value of the federal debt is the collateral that backs the money supply.
Because the debt is the basis of the money supply, if the government paid off its debt, what would be the basis of the money supply? Hmm, there is a good question. Obviously, there would be the paper bills and coins in circulation. There would also be the credit money that commercial banks created by monetizing assets into private loans. But obviously, the money supply would shrink drastically if the government paid off its debt.
As a practical matter, the government simply keeps up the process of turning over its debt, continually refinancing and expanding its debt. Obviously, that continues to expand the money supply as well, resulting in widespread easy credit and chronic inflation.
Individual banks also have the power to increase the money supply on their own, by monetizing assets into loans, as we detailed previously. There was a time in the early mid-1800s when the debt was paid off and the money supply for the nation was solely in hands of private state banks (called the Free Bank Era). The banks based their money issue on exactly what we have been talking about: the monetization of real estate and government bonds as collateral.
This era was criticized as the Wildcat Bank era, but it did not really end out of its own failure. It was brought to an end by the National Bank Act of 1863 to meet the financing needs of the Civil War.
After the Civil War, the government returned to the discipline of the gold standard. That was then criticized for being too inelastic in its ability to create credit. Which led to the formation of the Federal Reserve system in the 1910s to loosen up credit. Which worked spectacularly throughout the 1920’s to pump up the economy. The credit bubble burst, however, resulting in the Great Depression. To loosen up credit again, the dollar was taken off the gold standard. Since then we have had runaway economic growth and malinvestment fueled by easy credit and chronic inflation, culminating in the Credit Crunch of 2008 and the ongoing Great Recession.
There is a better way of these destructive and unsustainable cycle, and it involves moving out of the system of debt-backed money.
You give the bank your house, they give you money. You are then allowed to buy your house back from them, on a slow repayment plan. In short, they give you dollars up front, then you slowly give back the dollars to get your house back (except you give back about three times the number of original dollars, because of the interest charged).
This house for dollars scheme is one example of debt dollars. The dollars are based on a debt, the amount owed on a house. You supply the house, they supply the money. Where did they get the money? They created it.
Now, by creating it, I don’t mean they printed the dollars. In our modern system, that is not necessary. They simply created an account balance for you. On their accounting, they have a house as an asset, and you have money as your asset, so it balances out.
Hopefully, now you can better understand the meaning of economic statements like the following:
"Note that although the system of fractional-reserve banking creates money, it does not create wealth. When a bank loans out some of its reserves, it gives borrowers the ability to make transactions and therefore increases the supply of money. The borrowers are also undertaking a debt obligation to the bank, however, so the loan does not make them wealthier. In other words, the creation of money by the banking system increases the economy's liquidity, not its wealth." (N. Gregory Mankiw, Ph D., Professor of Economics at Harvard University, Macroeconomics, Fifth Edition, pg 485)
This easy creation of money by banks is the real reason why the rich always get richer. They create credit dollars, and they get to buy real assets like houses. As mentioned, they don’t even have to print actual paper dollars, they simply create money as an accounting balance. They get the house, you get the account balance. Of course, if you fail to scrounge dollars from other sources, they keep your house.
Nice little scam, really, but it’s only for the rich. In order to gain this money creating power, you have to prove you are sufficiently wealthy to start with. That’s because the rules state that banks have to have a minimum capital level before they can get chartered as a bank. Gotta have money to make money, as they say!
Housing was the traditional basis for a lot of money creation, but in today’s world, banks have found something even better: government cash flow. Now we all know that governments have a regular cash flow coming in from taxes. Bankers figured out that they can create money based on the promise of future cash flow. Creating money based on future money, it sounds kind of shady, doesn’t it? Here is how it works:
Any institution that generates cash flow can take out a loan, right? Except, long ago, they discovered the best way to get a loan is not go begging for money from individual sources, but to make the money sources come to them! They do this by issuing bonds. They advertise that they are in the market for some money, and they will take a loan from whoever gives them the best deal. Various people with money bid against each other, lowering the cost of the loan, until finally someone wins. The winner then buys the loan contract, which is called a bond. Both private companies and government bodies can gather money this way, by issuing bonds.
Bankers like bonds, because, as slips of paper, they are more easily bought and sold than real estate. If they didn’t want to hold the bond, they found they could sell the bond to someone else. Remember, at the root of the bond is a company or government paying off a loan. Whoever buys the bond gets that loan repayment money, so a market developed buying and selling bonds.
At some point the bankers realized that they could monetize bonds the same way they monetized real estate. Say you own a bond, and you sell it to the bank. You give them the bond, they give you money. As long as the bond has a market value, that process is just as legit as selling your house for money, right? It seems a bit shady because it has entered the realm of abstraction: creating money to exchange for the promise of other money.
This enters us into the ethereal realm of financial products, all the way up to the credit default swaps and derivatives which became notorious during the financial panic of 2008. As long as there was a market value for something, some creative banker could monetize it, creating money to pay for it, in an ever-growing mountain of credit leverage.
The dollar is often called debt money because it is based on the monetization of US government debt bonds. The US Federal Reserve is the source font of dollar creation, because it monetizes the bonds of the US government. The Fed Reserve is also responsible for releasing actual paper cash into the economy, but that is a separate issue. Interestingly, the US Mint releases coin cash into the economy in yet a third money creating process.
But at its most basic level, the Fed Reserve creates credit money by monetizing government debt. The Fed then provides that credit money to banks to distribute into the economy at large. That creates the base source of the money supply. The market value of the federal debt is the collateral that backs the money supply.
Because the debt is the basis of the money supply, if the government paid off its debt, what would be the basis of the money supply? Hmm, there is a good question. Obviously, there would be the paper bills and coins in circulation. There would also be the credit money that commercial banks created by monetizing assets into private loans. But obviously, the money supply would shrink drastically if the government paid off its debt.
As a practical matter, the government simply keeps up the process of turning over its debt, continually refinancing and expanding its debt. Obviously, that continues to expand the money supply as well, resulting in widespread easy credit and chronic inflation.
Individual banks also have the power to increase the money supply on their own, by monetizing assets into loans, as we detailed previously. There was a time in the early mid-1800s when the debt was paid off and the money supply for the nation was solely in hands of private state banks (called the Free Bank Era). The banks based their money issue on exactly what we have been talking about: the monetization of real estate and government bonds as collateral.
This era was criticized as the Wildcat Bank era, but it did not really end out of its own failure. It was brought to an end by the National Bank Act of 1863 to meet the financing needs of the Civil War.
After the Civil War, the government returned to the discipline of the gold standard. That was then criticized for being too inelastic in its ability to create credit. Which led to the formation of the Federal Reserve system in the 1910s to loosen up credit. Which worked spectacularly throughout the 1920’s to pump up the economy. The credit bubble burst, however, resulting in the Great Depression. To loosen up credit again, the dollar was taken off the gold standard. Since then we have had runaway economic growth and malinvestment fueled by easy credit and chronic inflation, culminating in the Credit Crunch of 2008 and the ongoing Great Recession.
There is a better way of these destructive and unsustainable cycle, and it involves moving out of the system of debt-backed money.
The Real Costs of Business with China
Great article detailing the practice of business with the Chinese. In sum, they are untrustworthy, highly unethical, and frankly brutal in the treatment of business partners. Read the following book review for yourself.
Poorly Made in China by Paul Midler
Reviewed by Muhammad Cohen
When you buy for US$2 in New York an umbrella that's made in China, you have to wonder how they do it. After all, the umbrella components have to cost something, there's shipping, and there's profit for numerous middlemen and the retailer. Among the economic miracles unfolding in China over the past two decades, the most mysterious may be how a country that skipped the Industrial Revolution, substituting the Cultural Revolution, became the low-cost factory floor to the world.
Poorly Made in China: An Insider's Account of the Tactics Behind China's Production Game provides fascinating and disturbing answers. Chinese manufacturers cut corners wherever they can, from product quality to factory equipment and maintenance. They unilaterally change product and packaging specifications to trim costs. They raise prices after the deal is signed, leaving the importer to absorb the added cost. They reproduce their customers' products for sale at higher margins in other markets. With support from government, bankers, and networks of fellow manufacturers, they conduct manufacturing and customer relations as a game, treating the other party as a patsy not a partner, playing for the short term of making an extra penny at the risk of product quality but also taking a long-term, multidimensional outlook that outflanks the hapless customer.
. . .
cont.
http://www.atimes.com/atimes/China/KG18Ad02.html
Poorly Made in China by Paul Midler
Reviewed by Muhammad Cohen
When you buy for US$2 in New York an umbrella that's made in China, you have to wonder how they do it. After all, the umbrella components have to cost something, there's shipping, and there's profit for numerous middlemen and the retailer. Among the economic miracles unfolding in China over the past two decades, the most mysterious may be how a country that skipped the Industrial Revolution, substituting the Cultural Revolution, became the low-cost factory floor to the world.
Poorly Made in China: An Insider's Account of the Tactics Behind China's Production Game provides fascinating and disturbing answers. Chinese manufacturers cut corners wherever they can, from product quality to factory equipment and maintenance. They unilaterally change product and packaging specifications to trim costs. They raise prices after the deal is signed, leaving the importer to absorb the added cost. They reproduce their customers' products for sale at higher margins in other markets. With support from government, bankers, and networks of fellow manufacturers, they conduct manufacturing and customer relations as a game, treating the other party as a patsy not a partner, playing for the short term of making an extra penny at the risk of product quality but also taking a long-term, multidimensional outlook that outflanks the hapless customer.
. . .
cont.
http://www.atimes.com/atimes/China/KG18Ad02.html
Wednesday, July 15, 2009
The Theory and Practice of Credit Exchanges and Alternative Money
Money represents wealth. Money can be issued based on anything of value, be it a good or a service. Creating money to represent some object of wealth is called monetizing. Any collateral can be monetized to create new money. Even labor can be monetized to create money.
Money that is created apart from collateral wealth, apart from real goods and services, is inflationary, because it causes a surplus of money relative to wealth. Money can be printed, but unless wealth is created along with it, it does not make anyone richer.
Credit, the kind issued by a credit clearing exchange, can only be issued in the same fashion. Credit can only be created based on the monetization of some collateral or service. By definition, the creation of credit only makes sense to facilitate some mutual transaction. Credit cannot be given out freely, any more than money loans can be given out freely.
For this reason, in a credit exchange, people should not be extended unearned credit lines. Credit clearing exchanges die because of negative balances. Credit clearing must proceed on the same time-tested basis as any other banking function: on good collateral.
A credit clearing exchange cannot be run solely on idealism. It has to be based on real wealth and offer a real profit motive, both for the members and the exchange operator.
Without the availability of an interest charge on loaned money, the credit exchange operator has to rely on an alternate source of revenue: brokerage. The exchange is not offering a good, like money, it is offering a service. The service is to broker economic transactions, and to track objectively and accurately the mutual credit streams created.
A credit exchange is backed by nothing more or less than the full faith and credit of its members. The exchange only profits insofar as it facilitates economic transactions. The interests of the exchange and the members are aligned: profitable economic transactions.
This is the only economic function of a credit exchange: facilitating economic transactions that would not otherwise take place. The economic problem the exchange solves is a lack of cash. For example, a plumber and a mechanic have both lost their jobs. They are both without money, so in the regular scheme of things, neither can afford each other’s services. However, the credit exchange can step in and facilitate their mutual transaction, garnering a small brokerage fee for the service.
If the tradesmen were flush with cash, they would not need the credit exchange broker. Thus, the target audience for a credit exchange is clear: the unemployed and under-employed. People who have excess time, but not a steady cash flow, need the services of a credit exchange. Some people would also like to join the credit exchange as a form of advertising. The larger the labor pool, the more transactions would take place.
Thus, in practice, the exchange operator must seek out and recruit clients into the exchange. The operator should have an eye for specific industries and skills that would be most beneficial for the overall health the exchange network. The operator must deliberately and systematically seek to maximize in-network credit transactions. Each new member should be encouraged to invite others into the network as well.
New members should not be extended free credit, as the problem of free-riders would get too large. Rather, new members should be required to deposit their own good/service into the exchange vaults. Economically speaking, this is a deposit of wealth which the credit exchange then monetizes. The deposit would earn a balance in the network, and mark the official entry of the member into the exchange’s economic system.
Members have to monetize their own wealth-building service as a form of capitalizing their own credit account. For example, a mechanic could monetize 8 hours of his own labor, or he could monetize 80 hours of his own labor. It would be up to the exchange operator to establish an upper limit on the credit value that could be monetized by any member. This is a very intuitive form of a credit limit that even a new member would understand.
Beginning members might not be allowed to monetize any of their labor at first, but might have to operate solely on an service-rendered-first trade basis. Or beginners might be allowed to monetize a day’s worth of labor. But as their reputation score rose, the credit limit could rise with it. Soon, a member might be able to monetize a week’s worth of labor, or more, as appropriate.
Monetizing labor means that trade credit is granted a member, under the expectation that future labor will be done. The member would literally sign over a labor check, or labor bond, stating how much labor was deposited with the exchange. It is nothing more or less than a personal IOU signed over to the exchange.
The exchange operator would then be able to market that IOU. Someone who needs that service would purchase that service with their own IOU. This is how a purely credit exchange network would operate. The IOUs function as money, but they are backed solely by the full faith and credit of the issuer. A member would deposit their own personal IOU with the exchange, then complete that service when someone purchased the IOU.
If someone refused to, or was unable to, honor their IOU, functionally, that means they have defaulted on their credit. In such cases, the loss would have to be absorbed by the exchange operator. The operator must be running at a sufficient profit to enable the write-off of defaulted credit by unfaithful members. Obviously, this is exactly parallel to how a money bank must earn enough dollars in interest and fees to offset loan losses.
Members would be encouraged to be faithful guarantors of their IOUs by the benefits of being in-network. Their faithfulness and skill in fulfilling their IOUs would be revealed by their reputation score. If someone refused to honor their own IOU on day one, before they used anyone else’s services, there would be no harm done to the exchange itself. However, if someone spent two weeks using the services of the exchange, then refused to contribute in turn, that would be a huge loss for the exchange to absorb.
Everyone contributes with the expectation of getting something back, so widespread defaults could easily shake the confidence in the faithfulness of the exchange network itself. Members should be fully briefed on the high ethical standard that they are expected to maintain when they join the network. Obviously, refusal to honor even one IOU could be grounds for removal from the exchange network, and new members should be limited to very small account balances until they established their credit worthiness.
So far, I have only discussed the monetization and trading of services, but goods can be monetized into the exchange network as well. Rather than capitalizing their own labor through an IOU, someone might simply contribute a bicycle, or a car, or a bus, or whatever, into the capital fund of the exchange network. The member would receive trade credit, and the exchange operator would then market the collateral. Within network, members could offer their own goods directly for sale to other members for trade credit.
Counterfeiting is a huge problem for alternative currencies, as the printing technology is likely to be simplistic and the ability to track or prosecute counterfeiters almost non-existent. Trade credits and other alternative currencies should be electronic to the greatest extent possible. When printed, they should be printed in cheque form, to be countersigned upon transfer, so that a chain of legitimacy can be established. Using checks has the added advantage of preventing theft.
Money that is created apart from collateral wealth, apart from real goods and services, is inflationary, because it causes a surplus of money relative to wealth. Money can be printed, but unless wealth is created along with it, it does not make anyone richer.
Credit, the kind issued by a credit clearing exchange, can only be issued in the same fashion. Credit can only be created based on the monetization of some collateral or service. By definition, the creation of credit only makes sense to facilitate some mutual transaction. Credit cannot be given out freely, any more than money loans can be given out freely.
For this reason, in a credit exchange, people should not be extended unearned credit lines. Credit clearing exchanges die because of negative balances. Credit clearing must proceed on the same time-tested basis as any other banking function: on good collateral.
A credit clearing exchange cannot be run solely on idealism. It has to be based on real wealth and offer a real profit motive, both for the members and the exchange operator.
Without the availability of an interest charge on loaned money, the credit exchange operator has to rely on an alternate source of revenue: brokerage. The exchange is not offering a good, like money, it is offering a service. The service is to broker economic transactions, and to track objectively and accurately the mutual credit streams created.
A credit exchange is backed by nothing more or less than the full faith and credit of its members. The exchange only profits insofar as it facilitates economic transactions. The interests of the exchange and the members are aligned: profitable economic transactions.
This is the only economic function of a credit exchange: facilitating economic transactions that would not otherwise take place. The economic problem the exchange solves is a lack of cash. For example, a plumber and a mechanic have both lost their jobs. They are both without money, so in the regular scheme of things, neither can afford each other’s services. However, the credit exchange can step in and facilitate their mutual transaction, garnering a small brokerage fee for the service.
If the tradesmen were flush with cash, they would not need the credit exchange broker. Thus, the target audience for a credit exchange is clear: the unemployed and under-employed. People who have excess time, but not a steady cash flow, need the services of a credit exchange. Some people would also like to join the credit exchange as a form of advertising. The larger the labor pool, the more transactions would take place.
Thus, in practice, the exchange operator must seek out and recruit clients into the exchange. The operator should have an eye for specific industries and skills that would be most beneficial for the overall health the exchange network. The operator must deliberately and systematically seek to maximize in-network credit transactions. Each new member should be encouraged to invite others into the network as well.
New members should not be extended free credit, as the problem of free-riders would get too large. Rather, new members should be required to deposit their own good/service into the exchange vaults. Economically speaking, this is a deposit of wealth which the credit exchange then monetizes. The deposit would earn a balance in the network, and mark the official entry of the member into the exchange’s economic system.
Members have to monetize their own wealth-building service as a form of capitalizing their own credit account. For example, a mechanic could monetize 8 hours of his own labor, or he could monetize 80 hours of his own labor. It would be up to the exchange operator to establish an upper limit on the credit value that could be monetized by any member. This is a very intuitive form of a credit limit that even a new member would understand.
Beginning members might not be allowed to monetize any of their labor at first, but might have to operate solely on an service-rendered-first trade basis. Or beginners might be allowed to monetize a day’s worth of labor. But as their reputation score rose, the credit limit could rise with it. Soon, a member might be able to monetize a week’s worth of labor, or more, as appropriate.
Monetizing labor means that trade credit is granted a member, under the expectation that future labor will be done. The member would literally sign over a labor check, or labor bond, stating how much labor was deposited with the exchange. It is nothing more or less than a personal IOU signed over to the exchange.
The exchange operator would then be able to market that IOU. Someone who needs that service would purchase that service with their own IOU. This is how a purely credit exchange network would operate. The IOUs function as money, but they are backed solely by the full faith and credit of the issuer. A member would deposit their own personal IOU with the exchange, then complete that service when someone purchased the IOU.
If someone refused to, or was unable to, honor their IOU, functionally, that means they have defaulted on their credit. In such cases, the loss would have to be absorbed by the exchange operator. The operator must be running at a sufficient profit to enable the write-off of defaulted credit by unfaithful members. Obviously, this is exactly parallel to how a money bank must earn enough dollars in interest and fees to offset loan losses.
Members would be encouraged to be faithful guarantors of their IOUs by the benefits of being in-network. Their faithfulness and skill in fulfilling their IOUs would be revealed by their reputation score. If someone refused to honor their own IOU on day one, before they used anyone else’s services, there would be no harm done to the exchange itself. However, if someone spent two weeks using the services of the exchange, then refused to contribute in turn, that would be a huge loss for the exchange to absorb.
Everyone contributes with the expectation of getting something back, so widespread defaults could easily shake the confidence in the faithfulness of the exchange network itself. Members should be fully briefed on the high ethical standard that they are expected to maintain when they join the network. Obviously, refusal to honor even one IOU could be grounds for removal from the exchange network, and new members should be limited to very small account balances until they established their credit worthiness.
So far, I have only discussed the monetization and trading of services, but goods can be monetized into the exchange network as well. Rather than capitalizing their own labor through an IOU, someone might simply contribute a bicycle, or a car, or a bus, or whatever, into the capital fund of the exchange network. The member would receive trade credit, and the exchange operator would then market the collateral. Within network, members could offer their own goods directly for sale to other members for trade credit.
Counterfeiting is a huge problem for alternative currencies, as the printing technology is likely to be simplistic and the ability to track or prosecute counterfeiters almost non-existent. Trade credits and other alternative currencies should be electronic to the greatest extent possible. When printed, they should be printed in cheque form, to be countersigned upon transfer, so that a chain of legitimacy can be established. Using checks has the added advantage of preventing theft.
Teleb and Spitznagel Call for Debt Cancellation
Taleb and Spitznagel have an excellent grasp on the problem of high debt, and getting people thinking about debt cancellation is a good thing. They also point out the folly of current economic modeling, and the failure of the economists in general. But their proposal to convert debt to equity is highly problematic.
The idea is taken straight from corporate finance: Corporate debt holders, rather than receiving cash payment, will sometimes receive ownership shares in the company. Debt holders can often be forced into this conversion against their will, as the article suggests.
However, this article is the perverse opposite of that process. Rather than debt holders being forced to accept equity, he is suggestion that owners be forced to give away shares to debt holders! The idea that we should support a system in which debt holders forcibly acquire an ownership stake is highly objectionable, in fact, it is outrageous.
The proposal would benefit one group: the debt holders who are seeing their debt-generated wealth evaporate on a large scale. Now that debt payments are defaulting like crazy, these parasites are trying to get hold of the underlying assets. It is an outrage! And an example of the priveleged elitist attitude which sees the entire world as a bunch of cattle to be milked and butchered for their profit and convenience.
Taleb and Spitznagel are speaking for the parasite class, and as far as I am concerned, they should be told to go to hell. There will be no forcible debt to equity conversions.
The solution to a high debt depression is a Jubilee renewal, freeing the people from their debts, not a bail out for the parasite class. The government can directly pay off debts, and simultaneously raise bank reserve requirements to absorb the excess money to avoid inflationary effects. This is the People's Bailout, and we could do it right now, without violating any laws or contracts.
http://www.ft.com/cms/s/0/4e02aeba-6fd8-11de-b835-00144feabdc0.html
The idea is taken straight from corporate finance: Corporate debt holders, rather than receiving cash payment, will sometimes receive ownership shares in the company. Debt holders can often be forced into this conversion against their will, as the article suggests.
However, this article is the perverse opposite of that process. Rather than debt holders being forced to accept equity, he is suggestion that owners be forced to give away shares to debt holders! The idea that we should support a system in which debt holders forcibly acquire an ownership stake is highly objectionable, in fact, it is outrageous.
The proposal would benefit one group: the debt holders who are seeing their debt-generated wealth evaporate on a large scale. Now that debt payments are defaulting like crazy, these parasites are trying to get hold of the underlying assets. It is an outrage! And an example of the priveleged elitist attitude which sees the entire world as a bunch of cattle to be milked and butchered for their profit and convenience.
Taleb and Spitznagel are speaking for the parasite class, and as far as I am concerned, they should be told to go to hell. There will be no forcible debt to equity conversions.
The solution to a high debt depression is a Jubilee renewal, freeing the people from their debts, not a bail out for the parasite class. The government can directly pay off debts, and simultaneously raise bank reserve requirements to absorb the excess money to avoid inflationary effects. This is the People's Bailout, and we could do it right now, without violating any laws or contracts.
http://www.ft.com/cms/s/0/4e02aeba-6fd8-11de-b835-00144feabdc0.html
Tuesday, July 14, 2009
International Trade and Protectionism, part 3
Policy Implications
Americans spent 200 years of industrialization building up a high quality of life and standard of living, only to watch it petered away in the last generation through out-sourcing of industries and in-sourcing of cheap replacement labor. It shouldn’t be surprising that our average wage and quality of life have been deteriorating for the last 30 years.
The American wage supports an entire way of life, including a minimum wage, safety standards, environmental protections, health care costs, affirmative action set asides, and a retirement system.
Allowing jobs to be out-sourced to low wage countries destroys those aspects of the American dream. Obviously, foreign workers who have none of those advantages can work by the hour for cheaper, but the true cost is borne by American society as a whole.
A rational economic policy for America would safeguard the foundations of our industrial and productive strength. Trade should be open and free when based on true comparative advantage and fair competition, in other words, when it truly benefits both countries.
Imports from countries that do not support an equivalent standard of living should be penalized with a tariff, with the tariff revenue being used to support the American way of life that is undermined by the import.
Corporations that export American professional jobs should face penalties such as a higher corporate tax rate based on what proportion of their workforce has been off-shored.
Tariffs should be levied across the board on countries who engage in any currency manipulation for trade advantage or provide any export subsidies.
American economic policy should support domestic employment by focusing on a stable and profitable productive base, allowing imports and outsourcing only when it would provide a demonstrable benefit to the American standard of living.
Promoting off-shoring based solely on wage arbitrage is actually economically backwards, resulting in production that is less efficient and more costly when viewed in resource terms. Resource terms are real terms, an absolute measure, as opposed to money terms, which are relative and illusory. If off-shoring destroys a naturally evolved network of comparative advantage, it is economically backwards, even if it appears to "save money" in dollar terms. In other words, it is bad for the whole world's economy overall, not just the American economy.
Economic regions are defined by geography, common currency, free labor movement, and transportation integration. Economic regions should be encouraged to become as independent as possible, based on natural comparative advantages, which save resources and produce goods more cheaply on an absolute scale.
Trade which is based on those comparative advantages between regions should be encouraged. However, wholesale relocation of productive industry from one region to another should be discouraged. Rather, domestic industries in each region should be nourished, with the goal of uplifting standards of living in each region without lowing standards of living in another, while maximizing the efficient use of scarce resources everywhere.
Only in this way can a long-term sustainable global economy, with rising standards of living for all, be established.
Americans spent 200 years of industrialization building up a high quality of life and standard of living, only to watch it petered away in the last generation through out-sourcing of industries and in-sourcing of cheap replacement labor. It shouldn’t be surprising that our average wage and quality of life have been deteriorating for the last 30 years.
The American wage supports an entire way of life, including a minimum wage, safety standards, environmental protections, health care costs, affirmative action set asides, and a retirement system.
Allowing jobs to be out-sourced to low wage countries destroys those aspects of the American dream. Obviously, foreign workers who have none of those advantages can work by the hour for cheaper, but the true cost is borne by American society as a whole.
A rational economic policy for America would safeguard the foundations of our industrial and productive strength. Trade should be open and free when based on true comparative advantage and fair competition, in other words, when it truly benefits both countries.
Imports from countries that do not support an equivalent standard of living should be penalized with a tariff, with the tariff revenue being used to support the American way of life that is undermined by the import.
Corporations that export American professional jobs should face penalties such as a higher corporate tax rate based on what proportion of their workforce has been off-shored.
Tariffs should be levied across the board on countries who engage in any currency manipulation for trade advantage or provide any export subsidies.
American economic policy should support domestic employment by focusing on a stable and profitable productive base, allowing imports and outsourcing only when it would provide a demonstrable benefit to the American standard of living.
Promoting off-shoring based solely on wage arbitrage is actually economically backwards, resulting in production that is less efficient and more costly when viewed in resource terms. Resource terms are real terms, an absolute measure, as opposed to money terms, which are relative and illusory. If off-shoring destroys a naturally evolved network of comparative advantage, it is economically backwards, even if it appears to "save money" in dollar terms. In other words, it is bad for the whole world's economy overall, not just the American economy.
Economic regions are defined by geography, common currency, free labor movement, and transportation integration. Economic regions should be encouraged to become as independent as possible, based on natural comparative advantages, which save resources and produce goods more cheaply on an absolute scale.
Trade which is based on those comparative advantages between regions should be encouraged. However, wholesale relocation of productive industry from one region to another should be discouraged. Rather, domestic industries in each region should be nourished, with the goal of uplifting standards of living in each region without lowing standards of living in another, while maximizing the efficient use of scarce resources everywhere.
Only in this way can a long-term sustainable global economy, with rising standards of living for all, be established.
Friday, July 10, 2009
International Trade: Comparative Advantage and Protectionism, part 2
That money saved is the usual macro-economic justification for off-shoring in the first place. Theoretically, that money saved creates a job elsewhere in the economy. This is where so many people trip up, unable to differentiate monetary effects from real economic effects. In real economic effects, production of the same output has become less efficient and capital destroyed.
The great lie told during this generation of outsourcing has been that these laid-off workers would move up the knowledge chain, into higher value-added occupations. However, we can see that this is empirically false.
The fact is, there is a natural limit to the amount of “knowledge economy” jobs that are available. Knowledge jobs (traditionally called white collar) are subsidiary jobs: they exist to support some other industry. Remove the base industry, and the knowledge job disappears with it.
The idea that you can have an entire economy based on knowledge jobs is silly, it does not even make sense. There are only so many accountants, teachers, lawyers, salesmen, and consultants needed for a given population. They are subsidiary jobs because all of these “knowledge-work” professions depend on other industries to create the wealth. Without a primary base of wealth-creating enterprises, white collar jobs are not required. The same thing goes for so-called service jobs. You can’t base an economy on retail, restaurants, hair stylists, and spas. All those jobs are possible in a wealthy and nicely diversified economy, but without a wealth-creating base, they wither and die as overall standards of living fall, because there is less real wealth circulating.
This is a simple truth: at the base of every economy are the wealth-producers, who create and build something tangible that improves our quality of life. Mining, farming, chemicals, steel, plastics, textiles, and manufacturing of all kinds, that is the basis of the modern economy. A huge chunk of white collar economic activity then develops to support those industries, trailing off into the salesmen and retail stores that move the wealth. Teachers, doctors, police, and government workers are necessary for civil society, but they do not create wealth, and their standard of living is dependent on the wealth-producing industries.
To help clarify the economic principle, let’s look at a practical example. A car factory in Michigan is shut down, with production moved to a car factory in China instead. Physical plant in Michigan is destroyed, and skilled workers are fired. Cars intended for the American market are now shipped in from China, consuming extra resources in the transportation process.
The process is only economically justified if the displaced workers can find a new activity that produces greater wealth than what they did before. Is that even possible? What are their options? In the real world, such displaced workers have to switch careers, becoming truck drivers, plumbers, laborers, or whatever. Does that increase wealth? Unfortunately not. Unless they are shifted to another wealth creating activity, they will merely become wealth-consumers, and compete with other workers in some service job. So, they lose their own high previous wage, and drive down wages in whatever field they go into, while adding nothing of wealth to the economy as a whole.
But what about the money the car company saved? Doesn’t that return somewhere in some efficiency to create a new job? Let’s follow the money trail and see. Ok, so assume the company’s dollar profits just went up by lowering labor costs. The dollars return to the US economy through executive salaries and stock owner dividends. From a class perspective, the rich just got richer and the poor got poorer, but is it good from a macroeconomic perspective?
The question is, what happens to those dollars when they enter the domestic economy? Of course, there are less dollars in the US economy at first, because the laid-off worker is not being paid. Say the worker was paid 100 dollars, but after outsourcing, 50 dollars go to the Chinese worker, and the remaining 50 dollars goes to corporate profits. However, the 50 dollars paid to the Chinaman have to come back to the US economy eventually, as dollars can’t be used in China. But when the dollars do get back to the US, there is less stuff to buy. Less goods are being produced because our industry was lost to outsourcing. A constant amount of dollars chasing fewer goods: a formula for inflation.
The only way to short circuit this process is to make sure the laid-off worker is moved into another productive industry. If the worker transitions to any non-wealth creating job, he will merely be adding to a fixed labor pool, with the effect of driving down wages. There is no way around this. If he becomes a laborer, we now have one more laborer, if he becomes a plumber, we have one more plumber, if he becomes an accountant, we now have one more accountant. In all cases, no new wealth is being produced, so wages can only be driven down as the fields are crowded with displaced workers.
We have the same amount of real wealth available, since the car he built is now build and imported from China. We are poorer in terms of resources however, if for no other reason than the increased transportation costs. We have the same amount of money in circulation, assuming that is kept constant. We just have more workers in other fields. This is known as downward mobility.
Even if he becomes a doctor, which would make him personally richer, the country overall is poorer. His dollar wage may have gone up, and the country gets a needed doctor, but our overall wealth went down. Doctors do not create wealth. Teachers do not create wealth, lawyers do not create wealth, government workers don’t create wealth… The list could go on and on. Unless our displaced worker finds another wealth-producing position to fill, our country got poorer.
Some have objected to protectionism on the grounds of scale, asking, so why doesn’t each state become protectionist, or it must be bad to move a factory from New York to Alabama, for example. Unfortunately, these questions reveal a poor understanding of comparative advantage in regional economies, so let us examine these claims.
Let’s say a factory owner sees a potential profit relocating a factory from high cost New York to low cost Alabama. How is that different from relocating to China? The key difference is the available movement of labor. If the displaced New York factory worker cannot find better employment in New York, he is free to move to Alabama himself and take advantage of its growing economy. Thus, in a regionally integrated economy like the United States, economic progress proceeds generally and in a healthy fashion.
Also, the white collar jobs that support the wealth-building activity are all created locally. So producing cars in Alabama will not only employ laborers and skilled factory workers, but also technicians, engineers, accountants, and lawyers. None of those jobs are available to Americans if the factory is located in China. The local wealth-creation supports higher wages for those positions, and drags up wages overall. This is a "drawing-upwards" of workers into higher standards of living, the opposite of what happens when displaced workers have to get retrained and placed into a labor pool with workers in an already-existing industry.
Americans spent 200 years of industrialization building up a high quality of life and standard of living, only to watch it petered away in the last generation through out-sourcing of industries and in-sourcing of cheap replacement labor. It shouldn’t be surprising that our average wage and quality of life have been deteriorating for the last 30 years.
The American wage supports an entire way of life, including a minimum wage, safety standards, environmental protections, health care costs, affirmative action set asides, and a retirement system. Allowing jobs to be out-sourced to low wage countries destroys those aspects of the American dream. Obviously, foreign workers who have none of those advantages can work by the hour for cheaper, but the true cost is borne by American society as a whole.
A rational economic policy for America would safeguard the foundations of our industrial strength. Trade should be open and free when based on true comparative advantage and fair competition. Imports from countries that do not support an equivalent standard of living should be penalized with a tariff, with the tariff revenue being used to support the American way of life that is undermined by the import. Corporations that export American professional jobs should face penalties such as a higher corporate tax rate based on what proportion of their workforce has been off-shored. Tariffs should be levied across the board on countries who engage in any currency manipulation for trade advantage or provide any export subsidies.
American economic policy should support domestic employment by focusing on a stable and profitable productive base, allowing imports and outsourcing only when it would provide a demonstrable benefit to the American standard of living.
The great lie told during this generation of outsourcing has been that these laid-off workers would move up the knowledge chain, into higher value-added occupations. However, we can see that this is empirically false.
The fact is, there is a natural limit to the amount of “knowledge economy” jobs that are available. Knowledge jobs (traditionally called white collar) are subsidiary jobs: they exist to support some other industry. Remove the base industry, and the knowledge job disappears with it.
The idea that you can have an entire economy based on knowledge jobs is silly, it does not even make sense. There are only so many accountants, teachers, lawyers, salesmen, and consultants needed for a given population. They are subsidiary jobs because all of these “knowledge-work” professions depend on other industries to create the wealth. Without a primary base of wealth-creating enterprises, white collar jobs are not required. The same thing goes for so-called service jobs. You can’t base an economy on retail, restaurants, hair stylists, and spas. All those jobs are possible in a wealthy and nicely diversified economy, but without a wealth-creating base, they wither and die as overall standards of living fall, because there is less real wealth circulating.
This is a simple truth: at the base of every economy are the wealth-producers, who create and build something tangible that improves our quality of life. Mining, farming, chemicals, steel, plastics, textiles, and manufacturing of all kinds, that is the basis of the modern economy. A huge chunk of white collar economic activity then develops to support those industries, trailing off into the salesmen and retail stores that move the wealth. Teachers, doctors, police, and government workers are necessary for civil society, but they do not create wealth, and their standard of living is dependent on the wealth-producing industries.
To help clarify the economic principle, let’s look at a practical example. A car factory in Michigan is shut down, with production moved to a car factory in China instead. Physical plant in Michigan is destroyed, and skilled workers are fired. Cars intended for the American market are now shipped in from China, consuming extra resources in the transportation process.
The process is only economically justified if the displaced workers can find a new activity that produces greater wealth than what they did before. Is that even possible? What are their options? In the real world, such displaced workers have to switch careers, becoming truck drivers, plumbers, laborers, or whatever. Does that increase wealth? Unfortunately not. Unless they are shifted to another wealth creating activity, they will merely become wealth-consumers, and compete with other workers in some service job. So, they lose their own high previous wage, and drive down wages in whatever field they go into, while adding nothing of wealth to the economy as a whole.
But what about the money the car company saved? Doesn’t that return somewhere in some efficiency to create a new job? Let’s follow the money trail and see. Ok, so assume the company’s dollar profits just went up by lowering labor costs. The dollars return to the US economy through executive salaries and stock owner dividends. From a class perspective, the rich just got richer and the poor got poorer, but is it good from a macroeconomic perspective?
The question is, what happens to those dollars when they enter the domestic economy? Of course, there are less dollars in the US economy at first, because the laid-off worker is not being paid. Say the worker was paid 100 dollars, but after outsourcing, 50 dollars go to the Chinese worker, and the remaining 50 dollars goes to corporate profits. However, the 50 dollars paid to the Chinaman have to come back to the US economy eventually, as dollars can’t be used in China. But when the dollars do get back to the US, there is less stuff to buy. Less goods are being produced because our industry was lost to outsourcing. A constant amount of dollars chasing fewer goods: a formula for inflation.
The only way to short circuit this process is to make sure the laid-off worker is moved into another productive industry. If the worker transitions to any non-wealth creating job, he will merely be adding to a fixed labor pool, with the effect of driving down wages. There is no way around this. If he becomes a laborer, we now have one more laborer, if he becomes a plumber, we have one more plumber, if he becomes an accountant, we now have one more accountant. In all cases, no new wealth is being produced, so wages can only be driven down as the fields are crowded with displaced workers.
We have the same amount of real wealth available, since the car he built is now build and imported from China. We are poorer in terms of resources however, if for no other reason than the increased transportation costs. We have the same amount of money in circulation, assuming that is kept constant. We just have more workers in other fields. This is known as downward mobility.
Even if he becomes a doctor, which would make him personally richer, the country overall is poorer. His dollar wage may have gone up, and the country gets a needed doctor, but our overall wealth went down. Doctors do not create wealth. Teachers do not create wealth, lawyers do not create wealth, government workers don’t create wealth… The list could go on and on. Unless our displaced worker finds another wealth-producing position to fill, our country got poorer.
Some have objected to protectionism on the grounds of scale, asking, so why doesn’t each state become protectionist, or it must be bad to move a factory from New York to Alabama, for example. Unfortunately, these questions reveal a poor understanding of comparative advantage in regional economies, so let us examine these claims.
Let’s say a factory owner sees a potential profit relocating a factory from high cost New York to low cost Alabama. How is that different from relocating to China? The key difference is the available movement of labor. If the displaced New York factory worker cannot find better employment in New York, he is free to move to Alabama himself and take advantage of its growing economy. Thus, in a regionally integrated economy like the United States, economic progress proceeds generally and in a healthy fashion.
Also, the white collar jobs that support the wealth-building activity are all created locally. So producing cars in Alabama will not only employ laborers and skilled factory workers, but also technicians, engineers, accountants, and lawyers. None of those jobs are available to Americans if the factory is located in China. The local wealth-creation supports higher wages for those positions, and drags up wages overall. This is a "drawing-upwards" of workers into higher standards of living, the opposite of what happens when displaced workers have to get retrained and placed into a labor pool with workers in an already-existing industry.
Americans spent 200 years of industrialization building up a high quality of life and standard of living, only to watch it petered away in the last generation through out-sourcing of industries and in-sourcing of cheap replacement labor. It shouldn’t be surprising that our average wage and quality of life have been deteriorating for the last 30 years.
The American wage supports an entire way of life, including a minimum wage, safety standards, environmental protections, health care costs, affirmative action set asides, and a retirement system. Allowing jobs to be out-sourced to low wage countries destroys those aspects of the American dream. Obviously, foreign workers who have none of those advantages can work by the hour for cheaper, but the true cost is borne by American society as a whole.
A rational economic policy for America would safeguard the foundations of our industrial strength. Trade should be open and free when based on true comparative advantage and fair competition. Imports from countries that do not support an equivalent standard of living should be penalized with a tariff, with the tariff revenue being used to support the American way of life that is undermined by the import. Corporations that export American professional jobs should face penalties such as a higher corporate tax rate based on what proportion of their workforce has been off-shored. Tariffs should be levied across the board on countries who engage in any currency manipulation for trade advantage or provide any export subsidies.
American economic policy should support domestic employment by focusing on a stable and profitable productive base, allowing imports and outsourcing only when it would provide a demonstrable benefit to the American standard of living.
International Trade, Comparative Advantage and Protectionism, part 1
The latest attack of economic propaganda came out of the G8 meeting in Italy today, extolling the virtues of free trade and vowing to fight protectionism. The classic formula -- "the Great Depression was made worse by protectionism" – continues to get ground into our collective mindset until it becomes an unquestioned axiom of thought. Heck, I used to believe it myself, until I actually starting analyzing it.
Here is the short-form rebuttal: in the 1920's, the US was the world’s number 1 exporter and creditor. Today, the US is the world's number 1 importer and debtor. The case against protectionism, for America, does not apply. Less developed countries have understood for centuries that domestic industries often need protection to stand a chance of getting off the ground against larger and richer foreign competition. From colonial America to post-war Japan, nurturing of domestic industry has always been practiced.
But what about today? Have we passed the point where national protectionism is not necessary, that it does more harm than good? In fact, it is the opposite. Our economic world today, more than any other time in history, calls for a certain amount of protectionism. I am not making this claim based on nationalism or some theory of social justice, either (although those arguments have their own merits). I am saying protectionism is justified solely on economic grounds.
In free-trade theory, when a domestic job is displaced due to foreign competition, a new job is supposed to open up somewhere in the economy because of the money saved, based on the efficiencies of comparative advantage in production. The idea is that a foreigner can produce something more efficiently, thus lowering overall costs, thereby freeing up more money, which will create a job somewhere else.
Comparative advantage is a powerful economic theory, and it has much truth to it. In order to understand why it doesn't it apply to certain aspects of international trade today, we have to understand why it does apply to some situations. Only by understanding its truth and correct application, can we understand when it is used falsely and incorrectly applied.
Comparative advantage is mainly rooted in geological and environmental factors. For example, people on grassland plains have a comparative advantage raising cattle, people on the coasts have a comparative advantage catching fish, and people in the mountains have a comparative advantage raising timber. In a primitive economy, people have to raise their own meat, catch their own fish, and build their own houses out of local resources. However, trading freely and widely allows them to specialize in what they have an advantage in, thereby benefitting everyone.
Another aspect of comparative advantage comes from relative location. Thus, a factory close to a source of materials has a comparative advantage over a factory far away. An oil field with easily extracted crude has a comparative advantage over a location with deeper, harder to access oil. A power plant close to its fuel source has a comparative advantage over one farther away, and so on.
All comparative advantage is rooted in the efficient use of scare resources. The rule is: less resources in, cheaper products out. We all get richer, meaning more output in less time using less resources, when everyone is operating at maximum efficiency. Healthy systems of domestic and international trade incorporate those efficiencies. For example, oil from the Middle East is more easily accessed than domestic sources, while coffee and bananas cannot be grown in America. These are exactly the kind of comparative advantages that lie at the heart of healthy trade, making us all wealthier by encouraging us to do what we have a natural efficiency doing.
The problem with comparative advantage in global trade today is that it is not based on real comparative advantage, but only on the illusion of advantage created by money. Thus, the dominant source of comparative advantage today is found in taking advantage of low wage labor in countries with cheap currencies and low standards of living. We are so accustomed to operating in the nominal terms of dollars that we are blinded to the real effects of such wage arbitrage.
Real comparative advantage takes advantage of real efficiencies to increase overall wealth. Exporting jobs to low wage countries decreases real wealth by working against natural efficiencies and increasing input and transportation costs. The problem is thinking in dollar terms, not in real terms. In real terms, what happens when an industry is off-shored? That domestic factory grew up at a natural nexus of efficiency related to labor, materials, markets, and transport. Moving that factory disrupts that natural efficiency and introduces massive inefficiencies. In dollar terms, it seems like a good idea, but in resource terms, it is not.
The comparatively cheap labor rate in dollars is papering over big losses of real wealth as resources are squandered to make factories from scratch in far distant locations. The distant location of the new factory also increases the loss of resources that results from transporting raw material and finished goods to a location that is far removed from either primary resources or consumer markets.
In short, from a purely macro-economic perspective, off-shoring decreases overall wealth. After off-shoring, production is transferred to a new location which takes greater time and uses greater resources. This is the opposite of comparative advantage, which is based on less time and less resources. After off-shoring, the real cost of production, measured in time and resources, has risen.
Meanwhile, at home, the factory is shuttered, meaning capital is destroyed, and the labor is idled, meaning skills and training (human capital) are wasted. Theoretically, these workers are going to find something else to do, but by definition, anything else they do will be less economically efficient, since they have already spent years training, mastering their specific economic role. Anything they do after layoffs will be an economic loss overall, unless they are immediately transferred into some high-value added endeavor.
Off-shoring means that local production networks based on real comparative advantages are tossed aside, throwing away those advantages for the sake of illusory dollar profits. Because no real efficiency is gain, we are actually getting poorer, because there is less overall wealth circulating in the economy.
Most people get stuck on this point, so it bears repeating until it is fully understood: When a production job is outsourced, no real wealth is created. Rather, real wealth is lost as comparative advantages, fixed capital, and labor skills are thrown away. We are actually getting poorer as wealth is thrown away and efficiencies lost. Corporations gain an advantage at the expense of domestic workers because of the illusion of dollar savings, but our collective standard of living falls.
The only hope, the leap of faith in trade theory, is that those displaced workers find a more efficient economic activity. From a macro-economic perspective, that new economic activity has to be more efficient and productive than the previous activity, or the economy has suffered a net loss.
But, should we take that leap of free trade faith? Is it possible for that laid-off worker to find a more productive activity? If they can’t find a more productive activity, their layoff is not economically justified.
Notice the macro perspective I am adopting here. From the macro economic perspective, replacing one worker with another only makes sense if it introduces a real efficiency into the process. Remember, giving a production job to a worker in China, who was previously unemployed, is economically neutral if it merely causes a worker in Detroit to be unemployed. That fact that the new Chinese factory is far away from sources, trade networks, and markets, means that the off-shoring starts out as an economically backward idea, since it consumes greater resources. Moving production to some far-away locale costs more, so it must be justified by a greater efficiency introduced elsewhere, or we have just gotten poorer (since we are using more resources to produce the same goods)!
From the individual corporation’s perspective, laying off the worker for a lower-wage worker increases profits. But that is exactly the illusion created by looking at the situation through the nominal dollar lens. The company is saving money, but by doing so, they are introducing inefficiencies into the economic system. The inefficiencies of off-shoring are only worth it if the displaced workers move into a more efficient occupation.
Notice that the off-shoring company does not care about the displaced worker. They company’s only concern is with their own higher corporate profits. This is the paradox of modern industrial economic policy planning. What saves money for individual companies is often bad for the economy as a whole.
Here is the short-form rebuttal: in the 1920's, the US was the world’s number 1 exporter and creditor. Today, the US is the world's number 1 importer and debtor. The case against protectionism, for America, does not apply. Less developed countries have understood for centuries that domestic industries often need protection to stand a chance of getting off the ground against larger and richer foreign competition. From colonial America to post-war Japan, nurturing of domestic industry has always been practiced.
But what about today? Have we passed the point where national protectionism is not necessary, that it does more harm than good? In fact, it is the opposite. Our economic world today, more than any other time in history, calls for a certain amount of protectionism. I am not making this claim based on nationalism or some theory of social justice, either (although those arguments have their own merits). I am saying protectionism is justified solely on economic grounds.
In free-trade theory, when a domestic job is displaced due to foreign competition, a new job is supposed to open up somewhere in the economy because of the money saved, based on the efficiencies of comparative advantage in production. The idea is that a foreigner can produce something more efficiently, thus lowering overall costs, thereby freeing up more money, which will create a job somewhere else.
Comparative advantage is a powerful economic theory, and it has much truth to it. In order to understand why it doesn't it apply to certain aspects of international trade today, we have to understand why it does apply to some situations. Only by understanding its truth and correct application, can we understand when it is used falsely and incorrectly applied.
Comparative advantage is mainly rooted in geological and environmental factors. For example, people on grassland plains have a comparative advantage raising cattle, people on the coasts have a comparative advantage catching fish, and people in the mountains have a comparative advantage raising timber. In a primitive economy, people have to raise their own meat, catch their own fish, and build their own houses out of local resources. However, trading freely and widely allows them to specialize in what they have an advantage in, thereby benefitting everyone.
Another aspect of comparative advantage comes from relative location. Thus, a factory close to a source of materials has a comparative advantage over a factory far away. An oil field with easily extracted crude has a comparative advantage over a location with deeper, harder to access oil. A power plant close to its fuel source has a comparative advantage over one farther away, and so on.
All comparative advantage is rooted in the efficient use of scare resources. The rule is: less resources in, cheaper products out. We all get richer, meaning more output in less time using less resources, when everyone is operating at maximum efficiency. Healthy systems of domestic and international trade incorporate those efficiencies. For example, oil from the Middle East is more easily accessed than domestic sources, while coffee and bananas cannot be grown in America. These are exactly the kind of comparative advantages that lie at the heart of healthy trade, making us all wealthier by encouraging us to do what we have a natural efficiency doing.
The problem with comparative advantage in global trade today is that it is not based on real comparative advantage, but only on the illusion of advantage created by money. Thus, the dominant source of comparative advantage today is found in taking advantage of low wage labor in countries with cheap currencies and low standards of living. We are so accustomed to operating in the nominal terms of dollars that we are blinded to the real effects of such wage arbitrage.
Real comparative advantage takes advantage of real efficiencies to increase overall wealth. Exporting jobs to low wage countries decreases real wealth by working against natural efficiencies and increasing input and transportation costs. The problem is thinking in dollar terms, not in real terms. In real terms, what happens when an industry is off-shored? That domestic factory grew up at a natural nexus of efficiency related to labor, materials, markets, and transport. Moving that factory disrupts that natural efficiency and introduces massive inefficiencies. In dollar terms, it seems like a good idea, but in resource terms, it is not.
The comparatively cheap labor rate in dollars is papering over big losses of real wealth as resources are squandered to make factories from scratch in far distant locations. The distant location of the new factory also increases the loss of resources that results from transporting raw material and finished goods to a location that is far removed from either primary resources or consumer markets.
In short, from a purely macro-economic perspective, off-shoring decreases overall wealth. After off-shoring, production is transferred to a new location which takes greater time and uses greater resources. This is the opposite of comparative advantage, which is based on less time and less resources. After off-shoring, the real cost of production, measured in time and resources, has risen.
Meanwhile, at home, the factory is shuttered, meaning capital is destroyed, and the labor is idled, meaning skills and training (human capital) are wasted. Theoretically, these workers are going to find something else to do, but by definition, anything else they do will be less economically efficient, since they have already spent years training, mastering their specific economic role. Anything they do after layoffs will be an economic loss overall, unless they are immediately transferred into some high-value added endeavor.
Off-shoring means that local production networks based on real comparative advantages are tossed aside, throwing away those advantages for the sake of illusory dollar profits. Because no real efficiency is gain, we are actually getting poorer, because there is less overall wealth circulating in the economy.
Most people get stuck on this point, so it bears repeating until it is fully understood: When a production job is outsourced, no real wealth is created. Rather, real wealth is lost as comparative advantages, fixed capital, and labor skills are thrown away. We are actually getting poorer as wealth is thrown away and efficiencies lost. Corporations gain an advantage at the expense of domestic workers because of the illusion of dollar savings, but our collective standard of living falls.
The only hope, the leap of faith in trade theory, is that those displaced workers find a more efficient economic activity. From a macro-economic perspective, that new economic activity has to be more efficient and productive than the previous activity, or the economy has suffered a net loss.
But, should we take that leap of free trade faith? Is it possible for that laid-off worker to find a more productive activity? If they can’t find a more productive activity, their layoff is not economically justified.
Notice the macro perspective I am adopting here. From the macro economic perspective, replacing one worker with another only makes sense if it introduces a real efficiency into the process. Remember, giving a production job to a worker in China, who was previously unemployed, is economically neutral if it merely causes a worker in Detroit to be unemployed. That fact that the new Chinese factory is far away from sources, trade networks, and markets, means that the off-shoring starts out as an economically backward idea, since it consumes greater resources. Moving production to some far-away locale costs more, so it must be justified by a greater efficiency introduced elsewhere, or we have just gotten poorer (since we are using more resources to produce the same goods)!
From the individual corporation’s perspective, laying off the worker for a lower-wage worker increases profits. But that is exactly the illusion created by looking at the situation through the nominal dollar lens. The company is saving money, but by doing so, they are introducing inefficiencies into the economic system. The inefficiencies of off-shoring are only worth it if the displaced workers move into a more efficient occupation.
Notice that the off-shoring company does not care about the displaced worker. They company’s only concern is with their own higher corporate profits. This is the paradox of modern industrial economic policy planning. What saves money for individual companies is often bad for the economy as a whole.
Minimum Wage Law Has Negative Effects
The following is probably the best essay I have read concerning the pernicious negative effects of the minimum wage law. Printed in full, original article here.
Minimum Wage, Maximum Stupidity
In a free market, demand is always a function of price: the higher the price, the lower the demand. What may surprise most politicians is that these rules apply equally to both prices and wages. When employers evaluate their labor and capital needs, cost is a primary factor. When the cost of hiring low-skilled workers moves higher, jobs are lost. Despite this, minimum wage hikes, like the one set to take effect later this month, are always seen as an act of governmental benevolence. Nothing could be further from the truth.
When confronted with a clogged drain, most of us will call several plumbers and hire the one who quotes us the lowest price. If all the quotes are too high, most of us will grab some Drano and a wrench, and have at it. Labor markets work the same way.
Before bringing on another worker, an employer must be convinced that the added productivity will exceed the added cost (this includes not just wages, but all payroll taxes and other benefits.) So if an unskilled worker is capable of delivering only $6 per hour of increased productivity, such an individual is legally unemployable with a minimum wage of $7.25 per hour.
Low-skilled workers must compete for employers' dollars with both skilled workers and capital. For example, if a skilled worker can do a job for $14 per hour that two unskilled workers can do for $6.50 per hour each, then it makes economic sense for the employer to go with the unskilled labor. Increase the minimum wage to $7.25 per hour and the unskilled workers are priced out of their jobs. This dynamic is precisely why labor unions are such big supporters of minimum wage laws. Even though none of their members earn the minimum wage, the law helps protect their members from having to compete with lower-skilled workers.
Employers also have the choice of whether to employ people or machines. For example, an employer can hire a receptionist or invest in an automated answering system. The next time you are screaming obscenities into the phone as you try to have a conversation with a computer, you know what to blame for your frustration.
There are numerous other examples of employers substituting capital for labor simply because the minimum wage has made low-skilled workers uncompetitive. For example, handcarts have replaced skycaps at airports. The main reason fast-food restaurants use paper plates and plastic utensils is to avoid having to hire dishwashers.
As a result, many low-skilled jobs that used to be the first rung on the employment ladder have been priced out of the market. Can you remember the last time an usher showed you to your seat in a dark movie theater? When was the last time someone other than the cashier not only bagged your groceries, but also loaded them into your car? By the way, it won't be long before the cashiers themselves are priced out of the market, replaced by automated scanners, leaving you to bag your purchases with no help whatsoever.
The disappearance of these jobs has broader economic and societal consequences. First jobs are a means to improve skills so that low skilled workers can offer greater productivity to current or future employers. As their skills grow, so does their ability to earn higher wages. However, remove the bottom rung from the employment ladder and many never have a chance to climb it.
So the next time you are pumping your own gas in the rain, do not just think about the teenager who could have been pumping it for you, think about the auto mechanic he could have become had the minimum wage not denied him a job. Many auto mechanics used to learn their trade while working as pump jockeys. Between fill-ups, checking tire pressure, and washing windows, they would spend a lot of time helping and learning from the mechanics.
Because the minimum wage prevents so many young people (including a disproportionate number of minorities) from getting entry-level jobs, they never develop the skills necessary to command higher paying jobs. As a result, many turn to crime, while others subsist on government aid. Supporters of the minimum wage argue that it is impossible to support a family on the minimum wage. While that is true, it is completely irrelevant, as minimum wage jobs are not designed to support families. In fact, many people earning the minimum wage are themselves supported by their parents.
The way it is supposed to work is that people do not choose to start families until they can earn enough to support them. Lower wage jobs enable workers to eventually acquire the skills necessary to earn wages high enough to support a family. Does anyone really think a kid with a paper route should earn a wage high enough to support a family?
The only way to increase wages is to increase worker productivity. If wages could be raised simply by government mandate, we could set the minimum wage at $100 per hour and solve all problems. It should be clear that, at that level, most of the population would lose their jobs, and the remaining labor would be so expensive that prices for goods and services would skyrocket. That's the exact burden the minimum wage places on our poor and low-skilled workers, and ultimately every American consumer.
Since our leaders cannot even grasp this simple economic concept, how can we expect them to deal with the more complicated problems that currently confront us?
Minimum Wage, Maximum Stupidity
In a free market, demand is always a function of price: the higher the price, the lower the demand. What may surprise most politicians is that these rules apply equally to both prices and wages. When employers evaluate their labor and capital needs, cost is a primary factor. When the cost of hiring low-skilled workers moves higher, jobs are lost. Despite this, minimum wage hikes, like the one set to take effect later this month, are always seen as an act of governmental benevolence. Nothing could be further from the truth.
When confronted with a clogged drain, most of us will call several plumbers and hire the one who quotes us the lowest price. If all the quotes are too high, most of us will grab some Drano and a wrench, and have at it. Labor markets work the same way.
Before bringing on another worker, an employer must be convinced that the added productivity will exceed the added cost (this includes not just wages, but all payroll taxes and other benefits.) So if an unskilled worker is capable of delivering only $6 per hour of increased productivity, such an individual is legally unemployable with a minimum wage of $7.25 per hour.
Low-skilled workers must compete for employers' dollars with both skilled workers and capital. For example, if a skilled worker can do a job for $14 per hour that two unskilled workers can do for $6.50 per hour each, then it makes economic sense for the employer to go with the unskilled labor. Increase the minimum wage to $7.25 per hour and the unskilled workers are priced out of their jobs. This dynamic is precisely why labor unions are such big supporters of minimum wage laws. Even though none of their members earn the minimum wage, the law helps protect their members from having to compete with lower-skilled workers.
Employers also have the choice of whether to employ people or machines. For example, an employer can hire a receptionist or invest in an automated answering system. The next time you are screaming obscenities into the phone as you try to have a conversation with a computer, you know what to blame for your frustration.
There are numerous other examples of employers substituting capital for labor simply because the minimum wage has made low-skilled workers uncompetitive. For example, handcarts have replaced skycaps at airports. The main reason fast-food restaurants use paper plates and plastic utensils is to avoid having to hire dishwashers.
As a result, many low-skilled jobs that used to be the first rung on the employment ladder have been priced out of the market. Can you remember the last time an usher showed you to your seat in a dark movie theater? When was the last time someone other than the cashier not only bagged your groceries, but also loaded them into your car? By the way, it won't be long before the cashiers themselves are priced out of the market, replaced by automated scanners, leaving you to bag your purchases with no help whatsoever.
The disappearance of these jobs has broader economic and societal consequences. First jobs are a means to improve skills so that low skilled workers can offer greater productivity to current or future employers. As their skills grow, so does their ability to earn higher wages. However, remove the bottom rung from the employment ladder and many never have a chance to climb it.
So the next time you are pumping your own gas in the rain, do not just think about the teenager who could have been pumping it for you, think about the auto mechanic he could have become had the minimum wage not denied him a job. Many auto mechanics used to learn their trade while working as pump jockeys. Between fill-ups, checking tire pressure, and washing windows, they would spend a lot of time helping and learning from the mechanics.
Because the minimum wage prevents so many young people (including a disproportionate number of minorities) from getting entry-level jobs, they never develop the skills necessary to command higher paying jobs. As a result, many turn to crime, while others subsist on government aid. Supporters of the minimum wage argue that it is impossible to support a family on the minimum wage. While that is true, it is completely irrelevant, as minimum wage jobs are not designed to support families. In fact, many people earning the minimum wage are themselves supported by their parents.
The way it is supposed to work is that people do not choose to start families until they can earn enough to support them. Lower wage jobs enable workers to eventually acquire the skills necessary to earn wages high enough to support a family. Does anyone really think a kid with a paper route should earn a wage high enough to support a family?
The only way to increase wages is to increase worker productivity. If wages could be raised simply by government mandate, we could set the minimum wage at $100 per hour and solve all problems. It should be clear that, at that level, most of the population would lose their jobs, and the remaining labor would be so expensive that prices for goods and services would skyrocket. That's the exact burden the minimum wage places on our poor and low-skilled workers, and ultimately every American consumer.
Since our leaders cannot even grasp this simple economic concept, how can we expect them to deal with the more complicated problems that currently confront us?
Tuesday, July 7, 2009
It's All About the Productive Jobs
The basis of any and all economic activity is simple: productive jobs. Always keep in mind this basic law of economics: production must always preceed consumption. Part of the propaganda effort against the common citizen is the idea that consumption is all-important. Much propaganda is crafted trying to paint a rosy picture of the economy because of the importance of consumer confidence leading to greater spending. Along with allied stupidities like "we have to get credit flowing again" to "stimulate the economy".
Obviously, consumer confidence and available credit have their place in ramping up economic activity, but their effect is overshadowed by the far more important power of productive employment. Nothing elevates consumer confidence and loan applications like having a high paying and stable job. In fact, without a high paying and stable job, consumer confidence and credit applications are simply impossible, as people without jobs can't buy things or get loans.
These facts are so obviously plain, simple, and true, it is a marvel that anyone could ever support economic policies that aren't based on the fundamental importance of productive jobs. And yet, it seems we have built an entire generations worth of economic policy ignoring that fact. Even more unbelievably, our current economic policy, in the midst of a collapsing economy, is still operating in complete ignorance of the fundamental importance of productive jobs.
The official (and understated) unemployment rate is 9.5% and rising, the highest in 26 years. The United States now has fewer jobs than it did nine years ago, even though the work force has grown by 12.5 million people since then. It's the first time since the Great Depression that a recession has wiped out all the jobs created during the previous business cycle.
So, why was job growth from 2000 to 2007 so ephemaral and easily lost? They were in bubble jobs, unsustainable jobs. Most were parasite jobs (paper pushing finance jobs), and even the productive jobs (like construction) were often malinvested (into overbuilding). The debt-based bubble years of 2000-2007 have left us in worse condition than when we started, as now we are over-built and heavily burdened by debt.
Dr. Housing Bubble puts it eloquently in his recent analysis [here]:
"It is amazing how little focus has been given to job creation. If we spent half the amount of time as we did in bailing out the crony banks on job growth we’d be in much better shape. But as many of you now know the U.S. Treasury and Federal Reserve when push comes to shove, answer to their banking oligarchs first and then to whatever they have time for. That is why the unemployment situation is quickly falling apart. In fact, that is why we have seen no employment plan come out from either the last or current administration. No matter what tax break you give for buying a home, without a job it really doesn’t matter. That is something that really amazes me in this current economic crisis. Where are the jobs going to come from? If anything, I can stand behind a job plan more than I can stand behind a crony banking bailout. Yet all this time is devoted to saving Wall Street and banks. Now you know who the Fed serves and it isn’t the American citizen."
also, "It is amazing that the Federal Reserve, which in its mission talks about maintaining stability, has presided over: the Great Depression, multiple recessions, the 1987 Panic, the technology stock crash, and housing bubble. By this simple definition they have failed miserably. They operate as a cartel and when things are going well, it goes better for those connected here. When things hit the fan, they take care of their banking partners and take the average taxpayer out to dry."
Meanwhile, the productive economy continues to shed jobs because of high debt in a deflationary environment, which leads to both job destruction and constrained consumer spending. The fundamental solution to a debt deflation is cancellation of debt. Why is no one talking about this?
Obviously, consumer confidence and available credit have their place in ramping up economic activity, but their effect is overshadowed by the far more important power of productive employment. Nothing elevates consumer confidence and loan applications like having a high paying and stable job. In fact, without a high paying and stable job, consumer confidence and credit applications are simply impossible, as people without jobs can't buy things or get loans.
These facts are so obviously plain, simple, and true, it is a marvel that anyone could ever support economic policies that aren't based on the fundamental importance of productive jobs. And yet, it seems we have built an entire generations worth of economic policy ignoring that fact. Even more unbelievably, our current economic policy, in the midst of a collapsing economy, is still operating in complete ignorance of the fundamental importance of productive jobs.
The official (and understated) unemployment rate is 9.5% and rising, the highest in 26 years. The United States now has fewer jobs than it did nine years ago, even though the work force has grown by 12.5 million people since then. It's the first time since the Great Depression that a recession has wiped out all the jobs created during the previous business cycle.
So, why was job growth from 2000 to 2007 so ephemaral and easily lost? They were in bubble jobs, unsustainable jobs. Most were parasite jobs (paper pushing finance jobs), and even the productive jobs (like construction) were often malinvested (into overbuilding). The debt-based bubble years of 2000-2007 have left us in worse condition than when we started, as now we are over-built and heavily burdened by debt.
Dr. Housing Bubble puts it eloquently in his recent analysis [here]:
"It is amazing how little focus has been given to job creation. If we spent half the amount of time as we did in bailing out the crony banks on job growth we’d be in much better shape. But as many of you now know the U.S. Treasury and Federal Reserve when push comes to shove, answer to their banking oligarchs first and then to whatever they have time for. That is why the unemployment situation is quickly falling apart. In fact, that is why we have seen no employment plan come out from either the last or current administration. No matter what tax break you give for buying a home, without a job it really doesn’t matter. That is something that really amazes me in this current economic crisis. Where are the jobs going to come from? If anything, I can stand behind a job plan more than I can stand behind a crony banking bailout. Yet all this time is devoted to saving Wall Street and banks. Now you know who the Fed serves and it isn’t the American citizen."
also, "It is amazing that the Federal Reserve, which in its mission talks about maintaining stability, has presided over: the Great Depression, multiple recessions, the 1987 Panic, the technology stock crash, and housing bubble. By this simple definition they have failed miserably. They operate as a cartel and when things are going well, it goes better for those connected here. When things hit the fan, they take care of their banking partners and take the average taxpayer out to dry."
Meanwhile, the productive economy continues to shed jobs because of high debt in a deflationary environment, which leads to both job destruction and constrained consumer spending. The fundamental solution to a debt deflation is cancellation of debt. Why is no one talking about this?
Monday, July 6, 2009
California Issues its Own IOU Money
The official name for this new money issue is registered warrants, popularly called IOUs, but it is a form of money, like a bond or a real bill. Banks are accepting these IOUs (for this week at least), and there is a market already developing for them. I'll call them CaliBonds, since that what they really are.
The CaliBonds are issued for face value, but come with an interest premium (3.75%) payable at a certain future date (starting October 2nd, if the state has cash available). In order to complete the loop and have these function fully as money, the state would just have to make them acceptable for state payments like taxes, fees, and so on.
The first batch of 27,000 Calibonds worth $53 million are being mailed today, mostly to residents owed tax refunds. By the end of July, California will have issued $3.2 billion worth of CaliBonds.
Bids on the CaliBonds are already coming in below face value as investors attempt to take advantage of their uncertainly. In all honesty, their future payment is definitely in question, so below face value is probably an accurate assessment of their value.
Looking at California area Craigslist ads, a number of people are offering to pay cash for these CaliBonds right now. Three ads posted today in Los Angeles mentioned specific amounts: one ad is offering 65%, another 70%, while another is offering 90% of face value. One ad posted yesterday in San Diego offered 85%. Some entrepreneur has also already set up an IOU exchange web site http://ioumarket.com/ (although it has only 3 ads as of Monday afternoon).
This is while banks are honoring them, this week only, maybe. What will happen when banks are no longer accepting them for deposit? Values would likely fall even further.
While they provide tax exempt income, the real difference between these CaliBonds and real bonds is that no one is offering to buy these CaliBonds. They are being forced on people who were expecting cash. The fact they are being bid at a 10-35% discount shows more of their true worth. Regular citizens, who expected a cash refund on their tax overpayments are being given the short end of the stick.
The funny part is, a 3.75% tax free return is not bad in today's environment, and normally, people don't get any interest on their refund checks. The big question, IF, IF, IF the state government makes good on the payments in October.
Payment categories protected by the State Constitution, federal law and court decisions (education, debt service, state payroll, pensions, In-Home Supportive Services, and Medi-Cal providers) will receive regular payments in cash. All other general fund payments will be paid with CaliBonds (including payments to local governments for social services, private contractors, state vendors, income and corporate tax refunds, and payments for State operations including legislative per diem).
UPDATE:
The California registered warrants were available for redemption a month early:
http://www.sco.ca.gov/eo_news_registeredwarrants.html
The CaliBonds are issued for face value, but come with an interest premium (3.75%) payable at a certain future date (starting October 2nd, if the state has cash available). In order to complete the loop and have these function fully as money, the state would just have to make them acceptable for state payments like taxes, fees, and so on.
The first batch of 27,000 Calibonds worth $53 million are being mailed today, mostly to residents owed tax refunds. By the end of July, California will have issued $3.2 billion worth of CaliBonds.
Bids on the CaliBonds are already coming in below face value as investors attempt to take advantage of their uncertainly. In all honesty, their future payment is definitely in question, so below face value is probably an accurate assessment of their value.
Looking at California area Craigslist ads, a number of people are offering to pay cash for these CaliBonds right now. Three ads posted today in Los Angeles mentioned specific amounts: one ad is offering 65%, another 70%, while another is offering 90% of face value. One ad posted yesterday in San Diego offered 85%. Some entrepreneur has also already set up an IOU exchange web site http://ioumarket.com/ (although it has only 3 ads as of Monday afternoon).
This is while banks are honoring them, this week only, maybe. What will happen when banks are no longer accepting them for deposit? Values would likely fall even further.
While they provide tax exempt income, the real difference between these CaliBonds and real bonds is that no one is offering to buy these CaliBonds. They are being forced on people who were expecting cash. The fact they are being bid at a 10-35% discount shows more of their true worth. Regular citizens, who expected a cash refund on their tax overpayments are being given the short end of the stick.
The funny part is, a 3.75% tax free return is not bad in today's environment, and normally, people don't get any interest on their refund checks. The big question, IF, IF, IF the state government makes good on the payments in October.
Payment categories protected by the State Constitution, federal law and court decisions (education, debt service, state payroll, pensions, In-Home Supportive Services, and Medi-Cal providers) will receive regular payments in cash. All other general fund payments will be paid with CaliBonds (including payments to local governments for social services, private contractors, state vendors, income and corporate tax refunds, and payments for State operations including legislative per diem).
UPDATE:
The California registered warrants were available for redemption a month early:
http://www.sco.ca.gov/eo_news_registeredwarrants.html
Decrease Your Tax Withholding Now
It is a popular pasttime in America to get a big refund check in the mail when filing taxes. It's an understandable habit, as getting a big refund is a great feeling, like finding money in your pockets, and people prefer to over-withhold, since finding out you owe thousands is a real bummer. Heck, I've done it that way myself for years.
Now, however, is the time to change that habit. I did it a couple months ago, and if you haven't yet, you need to do it now. Change your withholdings so they take the bare minimum out of your check.
The fact is, it is very unlikely that any refunds will be issued next year. Already this year, a number of states have failed to process refunds properly. I myself don't want to trust government to have the money, or be willing to part with it, when refund time comes.
News articles are already being written about the problems people are facing when trying to secure a refund.
http://www.breitbart.com/article.php?id=D997417O0&show_article=1
You have been warned!
Now, however, is the time to change that habit. I did it a couple months ago, and if you haven't yet, you need to do it now. Change your withholdings so they take the bare minimum out of your check.
The fact is, it is very unlikely that any refunds will be issued next year. Already this year, a number of states have failed to process refunds properly. I myself don't want to trust government to have the money, or be willing to part with it, when refund time comes.
News articles are already being written about the problems people are facing when trying to secure a refund.
http://www.breitbart.com/article.php?id=D997417O0&show_article=1
You have been warned!
Tuesday, June 30, 2009
Student Loan Forgiveness
So, government will forgive your government-sponsored student loans if you work for the government. Classic example of how government power expands, slowly, incrementally, then totally.
http://www.ibrinfo.org/
http://www.ibrinfo.org/
Wednesday, June 17, 2009
Economic Misinformation about Falling Real Estate and Walking Away
Just read this blurb concerning housing: "If tens of thousands of these property owners who are 'underwater' decide to bail, South Florida would be hit with an economic crisis that will accelerate the decline in property values, cost thousands more jobs and could put hundreds of companies in jeopardy, economists, brokers and government officials warn. The scenario could re-accelerate the downward spiral in a real estate market that many hope may finally be reaching bottom and drag the broader economy down further. " [article here]
Balderdash and hogwash, all of it. This is the problem of a media that is controled by certain economic interests (the parasites): the news reflects only their worldview and perspective.
If you happen to be an economic parasite, yes, falling real estate is a big problem. For the vast majority of citizens, and for the economy as a whole, falling real estate prices is the best thing that could possibly happen.
Low house payments means more disposable income, which means more consumer spending. Low commercial rents means more profitable small businesses, and lower start-up barriers. All of which means greater productivity and more jobs.
Overall, the idea that low land prices somehow would hurt the economy is a total and complete lie. The only ones who benefit from high land prices are the parasite classes, and honest articles about real estate should declare this fact.
If we had a "HomeOwners Union", right now would be the perfect time to go on a mass mortgage payment strike, and sweep the feet out from under these economic parasites once and for all.
If you are currently underwater on your mortgage, you should be doing everything in your power to get out from under it, forthwith and posthaste. Unless there are some overriding personal reasons, perpare for evacuation. But not before extracting every last dollar out of your investment. Forget jingle mail: don't leave until the sherrif forcibly evicts you, and fight it every step of the way to maximize your returns. Forget your sunk costs, that is a psychological fallacy: the fact you have lost money in the past does not mean you should continue to throw good money after bad. Analyze your credit score rationally: your credit score is only worth a few thousand dollars, most likely. If you can save $50K by walking away, the hit to your credit will be worth it.
The banks are more than happy to milk you like a cow until you are dry as a bone. Don't fall for their propaganda and misinformation that would keep you in their cattle pen, also known as perpetual debt enslavement.
Balderdash and hogwash, all of it. This is the problem of a media that is controled by certain economic interests (the parasites): the news reflects only their worldview and perspective.
If you happen to be an economic parasite, yes, falling real estate is a big problem. For the vast majority of citizens, and for the economy as a whole, falling real estate prices is the best thing that could possibly happen.
Low house payments means more disposable income, which means more consumer spending. Low commercial rents means more profitable small businesses, and lower start-up barriers. All of which means greater productivity and more jobs.
Overall, the idea that low land prices somehow would hurt the economy is a total and complete lie. The only ones who benefit from high land prices are the parasite classes, and honest articles about real estate should declare this fact.
If we had a "HomeOwners Union", right now would be the perfect time to go on a mass mortgage payment strike, and sweep the feet out from under these economic parasites once and for all.
If you are currently underwater on your mortgage, you should be doing everything in your power to get out from under it, forthwith and posthaste. Unless there are some overriding personal reasons, perpare for evacuation. But not before extracting every last dollar out of your investment. Forget jingle mail: don't leave until the sherrif forcibly evicts you, and fight it every step of the way to maximize your returns. Forget your sunk costs, that is a psychological fallacy: the fact you have lost money in the past does not mean you should continue to throw good money after bad. Analyze your credit score rationally: your credit score is only worth a few thousand dollars, most likely. If you can save $50K by walking away, the hit to your credit will be worth it.
The banks are more than happy to milk you like a cow until you are dry as a bone. Don't fall for their propaganda and misinformation that would keep you in their cattle pen, also known as perpetual debt enslavement.
Thursday, June 11, 2009
Media Spin on Foreclosures: Pick Your Headline
Ok, lets play the media spin game, you get to choose the headline. Which would you choose, and why?
a) "Foreclosure Increase Smallest in Three Years"
b) "Foreclosures Fall 6 Percent"
c) "Foreclosures Rise 18 Percent"
d) "Foreclosure Filings at Third Highest Ever"
Incredibly, they are all true, to wit: a) the year over year percentage increase, from May 2008-2009 is smallest in 3 years, b) they fell 6% from their all-time high of last month, c) they have risen 18% month to month since last year, and d) speaks for itself, and is the most truthful and relevent point of them all: the foreclosure flood is larger than ever in the last three months.
Do you think it is an accident that all the media headlines sound like A or B, chosing to mislead with percentages?
Here's my headline for the day: "Media Reality Distortion Sees Record Increase, More Credibility Lost"
a) "Foreclosure Increase Smallest in Three Years"
b) "Foreclosures Fall 6 Percent"
c) "Foreclosures Rise 18 Percent"
d) "Foreclosure Filings at Third Highest Ever"
Incredibly, they are all true, to wit: a) the year over year percentage increase, from May 2008-2009 is smallest in 3 years, b) they fell 6% from their all-time high of last month, c) they have risen 18% month to month since last year, and d) speaks for itself, and is the most truthful and relevent point of them all: the foreclosure flood is larger than ever in the last three months.
Do you think it is an accident that all the media headlines sound like A or B, chosing to mislead with percentages?
Here's my headline for the day: "Media Reality Distortion Sees Record Increase, More Credibility Lost"
Tuesday, June 9, 2009
Economy Still Grinding Down
The US press continues its black-out on reality. Our media handlers clearly view us as cattle. Hell, hard to blame them. Unfortunately, reality proceeds regardless. The debt deflation continues to wipe out business activity, while, as I noted in the last post, the global stimulus money drives up basic prices.
Thanks to AEP, and the British free press, for some unbiased reporting:
For guidance on where we are in this long-drawn saga, I look to Berkeley's Barry Eichengreen, author of the Great Depression classic Golden Fetters – which avoids the error of viewing the 1930s through a US prism. He has crunched the latest data with Trinity College Dublin's Kevin O'Rourke for VoxEU, concluding that the global rupture over the last nine months has been more violent than in the early slump. This is logical. Global debt leverage is much greater this time.
The fall in industrial output has been roughly equal to the 1929-1930 stage for Germany and the Anglo-Saxons, but worse for Japan, France, Italy, and Eastern Europe. The collapse in world trade has been swifter: the global equity crash has been twice as bad. "It's a depression alright. The good news is that the policy response is very different. The question now is whether that response will work," they said.
The elastic was bound to snap back, just as it did in the bear rally of early 1931. Whether the underlying economy has begun to heal is another matter. World Bank chief economist Justin Yifu Lin said capacity utilization is running at an historic low of 50pc-60pc. Companies will have to fire a lot of workers. This is where the danger lies, and why he fears that deflation is creeping up on us.
Trade data from Asia are flashing warning signals again. Korea's exports were down 28.3pc in May, reversing the April rebound. Malaysia has slipped to -26pc, and India has touched a new low of -33pc.
US freight data is getting worse, not better. The Association of American Railroads said traffic was down 22pc in the third week of May from a year earlier. Canadian freight was down 34pc. The American Trucking Association (ATA) said it saw fresh drops of 4.5pc in March and a further 2.2pc in April. Tonnage is down 13pc over 12 months. Bob Costello, the ATA's chief economist, said companies have not cut inventories fast enough to keep pace with declining sales. The contraction in truck volume has "accelerated".
Yes, the Baltic Dry Index for bulk shipping of resources has quadrupled since January, but this reflects China's bid to stockpile metals while prices are low.
Stephen Roach, Morgan Stanley's Far East chief, fears an "Asian Relapse", saying the region is prisoner to its fatal dependency on exports to the West. The export share of GDP has risen from 36pc to 47pc across developing Asia over the last decade.
"China's incipient rebound relies on a time-worn stimulus formula: upping the ante on infrastructure spending in anticipation of an eventual rebound of global demand," he said. The strategy cannot work this time because Americans have exhausted their credit, and their desire to borrow. Consumption will fall from its peak of 72pc of GDP to the "pre-bubble norm" of 67pc, if not more.
David Rosenberg from Gluskins Sheff expects Americans to retrench ferociously as 78m baby boomers face the looming threat of penury in old age. "The big story is that the personal savings rate hit a 15-year high of 5.7pc in April. I believe it could test the post-War peak of 15pc. Too many pundits are still living in the old paradigm of Americans shopping till they drop," he said.
The list of countries in deflation is growing every month: Ireland (-3.5), Thailand (-3.3), China (-1.5), Switzerland (-1), Spain (-0.8), the US (-0.7), Singapore (-0.7), Taiwan (-0.5), Belgium (-0.4), Japan (-0.1), Sweden (-0.1), Germany (0).
Yet markets seem to think otherwise, and this has its own awful consequences. Inflation fears have driven 10-year US Treasury yields to 3.86pc, a full point above levels in March when the Fed intervened to force rates down. US mortgage rates have jumped to 5.29pc. Gilts have reached 3.92pc, and French 10-year bonds are at 4.05pc.
This bond revolt is enough to bring any global recovery to a shuddering halt. The irony is that those fretting loudest about inflation may themselves tip us into outright deflation, with all the perils of a debt compound trap.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5461562/Merkels-inflationary-fretting-may-wake-the-bears-from-hibernation.html
Thanks to AEP, and the British free press, for some unbiased reporting:
For guidance on where we are in this long-drawn saga, I look to Berkeley's Barry Eichengreen, author of the Great Depression classic Golden Fetters – which avoids the error of viewing the 1930s through a US prism. He has crunched the latest data with Trinity College Dublin's Kevin O'Rourke for VoxEU, concluding that the global rupture over the last nine months has been more violent than in the early slump. This is logical. Global debt leverage is much greater this time.
The fall in industrial output has been roughly equal to the 1929-1930 stage for Germany and the Anglo-Saxons, but worse for Japan, France, Italy, and Eastern Europe. The collapse in world trade has been swifter: the global equity crash has been twice as bad. "It's a depression alright. The good news is that the policy response is very different. The question now is whether that response will work," they said.
The elastic was bound to snap back, just as it did in the bear rally of early 1931. Whether the underlying economy has begun to heal is another matter. World Bank chief economist Justin Yifu Lin said capacity utilization is running at an historic low of 50pc-60pc. Companies will have to fire a lot of workers. This is where the danger lies, and why he fears that deflation is creeping up on us.
Trade data from Asia are flashing warning signals again. Korea's exports were down 28.3pc in May, reversing the April rebound. Malaysia has slipped to -26pc, and India has touched a new low of -33pc.
US freight data is getting worse, not better. The Association of American Railroads said traffic was down 22pc in the third week of May from a year earlier. Canadian freight was down 34pc. The American Trucking Association (ATA) said it saw fresh drops of 4.5pc in March and a further 2.2pc in April. Tonnage is down 13pc over 12 months. Bob Costello, the ATA's chief economist, said companies have not cut inventories fast enough to keep pace with declining sales. The contraction in truck volume has "accelerated".
Yes, the Baltic Dry Index for bulk shipping of resources has quadrupled since January, but this reflects China's bid to stockpile metals while prices are low.
Stephen Roach, Morgan Stanley's Far East chief, fears an "Asian Relapse", saying the region is prisoner to its fatal dependency on exports to the West. The export share of GDP has risen from 36pc to 47pc across developing Asia over the last decade.
"China's incipient rebound relies on a time-worn stimulus formula: upping the ante on infrastructure spending in anticipation of an eventual rebound of global demand," he said. The strategy cannot work this time because Americans have exhausted their credit, and their desire to borrow. Consumption will fall from its peak of 72pc of GDP to the "pre-bubble norm" of 67pc, if not more.
David Rosenberg from Gluskins Sheff expects Americans to retrench ferociously as 78m baby boomers face the looming threat of penury in old age. "The big story is that the personal savings rate hit a 15-year high of 5.7pc in April. I believe it could test the post-War peak of 15pc. Too many pundits are still living in the old paradigm of Americans shopping till they drop," he said.
The list of countries in deflation is growing every month: Ireland (-3.5), Thailand (-3.3), China (-1.5), Switzerland (-1), Spain (-0.8), the US (-0.7), Singapore (-0.7), Taiwan (-0.5), Belgium (-0.4), Japan (-0.1), Sweden (-0.1), Germany (0).
Yet markets seem to think otherwise, and this has its own awful consequences. Inflation fears have driven 10-year US Treasury yields to 3.86pc, a full point above levels in March when the Fed intervened to force rates down. US mortgage rates have jumped to 5.29pc. Gilts have reached 3.92pc, and French 10-year bonds are at 4.05pc.
This bond revolt is enough to bring any global recovery to a shuddering halt. The irony is that those fretting loudest about inflation may themselves tip us into outright deflation, with all the perils of a debt compound trap.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5461562/Merkels-inflationary-fretting-may-wake-the-bears-from-hibernation.html
Friday, May 29, 2009
Commodities Spike Up: Here Comes Inflation
Well, the eye of the storm appears to be passing, and the winds of inflation are picking back up. Take advantage of the low prices now to stock up, before the inflation hits the consumer level.
The interest on the long bond is continuing to rise, which will quickly wipe out the idea of housing recovery. Don't buy into this false real estate bottom. As mortgage rates rise up, the price of housing will fall.
Layoffs are going to be a huge problem going forward as well, as we have just begun to see the government cutting bloodbath, not to mention the collapse of the American car industry.
With joblessness, cost of living, and interest rates rising, combined with the negative supply trends of reverse migration and an aging population, the housing market is in for a long long fall. No need to rush there.
Commodities headed for the biggest monthly rally in 34 years, led by energy, as the slumping dollar boosted demand for raw materials as a hedge against inflation.
In May, the Reuters/Jefferies CRB Index of 19 energy, metal and agricultural prices has gained 14 percent, the most since July 1974. The dollar was poised for the biggest monthly drop since August against a basket of six major currencies.
Crude oil was set for the biggest monthly gain in a decade. Gasoline has soared more than 30 percent in May. Gold copper surged, while corn and soybeans reached the highest since September.
Crude-oil futures for July delivery rose $1.10, or 1.7 percent, to $66.18 a barrel on the New York Mercantile Exchange. This month, the price has jumped 29 percent, the most since March 1999.
Gasoline futures for June delivery rose 1.64 cents, or 0.9 percent, to $1.9269 a gallon. In May, the price has surged 31 percent, the most since March 2006.
Today, cotton jumped the most allowed by ICE Futures U.S. in New York. Gold futures topped $980 an ounce, and silver was poised for the biggest monthly gain in 22 years.
The interest on the long bond is continuing to rise, which will quickly wipe out the idea of housing recovery. Don't buy into this false real estate bottom. As mortgage rates rise up, the price of housing will fall.
Layoffs are going to be a huge problem going forward as well, as we have just begun to see the government cutting bloodbath, not to mention the collapse of the American car industry.
With joblessness, cost of living, and interest rates rising, combined with the negative supply trends of reverse migration and an aging population, the housing market is in for a long long fall. No need to rush there.
Commodities headed for the biggest monthly rally in 34 years, led by energy, as the slumping dollar boosted demand for raw materials as a hedge against inflation.
In May, the Reuters/Jefferies CRB Index of 19 energy, metal and agricultural prices has gained 14 percent, the most since July 1974. The dollar was poised for the biggest monthly drop since August against a basket of six major currencies.
Crude oil was set for the biggest monthly gain in a decade. Gasoline has soared more than 30 percent in May. Gold copper surged, while corn and soybeans reached the highest since September.
Crude-oil futures for July delivery rose $1.10, or 1.7 percent, to $66.18 a barrel on the New York Mercantile Exchange. This month, the price has jumped 29 percent, the most since March 1999.
Gasoline futures for June delivery rose 1.64 cents, or 0.9 percent, to $1.9269 a gallon. In May, the price has surged 31 percent, the most since March 2006.
Today, cotton jumped the most allowed by ICE Futures U.S. in New York. Gold futures topped $980 an ounce, and silver was poised for the biggest monthly gain in 22 years.
Monday, April 27, 2009
The Jubilee Solution to the Economic Crisis: the People’s Bailout
The worldwide economy is unraveling because of high debt. High debt is destroying the economy not only because businesses are forced to liquidate in the face of unpayable debt, but also because consumers won’t spend when their debt load gets too high. The high debt load is made worse by deflation, which makes older debt harder to pay off.
Jubilee means the forgiveness of debt, but can the principle of Jubilee debt forgiveness be applied to our current economic situation? Yes, it can. In fact, debt cancellation is the only solution to the problem, other than letting the problem run its course through a long period of economic depression, which cancels debt the slow and painful way.
The central governments of the world are currently attempting to inflate the money supply, through quantitative easing, to counter the deflation and stimulate growth. However, this approach is failing for a number of reasons. The basic disconnect is in giving the stimulus to banks, rather than directly to citizens.
Stimulation only works if the cash is spent. If the government prints a billion dollars only to bury it under the ground, obviously, no stimulus and no inflation will take place. Giving the cash to the banks is roughly equivalent to burying the new money under the ground. For one, the banks are using it to shore up their balance sheets, for two, consumers are already buried in debt and facing mass layoffs, so taking on more debt is not an option, so the money just sits in the banks.
The Jubilee economic solution would combine cash stimulus with debt cancellation. However, rather than bailing out the banks, and encouraging the people to go into greater debt, the government will give cash stimulus directly to the people. People will be targeted according to their debt, receiving cash payment equal to their debt level, payment going directly to the debt holder. In effect, everyone’s debt will be cancelled.
In order to prevent runaway inflation, the government will at the same time raise the banks’ cash reserve requirement in equal proportion to the cash stimulus. Thus, the cash will pass through the citizens, paying off their debt, and get soaked up back into the vaults of the banks.
The net effect will be a reset of the financial system, as all debts get fully paid off. Without the crushing weight of credit cards, mortgages, car payments, and student loans, people will be free to spend and invest again. The debt deflation will be totally defeated, and unemployment will quickly shrink as the business liquidation cycle ends and the economy takes off, with the desired upward effect on wages. The stage would be set for a new economic expansion as investments, inventions, and innovations are freed up to work their wealth-creating magic.
This is the Jubilee solution to our economic crisis. The beauty of the plan is that it would not require any new laws nor a Constitutional Amendment, and would not require the abrogation or violation of any contracts. Essentially, it could be done by executive action, but obviously, widespread Congressional support would be ideal as well.
What can you do to help make it happen? Spread the word however you can: tell your friends and family, blog it, forward it, provide the plan to your political representatives, run for office yourself, the possibilities are endless.
This is the Jubilee solution to our economic crisis, the people’s bailout. God bless us all.
note: by cash, I do not imply actual paper script to be printed and distributed; electronic credit money would actually work much better.
Jubilee means the forgiveness of debt, but can the principle of Jubilee debt forgiveness be applied to our current economic situation? Yes, it can. In fact, debt cancellation is the only solution to the problem, other than letting the problem run its course through a long period of economic depression, which cancels debt the slow and painful way.
The central governments of the world are currently attempting to inflate the money supply, through quantitative easing, to counter the deflation and stimulate growth. However, this approach is failing for a number of reasons. The basic disconnect is in giving the stimulus to banks, rather than directly to citizens.
Stimulation only works if the cash is spent. If the government prints a billion dollars only to bury it under the ground, obviously, no stimulus and no inflation will take place. Giving the cash to the banks is roughly equivalent to burying the new money under the ground. For one, the banks are using it to shore up their balance sheets, for two, consumers are already buried in debt and facing mass layoffs, so taking on more debt is not an option, so the money just sits in the banks.
The Jubilee economic solution would combine cash stimulus with debt cancellation. However, rather than bailing out the banks, and encouraging the people to go into greater debt, the government will give cash stimulus directly to the people. People will be targeted according to their debt, receiving cash payment equal to their debt level, payment going directly to the debt holder. In effect, everyone’s debt will be cancelled.
In order to prevent runaway inflation, the government will at the same time raise the banks’ cash reserve requirement in equal proportion to the cash stimulus. Thus, the cash will pass through the citizens, paying off their debt, and get soaked up back into the vaults of the banks.
The net effect will be a reset of the financial system, as all debts get fully paid off. Without the crushing weight of credit cards, mortgages, car payments, and student loans, people will be free to spend and invest again. The debt deflation will be totally defeated, and unemployment will quickly shrink as the business liquidation cycle ends and the economy takes off, with the desired upward effect on wages. The stage would be set for a new economic expansion as investments, inventions, and innovations are freed up to work their wealth-creating magic.
This is the Jubilee solution to our economic crisis. The beauty of the plan is that it would not require any new laws nor a Constitutional Amendment, and would not require the abrogation or violation of any contracts. Essentially, it could be done by executive action, but obviously, widespread Congressional support would be ideal as well.
What can you do to help make it happen? Spread the word however you can: tell your friends and family, blog it, forward it, provide the plan to your political representatives, run for office yourself, the possibilities are endless.
This is the Jubilee solution to our economic crisis, the people’s bailout. God bless us all.
note: by cash, I do not imply actual paper script to be printed and distributed; electronic credit money would actually work much better.
Thursday, April 16, 2009
Jubilee without Theft or Inflation
I believe that Jubilee could be accomplished without the complaints of theft or inflation that typically arise. Here is how it would work:
The government would issue checks to everyone to pay off their debts.
While doing so, the government would raise bank reserve requirements by the corresponding amount.
Thus, a huge new pool of money would come into existence to pay off people's debts, but then it would get sunk in the banks, never to recirculate to cause inflation.
No contracts would be violated, no cases could be dragged to court, no extra laws would have to be passed.
Viola! Rejoice in the Jubilee Year!
The government would issue checks to everyone to pay off their debts.
While doing so, the government would raise bank reserve requirements by the corresponding amount.
Thus, a huge new pool of money would come into existence to pay off people's debts, but then it would get sunk in the banks, never to recirculate to cause inflation.
No contracts would be violated, no cases could be dragged to court, no extra laws would have to be passed.
Viola! Rejoice in the Jubilee Year!
Tuesday, April 14, 2009
The Economic War against the Common Man
What really happened
Exerpts of a brilliant economic analysis follows, read the full essay here: http://www.marketoracle.co.uk/Article9986.html
Iceland’s financial crisis today is less an issue of international law as of outright lawlessness perpetrated by the purveyors of so-called free market democracy. Nations pressing Iceland for payment impose one set of laws for others while following quite a different set for themselves. Preaching to Iceland about international law, the United States and Great Britain themselves have broken the clearest of international laws – those against waging aggressive war. Their propagandists are skillful at using the language of capitalism and morality, yet they are neither capitalist nor moral. Their financial strategy is to play an ages-old psychological game. Make countries like Iceland feel guilty about being debtors rather than recognizing they have been victims of an international Ponzi scheme. In a nutshell, the game is to lay down “laws” for debtors in the form of destructive austerity programs fashioned by irresponsible and indeed, parasitic creditors. This “aid advice” ends in outright asset stripping, both public and private.
Asset stripping to pay debts has caused collapse time and again in history, but is strangely downplayed in today’s academic curriculum as an “inconvenient truth” as far as vested financial interests are concerned. Income is siphoned off by a scheme that is elegant and simple. Hapless victims – and now entire economies, not just individuals – are maneuvered onto a debt treadmill from which there is no escape. Creditors pile on credit and let the debts grow at the “magic of compound interest,” knowing that their loans cannot be repaid – except by asset sell-offs. No economy’s productivity can keep pace with exponentially compounding debt. Whatever was owned (and indeed, financed originally by public debt but now paid off) is stripped away for interest payments that never end. The aim is for these payments to absorb as much of the surplus as possible, so that the national economy in effect works to pay tribute to the new global financial class – bankers and money managers of mutual funds, pension funds and hedge funds.
The product they are selling is debt. They build up their own wealth by indebting others, and then forcing sell-offs to buyers who take on their own debt in the hope of making asset-price gains as property prices are impossibly inflated relative to the wages of living labor. This has become the new, euphemistically dubbed post-industrial form of wealth creation – a strategy that is now collapsing economies throughout the world.
The second important principle is how radically today’s post-capitalist order has inverted traditional ways of making money. Instead of making profits on new capital investment, the easiest path to quick riches in today’s global financial system is to foreclose at pennies on the dollar, and make a “capital gain” by flipping property onto world financial markets that are being inflated by central banks. While financial spokespersons promise that “there is no such thing as a free lunch,” today’s hit-and-run financial bubble, fraud and insider privatizations culminating in public-sector bailouts (“socializing the risk” while privatizing the profits and capital gains) – has become all about obtaining a free lunch.
But it is a zero-sum gambling game, with losers on the other side of the table from the winners. One party’s gain is another’s loss – and indeed, this kind of game ends up shrinking the economy by diverting resources away from real investment in tangible capital formation. Unlike industrial capitalism, which employs labor and invests in capital equipment to turn raw materials into salable commodities, today’s post-industrial financialized system only offers the virtual (and temporary) wealth of asset bubbles. Its financial managers claim to be acting in the tradition of classical economists and share their concept of free markets, but in actuality they have been part of an intellectual fraud that depicts their system as something other than the financialized wealth extraction on the real economy of production and consumption that it is. Financialized wealth is extractive, not productive. That is because loans, stocks and bond securities are claims on wealth, not real wealth itself.
Fortunately, this need not happen in countries that do not impose debt leveraging on themselves, but only in countries that let the public utility of money and credit creation be privatized in the hands of a cosmopolitan financial class.
Consider the role of banking in this neo-feudal order. Banks do not create credit to finance manufacturing – that is done mainly out of retained earnings and equity. Banks create credit primarily to lend against collateral already in place – loans that simply extract money from the economy. This is an inherently destructive act, one that is anti-capitalist in the sense that it undercuts industrial growth in favor of interest extraction and short-term speculative gains.
The trick is to get this policy welcomed as if it were progress, as “post-industrial” rather than a lapse backward. Only today is it becoming apparent that the collateral-based lending of banks “creates wealth” mainly by inflating asset-price bubbles, especially in real estate. Bankers calculate how much debt a given flow of residential or commercial real estate income can support, and create enough credit to make a loan large enough to absorb this surplus revenue. Bankers do the same with industry by lending corporate raiders enough money in take-over “junk” bonds to turn profits into a flow of interest payments for themselves, and with capital gains for the raiders. Central banks fuel this process by swamping economies with easy credit (that is, debt) that keeps the financial sector fat while impoverishing the increasingly indebted nation.
Finance thus is the historical antithesis of property, sanctifying its own right to expropriate indebted property owners. Originally denounced by Christianity, Judaism and Islam, interest-bearing debt has sanctified itself as the predominant form of wealth. This is not what the classical economists and democratic political reformers expected to see. They explained how to avoid this economic dystopia by appropriate government tax policy and regulation to minimize the economic role and political power of post-feudal bankers and rentiers. (Rentiers are people who live off interest and rents, that is, off absentee incomes paid on a regular basis.)
Bankers managed to convince ambitious fortune-seekers that the way to wealth and economic growth lay in debt leveraging, not in staying free of debt. Selling debt as their product, banks and speculators at the world’s financial core needed to prepare for what they must have known would lead to economic collapse and destroyed economies throughout history. They prepared the path to ruin by ideological engineering aimed at shaping how populations think about history, so as to accept debt pyramiding as a good economic strategy.
Turning economic power into political power - Creditors in most countries have been able to turn their economic power into political power with the aim of shifting the tax burden off themselves and onto labor and industry. The final coup de grace occurs when they get the government to bail them out from their losses on bad loans. In the United States, Congress has tripled the national debt in less than a year to bail out creditors with little thought of helping debtors, or even of prosecuting the massive financial fraud involved in its subprime real estate bubble and the sale of junk mortgages to gullible foreign buyers.
Allowing economies to be crippled with interest payments was unthinkable until recently. To achieve so radical a break in the public’s idea of prosperity and self-reliance, it has been necessary for creditors to wipe out knowledge of how legal systems have been amended to put creditor interests above those of debtors over the past eight centuries – and how the leading classical economists and Enlightenment cultural and religious leaders sought to subordinate creditor interests to those of growth and prosperity for the economy at large. But the new banking class has been clever enough to hire the best propagandists money can buy while remaining blind to the havoc they are wreaking with people’s lives.
The trick is to fool debtors into thinking that “free markets” means paying one’s debts. Creditors can succeed in letting debt leveraging and “the magic of compound interest” empty out economies only by diverting attention from what Adam Smith and other classical economists warned against. For them, a free market was one free of debt – especially foreign debt. In The Wealth of Nations (especially Book V, chapter 3), Smith warned against creditors becoming “free” enough to disable the ability of governments to protect citizens from creditors – especially the Dutch, who were the major investors in British monopolies created to be sold to pay for that nation’s seemingly eternal wars with France. The problem was that creditors sought to extract the wealth of nations for themselves, not to create wealth. Their greed was destructive to society as a whole, because it was easier to simply strip assets than to create real capital.
The tacit assumption is not that bankers’ exorbitant greed is achieved at the expense of the economy at large, but that the financial sector’s prosperity is a precondition for the economy to grow. The bankers try to cap matters by trotting out poor retirees (like the widows and orphans of old – presumably those living on “fixed incomes” in the form of trust funds) whose meager savings should be supported. Doing so just happens to save the financial oligarchy of billionaires at the top of the economic pyramid, but not the proverbial victims.
The use of human shields such as union members concerned about the investments of their pension funds to protect the wealth of the kleptocrats is likewise shameless. Wall Street sages in the United States, for example, shed crocodile tears over the fate of the working people suffering from the stock market collapse, knowing full well that financial assets are heavily concentrated at the top of the economic pyramid, with workers having, only a meager share of those stocks and bonds. Ignored is the fact that the government could bail out failing pension funds (like Social Security) directly at just a small fraction of the cost of propping up the assets of the affluent.
The best path for nations is to put their own economic growth before the interests of creditors. For many generations this ethic supported a set of political checks and balances that kept the growth of international debt in terms considered to be tolerable – much too heavy by the free-market standards of Smith and John Stuart Mill, but not so high as to prompt widespread defaults and debt repudiation.
This ethic has changed in recent years. Countries have accepted creditor propaganda that debts are a “point of honor,” much as the poor believe that paying their debts – even when they are in negative equity – is the “honest thing to do.” Obviously this ethic is not self-applied to the world’s largest financial institutions or real estate speculators. But Iceland accepted it in what is a characteristic of small, closely-knit communities where the word of neighbors is their bond. The root of Iceland’s ethic is mutual aid and prosperity for all. It is a fine, highly socialized attitude, and therefore tragic that it has helped lead the nation to fall prone to the snake oil of debt peonage.
Having stuck Third World countries with debts beyond their ability to pay, the IMF and World Bank used their creditor leverage to force governments to impose draconian austerity plans that had the effect of preventing growth toward industrial and agricultural self-sufficiency, thereby also crushing prospects for competitiveness. The IMF and World Bank then demanded that debtor countries sell off their public infrastructure, land, subsoil rights and other assets to pay the debts that these institutions sponsored so irresponsibly. (If IMF loans were not simply irresponsible, then they knowingly crippled debtor-country economies.) It is an age-old story of conquest, now accomplished without conventional warfare.
Psychologists have explained the creditor proclivity for violence by the tendency for rentiers to fight for unearned income – inheritance, or other “free wealth” that they have obtained without effort of their own. People who work for a living and are able to support themselves believe that they can survive, and so there is less of the kind of panic that creditors and other free lunchers feel at the thought that their extractive revenue may end. They fight passionately against the prospect of having to live on what they produce or earn by their own merits. So the last thing that rentiers really want is a free market. In a shameless irony, they tend to accuse populations of being terrorists if they seek to defend themselves against predatory creditors and land-grabbers!
This is just the opposite of the free markets that were promised them back in 1990-91. Instead of economic growth, the “real” economy of production and consumption shrunk, even as foreign financial inflows inflated property prices for housing and office space, fuel and public utilities. Real estate and utility services hitherto provided freely or at subsidy to the economy at large were turned into a predatory vehicle for foreigners to extract income, putting the domestic population on rations, much as what occurs under military occupation. Yet the public media, academic centers and parliaments have persuaded populations that this is part of a natural order, even the product of how a free-market is supposed to operate, rather than a retrogression back to quasi-feudal institutions. The simplistic idea is that making money is itself “capitalist” ipso facto, regardless of whether industrial capital is being created or dismantled and stripped.
Most societies throughout history have sought to provide credit legally in ways that do not permit creditor oligarchies to emerge. Today’s creditor advocates are at war with the spirit of this idea. And in taking this position, they reject the thrust of the Enlightenment’s anti-usury laws, classical political economy’s distinction between productive and sterile investment, the St. Simonian attempt at financial reform, and the Progressive Era’s attempt to mobilize national credit to fund productive industrial investment rather than being extractive, benefiting only the few. The classical idea of economic freedom itself was formulated as the antithesis to feudal-epoch finance. And the ideal of freedom from predatory finance is what is being threatened today, as if society has forgotten how long and hard the reform struggle has been.
The common thread in these ideas is that people deserve to receive the fruits of their labor. This means bringing prices in line with actual labor-costs of production. It also means that one’s wealth should be limited to only what one creates – not land and natural resources, or monopoly privileges to extract income via control of roads, the right to create money and other natural monopolies. The aim of social reform for many centuries has been to purge capitalism of its legacy of absentee rentier property ownership patterns and creditor-oriented laws inherited from medieval times. The way to do this is to treat banking like transportation and the broadcasting spectrum, as a public utility to form a just fiscal base, not something to be privatized so that individual rentiers can tax society at large for what rightly is a public utility.
The problem goes to the very foundation of economic theory. Any set of statistics reflects categories in economic theory, and in recent years the Chicago School has taken the lead in what is now a nationwide trend to exclude the history of economic thought from the academic curriculum. One can get all the way through a Ph.D. without having surveyed the evolution of classical economics from the Physiocrats through Adam Smith, John Stuart Mill and the Progressive Era reformers. The essence of social reform throughout the Enlightenment, and indeed extending all the way back to the Church Schoolmen is no longer taught – the distinctions between earned and unearned income and wealth, and productive and unproductive (or “sterile”) employment and investment. Post-classical thought insists that all income is productive in proportion to whatever it earns – including the collection of economic rent or extortion of monopoly super-profit, or financial charges for interest and credit card fees, and the exorbitant salaries and bonuses that financial managers pay themselves. All revenue – and therefore, all wealth – appears to be “earned.” By their definition. This denies the concept of “investment in zero-sum activities that merely transfer income into the unproductive sector’s pockets, in contrast to creating income.
As a guide to policy reform, classical economics aimed at creating an economic and fiscal system that would bring market prices in line with technologically necessary costs of production. All such costs ultimately are reducible to labor. The necessary complement to the labor theory of value (adjusted for different grades of labor, the cost of their education and the linkage between wage levels and productivity) was the analysis of economic rent – an institutional add-on reflecting property ownership patterns, financial charges and taxes, not inherent costs of production. The classical reform program was to minimize the cost of production and of living, making economies more competitive by purifying industrial capitalism and removing its remaining feudal legacies, above all the right of hereditary absentee owners (landlords) to siphon off a rental charge for access to land for sites supplied by nature and given value by local public spending (e.g., “location, location, and location,” as real estate agents explain matters to prospective buyers) – and the right of bankers to charge for creating credit that governments could freely create themselves.Fighting against progressive reforms, banks and other financial institutions have sought to preserve their special privileges by law, minimizing taxes on themselves by shifting the burden onto labor and industry. What they have achieved by financializing economies is (1) to raise the cost of living and the cost of doing business; (2) to free their major customers – mortgage borrowers – from taxation so as to leave as much surplus as possible available to be paid as interest; (3) to collect revenue hitherto used to finance the public sector by capitalizing it into interest charges and to inflate the price of housing and other real estate and privatized monopolies; (4) to effectively shift taxes onto labor and industry, thereby raising prices and undermining the competitive power of financialized economies. This is a travesty of classical “free market” policy. It is a policy for predators that mainly burdens economies with high interest and fees while also making the tax burden more oppressive while they reap the benefits.
John Maynard Keynes believed that the proper task of governments was to prevent over-indebtedness from leading to economic depression. He concluded his General Theory (1936) with a call for “euthanasia of the rentier.” Hoping to make credit productive, not extractive, his followers have advocated making banking a public utility so as to steer debt creation to fund growth in the means of production, not economic overhead by inflating property bubbles. Radical as this may appear today, this was the aim of the 19th century classical economists, and underlay the financial reforms that shaped the 20th-century economic takeoff. Only quite recently has the global financial press rediscovered this logic in the wake of today’s bubble meltdown.
Exerpts of a brilliant economic analysis follows, read the full essay here: http://www.marketoracle.co.uk/Article9986.html
Iceland’s financial crisis today is less an issue of international law as of outright lawlessness perpetrated by the purveyors of so-called free market democracy. Nations pressing Iceland for payment impose one set of laws for others while following quite a different set for themselves. Preaching to Iceland about international law, the United States and Great Britain themselves have broken the clearest of international laws – those against waging aggressive war. Their propagandists are skillful at using the language of capitalism and morality, yet they are neither capitalist nor moral. Their financial strategy is to play an ages-old psychological game. Make countries like Iceland feel guilty about being debtors rather than recognizing they have been victims of an international Ponzi scheme. In a nutshell, the game is to lay down “laws” for debtors in the form of destructive austerity programs fashioned by irresponsible and indeed, parasitic creditors. This “aid advice” ends in outright asset stripping, both public and private.
Asset stripping to pay debts has caused collapse time and again in history, but is strangely downplayed in today’s academic curriculum as an “inconvenient truth” as far as vested financial interests are concerned. Income is siphoned off by a scheme that is elegant and simple. Hapless victims – and now entire economies, not just individuals – are maneuvered onto a debt treadmill from which there is no escape. Creditors pile on credit and let the debts grow at the “magic of compound interest,” knowing that their loans cannot be repaid – except by asset sell-offs. No economy’s productivity can keep pace with exponentially compounding debt. Whatever was owned (and indeed, financed originally by public debt but now paid off) is stripped away for interest payments that never end. The aim is for these payments to absorb as much of the surplus as possible, so that the national economy in effect works to pay tribute to the new global financial class – bankers and money managers of mutual funds, pension funds and hedge funds.
The product they are selling is debt. They build up their own wealth by indebting others, and then forcing sell-offs to buyers who take on their own debt in the hope of making asset-price gains as property prices are impossibly inflated relative to the wages of living labor. This has become the new, euphemistically dubbed post-industrial form of wealth creation – a strategy that is now collapsing economies throughout the world.
The second important principle is how radically today’s post-capitalist order has inverted traditional ways of making money. Instead of making profits on new capital investment, the easiest path to quick riches in today’s global financial system is to foreclose at pennies on the dollar, and make a “capital gain” by flipping property onto world financial markets that are being inflated by central banks. While financial spokespersons promise that “there is no such thing as a free lunch,” today’s hit-and-run financial bubble, fraud and insider privatizations culminating in public-sector bailouts (“socializing the risk” while privatizing the profits and capital gains) – has become all about obtaining a free lunch.
But it is a zero-sum gambling game, with losers on the other side of the table from the winners. One party’s gain is another’s loss – and indeed, this kind of game ends up shrinking the economy by diverting resources away from real investment in tangible capital formation. Unlike industrial capitalism, which employs labor and invests in capital equipment to turn raw materials into salable commodities, today’s post-industrial financialized system only offers the virtual (and temporary) wealth of asset bubbles. Its financial managers claim to be acting in the tradition of classical economists and share their concept of free markets, but in actuality they have been part of an intellectual fraud that depicts their system as something other than the financialized wealth extraction on the real economy of production and consumption that it is. Financialized wealth is extractive, not productive. That is because loans, stocks and bond securities are claims on wealth, not real wealth itself.
Fortunately, this need not happen in countries that do not impose debt leveraging on themselves, but only in countries that let the public utility of money and credit creation be privatized in the hands of a cosmopolitan financial class.
Consider the role of banking in this neo-feudal order. Banks do not create credit to finance manufacturing – that is done mainly out of retained earnings and equity. Banks create credit primarily to lend against collateral already in place – loans that simply extract money from the economy. This is an inherently destructive act, one that is anti-capitalist in the sense that it undercuts industrial growth in favor of interest extraction and short-term speculative gains.
The trick is to get this policy welcomed as if it were progress, as “post-industrial” rather than a lapse backward. Only today is it becoming apparent that the collateral-based lending of banks “creates wealth” mainly by inflating asset-price bubbles, especially in real estate. Bankers calculate how much debt a given flow of residential or commercial real estate income can support, and create enough credit to make a loan large enough to absorb this surplus revenue. Bankers do the same with industry by lending corporate raiders enough money in take-over “junk” bonds to turn profits into a flow of interest payments for themselves, and with capital gains for the raiders. Central banks fuel this process by swamping economies with easy credit (that is, debt) that keeps the financial sector fat while impoverishing the increasingly indebted nation.
Finance thus is the historical antithesis of property, sanctifying its own right to expropriate indebted property owners. Originally denounced by Christianity, Judaism and Islam, interest-bearing debt has sanctified itself as the predominant form of wealth. This is not what the classical economists and democratic political reformers expected to see. They explained how to avoid this economic dystopia by appropriate government tax policy and regulation to minimize the economic role and political power of post-feudal bankers and rentiers. (Rentiers are people who live off interest and rents, that is, off absentee incomes paid on a regular basis.)
Bankers managed to convince ambitious fortune-seekers that the way to wealth and economic growth lay in debt leveraging, not in staying free of debt. Selling debt as their product, banks and speculators at the world’s financial core needed to prepare for what they must have known would lead to economic collapse and destroyed economies throughout history. They prepared the path to ruin by ideological engineering aimed at shaping how populations think about history, so as to accept debt pyramiding as a good economic strategy.
Turning economic power into political power - Creditors in most countries have been able to turn their economic power into political power with the aim of shifting the tax burden off themselves and onto labor and industry. The final coup de grace occurs when they get the government to bail them out from their losses on bad loans. In the United States, Congress has tripled the national debt in less than a year to bail out creditors with little thought of helping debtors, or even of prosecuting the massive financial fraud involved in its subprime real estate bubble and the sale of junk mortgages to gullible foreign buyers.
Allowing economies to be crippled with interest payments was unthinkable until recently. To achieve so radical a break in the public’s idea of prosperity and self-reliance, it has been necessary for creditors to wipe out knowledge of how legal systems have been amended to put creditor interests above those of debtors over the past eight centuries – and how the leading classical economists and Enlightenment cultural and religious leaders sought to subordinate creditor interests to those of growth and prosperity for the economy at large. But the new banking class has been clever enough to hire the best propagandists money can buy while remaining blind to the havoc they are wreaking with people’s lives.
The trick is to fool debtors into thinking that “free markets” means paying one’s debts. Creditors can succeed in letting debt leveraging and “the magic of compound interest” empty out economies only by diverting attention from what Adam Smith and other classical economists warned against. For them, a free market was one free of debt – especially foreign debt. In The Wealth of Nations (especially Book V, chapter 3), Smith warned against creditors becoming “free” enough to disable the ability of governments to protect citizens from creditors – especially the Dutch, who were the major investors in British monopolies created to be sold to pay for that nation’s seemingly eternal wars with France. The problem was that creditors sought to extract the wealth of nations for themselves, not to create wealth. Their greed was destructive to society as a whole, because it was easier to simply strip assets than to create real capital.
The tacit assumption is not that bankers’ exorbitant greed is achieved at the expense of the economy at large, but that the financial sector’s prosperity is a precondition for the economy to grow. The bankers try to cap matters by trotting out poor retirees (like the widows and orphans of old – presumably those living on “fixed incomes” in the form of trust funds) whose meager savings should be supported. Doing so just happens to save the financial oligarchy of billionaires at the top of the economic pyramid, but not the proverbial victims.
The use of human shields such as union members concerned about the investments of their pension funds to protect the wealth of the kleptocrats is likewise shameless. Wall Street sages in the United States, for example, shed crocodile tears over the fate of the working people suffering from the stock market collapse, knowing full well that financial assets are heavily concentrated at the top of the economic pyramid, with workers having, only a meager share of those stocks and bonds. Ignored is the fact that the government could bail out failing pension funds (like Social Security) directly at just a small fraction of the cost of propping up the assets of the affluent.
The best path for nations is to put their own economic growth before the interests of creditors. For many generations this ethic supported a set of political checks and balances that kept the growth of international debt in terms considered to be tolerable – much too heavy by the free-market standards of Smith and John Stuart Mill, but not so high as to prompt widespread defaults and debt repudiation.
This ethic has changed in recent years. Countries have accepted creditor propaganda that debts are a “point of honor,” much as the poor believe that paying their debts – even when they are in negative equity – is the “honest thing to do.” Obviously this ethic is not self-applied to the world’s largest financial institutions or real estate speculators. But Iceland accepted it in what is a characteristic of small, closely-knit communities where the word of neighbors is their bond. The root of Iceland’s ethic is mutual aid and prosperity for all. It is a fine, highly socialized attitude, and therefore tragic that it has helped lead the nation to fall prone to the snake oil of debt peonage.
Having stuck Third World countries with debts beyond their ability to pay, the IMF and World Bank used their creditor leverage to force governments to impose draconian austerity plans that had the effect of preventing growth toward industrial and agricultural self-sufficiency, thereby also crushing prospects for competitiveness. The IMF and World Bank then demanded that debtor countries sell off their public infrastructure, land, subsoil rights and other assets to pay the debts that these institutions sponsored so irresponsibly. (If IMF loans were not simply irresponsible, then they knowingly crippled debtor-country economies.) It is an age-old story of conquest, now accomplished without conventional warfare.
Psychologists have explained the creditor proclivity for violence by the tendency for rentiers to fight for unearned income – inheritance, or other “free wealth” that they have obtained without effort of their own. People who work for a living and are able to support themselves believe that they can survive, and so there is less of the kind of panic that creditors and other free lunchers feel at the thought that their extractive revenue may end. They fight passionately against the prospect of having to live on what they produce or earn by their own merits. So the last thing that rentiers really want is a free market. In a shameless irony, they tend to accuse populations of being terrorists if they seek to defend themselves against predatory creditors and land-grabbers!
This is just the opposite of the free markets that were promised them back in 1990-91. Instead of economic growth, the “real” economy of production and consumption shrunk, even as foreign financial inflows inflated property prices for housing and office space, fuel and public utilities. Real estate and utility services hitherto provided freely or at subsidy to the economy at large were turned into a predatory vehicle for foreigners to extract income, putting the domestic population on rations, much as what occurs under military occupation. Yet the public media, academic centers and parliaments have persuaded populations that this is part of a natural order, even the product of how a free-market is supposed to operate, rather than a retrogression back to quasi-feudal institutions. The simplistic idea is that making money is itself “capitalist” ipso facto, regardless of whether industrial capital is being created or dismantled and stripped.
Most societies throughout history have sought to provide credit legally in ways that do not permit creditor oligarchies to emerge. Today’s creditor advocates are at war with the spirit of this idea. And in taking this position, they reject the thrust of the Enlightenment’s anti-usury laws, classical political economy’s distinction between productive and sterile investment, the St. Simonian attempt at financial reform, and the Progressive Era’s attempt to mobilize national credit to fund productive industrial investment rather than being extractive, benefiting only the few. The classical idea of economic freedom itself was formulated as the antithesis to feudal-epoch finance. And the ideal of freedom from predatory finance is what is being threatened today, as if society has forgotten how long and hard the reform struggle has been.
The common thread in these ideas is that people deserve to receive the fruits of their labor. This means bringing prices in line with actual labor-costs of production. It also means that one’s wealth should be limited to only what one creates – not land and natural resources, or monopoly privileges to extract income via control of roads, the right to create money and other natural monopolies. The aim of social reform for many centuries has been to purge capitalism of its legacy of absentee rentier property ownership patterns and creditor-oriented laws inherited from medieval times. The way to do this is to treat banking like transportation and the broadcasting spectrum, as a public utility to form a just fiscal base, not something to be privatized so that individual rentiers can tax society at large for what rightly is a public utility.
The problem goes to the very foundation of economic theory. Any set of statistics reflects categories in economic theory, and in recent years the Chicago School has taken the lead in what is now a nationwide trend to exclude the history of economic thought from the academic curriculum. One can get all the way through a Ph.D. without having surveyed the evolution of classical economics from the Physiocrats through Adam Smith, John Stuart Mill and the Progressive Era reformers. The essence of social reform throughout the Enlightenment, and indeed extending all the way back to the Church Schoolmen is no longer taught – the distinctions between earned and unearned income and wealth, and productive and unproductive (or “sterile”) employment and investment. Post-classical thought insists that all income is productive in proportion to whatever it earns – including the collection of economic rent or extortion of monopoly super-profit, or financial charges for interest and credit card fees, and the exorbitant salaries and bonuses that financial managers pay themselves. All revenue – and therefore, all wealth – appears to be “earned.” By their definition. This denies the concept of “investment in zero-sum activities that merely transfer income into the unproductive sector’s pockets, in contrast to creating income.
As a guide to policy reform, classical economics aimed at creating an economic and fiscal system that would bring market prices in line with technologically necessary costs of production. All such costs ultimately are reducible to labor. The necessary complement to the labor theory of value (adjusted for different grades of labor, the cost of their education and the linkage between wage levels and productivity) was the analysis of economic rent – an institutional add-on reflecting property ownership patterns, financial charges and taxes, not inherent costs of production. The classical reform program was to minimize the cost of production and of living, making economies more competitive by purifying industrial capitalism and removing its remaining feudal legacies, above all the right of hereditary absentee owners (landlords) to siphon off a rental charge for access to land for sites supplied by nature and given value by local public spending (e.g., “location, location, and location,” as real estate agents explain matters to prospective buyers) – and the right of bankers to charge for creating credit that governments could freely create themselves.Fighting against progressive reforms, banks and other financial institutions have sought to preserve their special privileges by law, minimizing taxes on themselves by shifting the burden onto labor and industry. What they have achieved by financializing economies is (1) to raise the cost of living and the cost of doing business; (2) to free their major customers – mortgage borrowers – from taxation so as to leave as much surplus as possible available to be paid as interest; (3) to collect revenue hitherto used to finance the public sector by capitalizing it into interest charges and to inflate the price of housing and other real estate and privatized monopolies; (4) to effectively shift taxes onto labor and industry, thereby raising prices and undermining the competitive power of financialized economies. This is a travesty of classical “free market” policy. It is a policy for predators that mainly burdens economies with high interest and fees while also making the tax burden more oppressive while they reap the benefits.
John Maynard Keynes believed that the proper task of governments was to prevent over-indebtedness from leading to economic depression. He concluded his General Theory (1936) with a call for “euthanasia of the rentier.” Hoping to make credit productive, not extractive, his followers have advocated making banking a public utility so as to steer debt creation to fund growth in the means of production, not economic overhead by inflating property bubbles. Radical as this may appear today, this was the aim of the 19th century classical economists, and underlay the financial reforms that shaped the 20th-century economic takeoff. Only quite recently has the global financial press rediscovered this logic in the wake of today’s bubble meltdown.
Thursday, April 9, 2009
The Pyramid Scheme of Money Creation and Destruction
Money is created and destroyed in one giant chain of credit clearing, both by the government and banks.
It officially starts in the creation of the monetary base by the Federal Reserve when it buys US Treasury securities. The Fed acquires Treasury securities, meaning it finances a loan to the US government. The Treasury then pays interest to the Fed for holding its bonds. The Fed pays for the Treasury bonds in cash, but it does not really pay the Treasury, it pays the people, by disbursing the cash to banks and citizens.
Say you get a loan from the bank. The bank gives you the money, but creates a loan you have to pay back. The loan is a negative balance for you, but a positive balance for the bank.
But where did the bank get the money? From the Fed! The Fed did the same thing for the bank that the bank did for you. The bank takes a loan from the Fed, getting cash to spend, but having a negative balance with the Fed, owing the Fed that money.
Ok, good so far, but where does the Fed get the money? The Fed gets the money from the Treasury. The Fed balances its cash distributions with assets of US bonds. Technically, the Fed gave a loan to the Treasury, and receives interest payments from Treasury just like anyone else when they buy a Treasury bond.
When the Fed buys bonds from the public, they are paying out money to the public, thereby expanding the money supply. When the Fed sells bonds to the public, they are taking money in from the public, thereby shrinking the money supply. When the Fed buys bonds directly from the Treasury, they are going through the motions of giving a cash loan to the Treasury, which really means distributing cash to the public, thereby expanding the money supply.
Why does the Treasury take loans from the Fed, and pay the Fed interest on those loans, rather than just distributing the money directly to the people? Good question. There are many people calling for the Treasury to do just that, taking direct control of the money supply and eliminating the role of the Fed.
However, it is a mistake to assume that this process starts at and is controlled by the Fed. In actually, most money is actually created by banks. When a bank gives you a loan, they give you the cash, an asset for you, and they get the loan note, an asset for them.
They are required to have a certain reserve cash amount, to be equal to about 10% of outstanding loans. But they don't check their reserves before they give you the loan. They give you the loan, then later, check to see if they have enough reserves to cover their outstanding loans. If they are short on reserves, they borrow the money from other banks, or directly from the Fed.
This is the Fed's role as lender of last resort. As the public demands more and more loans, the Fed is in the back of the whole system, creating more and more cash for the banks to loan out.
This is why Obama and his banking handlers are always talking about "getting credit going again" and other vacuous phrases. To them, the whole thing is a top down process, but one based on people's appetite for loans. So, to them, encouraging the people to spend more and go into greater debt makes perfect sense.
The whole system is leveraged to the hilt, due to the effects of fractional reserve banking. Because a loan at one bank deposited elsewhere becomes the basis for a new loan, which is then deposited elsewhere to become the basis of a new loan, the whole money system becomes a huge pyramid scheme built up on the much smaller value of original loans.
Thus, one bad loan destroys at least 10X its own value of money in the rest of the system. This inevitably happens in a debt deflation, as loans go bad on a large scale, the monetary system collapses, feeding further loan failure, and further monetary destruction. The so-called "credit crunch", which is a monetary black hole created by bad debt sucking in all the money around it and gaining strength as it goes.
This deflationary black hole wipes out the value of capital which had been bid upwards with debt leverage. The falling value of capital then wipes out the loans built upon that inflated capital base, dragging down the value of the remaining capital in a vicious cycle. Productive enterprises are wiped out and labor laid off as loans fail and debts become unpayable.
It's all quite inevitable given our system of credit money and fractional reserve banks. It happened even when our currency was on the gold standard, so that is no panacea. In fact, many blame the gold standard for prolonging the crisis, since it prevented the government from inflating the money supply to counteract the deflation.
The current government effort to reinflate the system with cash reserve injections and happy-face propaganda cannot work because it is targetted precisely backwards. The effort should not be to pump the banks full of capital, because the whole system is based on the demand of the people for more loans and their ability to pay them back. The government should let each and every bad bank fail, but provide massive stimulus checks directly to the people. That would do more than anything else to keep consumer confidence high and stimulate spending, far more than the vague terror caused by seeing our banking system on life support. Or, more simply, as I have been advocating from the start, cancel massive amounts of debt, which would stimulate optimism and spending without the pernicious effects of currency inflation.
It officially starts in the creation of the monetary base by the Federal Reserve when it buys US Treasury securities. The Fed acquires Treasury securities, meaning it finances a loan to the US government. The Treasury then pays interest to the Fed for holding its bonds. The Fed pays for the Treasury bonds in cash, but it does not really pay the Treasury, it pays the people, by disbursing the cash to banks and citizens.
Say you get a loan from the bank. The bank gives you the money, but creates a loan you have to pay back. The loan is a negative balance for you, but a positive balance for the bank.
But where did the bank get the money? From the Fed! The Fed did the same thing for the bank that the bank did for you. The bank takes a loan from the Fed, getting cash to spend, but having a negative balance with the Fed, owing the Fed that money.
Ok, good so far, but where does the Fed get the money? The Fed gets the money from the Treasury. The Fed balances its cash distributions with assets of US bonds. Technically, the Fed gave a loan to the Treasury, and receives interest payments from Treasury just like anyone else when they buy a Treasury bond.
When the Fed buys bonds from the public, they are paying out money to the public, thereby expanding the money supply. When the Fed sells bonds to the public, they are taking money in from the public, thereby shrinking the money supply. When the Fed buys bonds directly from the Treasury, they are going through the motions of giving a cash loan to the Treasury, which really means distributing cash to the public, thereby expanding the money supply.
Why does the Treasury take loans from the Fed, and pay the Fed interest on those loans, rather than just distributing the money directly to the people? Good question. There are many people calling for the Treasury to do just that, taking direct control of the money supply and eliminating the role of the Fed.
However, it is a mistake to assume that this process starts at and is controlled by the Fed. In actually, most money is actually created by banks. When a bank gives you a loan, they give you the cash, an asset for you, and they get the loan note, an asset for them.
They are required to have a certain reserve cash amount, to be equal to about 10% of outstanding loans. But they don't check their reserves before they give you the loan. They give you the loan, then later, check to see if they have enough reserves to cover their outstanding loans. If they are short on reserves, they borrow the money from other banks, or directly from the Fed.
This is the Fed's role as lender of last resort. As the public demands more and more loans, the Fed is in the back of the whole system, creating more and more cash for the banks to loan out.
This is why Obama and his banking handlers are always talking about "getting credit going again" and other vacuous phrases. To them, the whole thing is a top down process, but one based on people's appetite for loans. So, to them, encouraging the people to spend more and go into greater debt makes perfect sense.
The whole system is leveraged to the hilt, due to the effects of fractional reserve banking. Because a loan at one bank deposited elsewhere becomes the basis for a new loan, which is then deposited elsewhere to become the basis of a new loan, the whole money system becomes a huge pyramid scheme built up on the much smaller value of original loans.
Thus, one bad loan destroys at least 10X its own value of money in the rest of the system. This inevitably happens in a debt deflation, as loans go bad on a large scale, the monetary system collapses, feeding further loan failure, and further monetary destruction. The so-called "credit crunch", which is a monetary black hole created by bad debt sucking in all the money around it and gaining strength as it goes.
This deflationary black hole wipes out the value of capital which had been bid upwards with debt leverage. The falling value of capital then wipes out the loans built upon that inflated capital base, dragging down the value of the remaining capital in a vicious cycle. Productive enterprises are wiped out and labor laid off as loans fail and debts become unpayable.
It's all quite inevitable given our system of credit money and fractional reserve banks. It happened even when our currency was on the gold standard, so that is no panacea. In fact, many blame the gold standard for prolonging the crisis, since it prevented the government from inflating the money supply to counteract the deflation.
The current government effort to reinflate the system with cash reserve injections and happy-face propaganda cannot work because it is targetted precisely backwards. The effort should not be to pump the banks full of capital, because the whole system is based on the demand of the people for more loans and their ability to pay them back. The government should let each and every bad bank fail, but provide massive stimulus checks directly to the people. That would do more than anything else to keep consumer confidence high and stimulate spending, far more than the vague terror caused by seeing our banking system on life support. Or, more simply, as I have been advocating from the start, cancel massive amounts of debt, which would stimulate optimism and spending without the pernicious effects of currency inflation.
Wednesday, April 1, 2009
Note to Government: Balance Your Budget
It is starting to hit people at every level of government with full force. After the "end of the world" budget cuts of last year, even more will need to be cut this year. California, for example, has to cut godawful amounts from their budget, and they are being cut off from any more credit.
The only solution left is budget cuts. Here is a simple idea: slash the budget across the board, starting with salaries, which make up the supermajority of all government budget items. For example, in education, salaries make up over 90% of the budget. Keep that in mind the next time you see some pathetic teacher protest over school budget cuts. It's never about saving the children, it's always about saving their salaries. What a joke. If government workers were willing to take a pay cut, there would be no need to cancel any programs.
Individual responsibility is going to return in a storm, as all the slackers, losers, welfare dregs and their social engineering leftist government-employed handlers are suddenly cut off from the public feedbag. Watching this unfold is a libertarian's wet dream.
Unfortunately for all of you reading this blog, our federal government is going to do its best to borrow and print money to pay the gap in all these deficits (not even to mention to yawning fiscal chasm known as the federal deficit).
What that means is, the savings and purchasing power of the working middle and upper classes are going to be siphoned away through inflation, to bail out those government programs.
Gear up for the fight now.
The only solution left is budget cuts. Here is a simple idea: slash the budget across the board, starting with salaries, which make up the supermajority of all government budget items. For example, in education, salaries make up over 90% of the budget. Keep that in mind the next time you see some pathetic teacher protest over school budget cuts. It's never about saving the children, it's always about saving their salaries. What a joke. If government workers were willing to take a pay cut, there would be no need to cancel any programs.
Individual responsibility is going to return in a storm, as all the slackers, losers, welfare dregs and their social engineering leftist government-employed handlers are suddenly cut off from the public feedbag. Watching this unfold is a libertarian's wet dream.
Unfortunately for all of you reading this blog, our federal government is going to do its best to borrow and print money to pay the gap in all these deficits (not even to mention to yawning fiscal chasm known as the federal deficit).
What that means is, the savings and purchasing power of the working middle and upper classes are going to be siphoned away through inflation, to bail out those government programs.
Gear up for the fight now.
Who Defends the Common Man?
The more things change the more they stay the same, eh? In 1896, William Jennings Bryant defended the economic well being of the common man against the finanacial interests of the east coast financial oligarchs. The country was on the gold standard, and the common man was pressed down with a heavy debt burden. Jennings stood for bimetalism, which meant inflating the money supply with silver to ease the debt burden under the deflationary gold standard. I have provided some exerpts from his speech. Notice how he denounces trickle-down economics, 90 years before Reagan introduced it to our modern ears. Amazing, truly amazing.
WJB's biography follows, he is my new hero:
William Jennings Bryan (March 19, 1860 – July 26, 1925) was the Democratic Party nominee for President of the United States in 1896, 1900 and 1908, a lawyer, and the Secretary of State under President Woodrow Wilson. One of the most popular speakers in American history, he was noted for a deep, commanding voice. Bryan was a devout Presbyterian, a supporter of popular democracy, a critic of banks and railroads, a leader of the silverite movement in the 1890s, a leading figure in the Democratic Party, a peace advocate, a prohibitionist, an opponent of Darwinism, and one of the most prominent leaders of Populism in the late 19th - and early 20th century. Because of his faith in the goodness and rightness of the common people, he was called "The Great Commoner."
The question remains more pressing than ever: who stands up for the common man? In Bryant's day, the Democratic Party proudly stood up for the average worker. Today, the same party actively engineers massive transfers of wealth to the investment classes. It is unreal. The common man has no one, absolutely no one.
Exerpts from his 1896 speech:
But we stand here representing people who are the equals before the law of the largest cities in the state of Massachusetts. When you come before us and tell us that we shall disturb your business interests, we reply that you have disturbed our business interests by your action. We say to you that you have made too limited in its application the definition of a businessman. The man who is employed for wages is as much a businessman as his employer. The attorney in a country town is as much a businessman as the corporation counsel in a great metropolis. The merchant at the crossroads store is as much a businessman as the merchant of New York. The farmer who goes forth in the morning and toils all day, begins in the spring and toils all summer, and by the application of brain and muscle to the natural resources of this country creates wealth, is as much a businessman as the man who goes upon the Board of Trade and bets upon the price of grain. The miners who go 1,000 feet into the earth or climb 2,000 feet upon the cliffs and bring forth from their hiding places the precious metals to be poured in the channels of trade are as much businessmen as the few financial magnates who in a backroom corner the money of the world.
We come to speak for this broader class of businessmen. My friends, we say not one word against those who live upon the Atlantic Coast; but those hardy pioneers who braved all the dangers of the wilderness, who have made the desert to blossom as the rose—those pioneers away out there, rearing their children near to nature’s heart, where they can mingle their voices with the voices of the birds—out there where they have erected schoolhouses for the education of their children and churches where they praise their Creator, and the cemeteries where sleep the ashes of their dead—are as deserving of the consideration of this party as any people in this country.
It is for these that we speak. We do not come as aggressors. Our war is not a war of conquest. We are fighting in the defense of our homes, our families, and posterity. We have petitioned, and our petitions have been scorned. We have entreated, and our entreaties have been disregarded. We have begged, and they have mocked when our calamity came.
We beg no longer; we entreat no more; we petition no more. We defy them!
The gentleman from Wisconsin has said he fears a Robespierre. My friend, in this land of the free you need fear no tyrant who will spring up from among the people. What we need is an Andrew Jackson to stand as Jackson stood, against the encroachments of aggregated wealth.
He says that we are opposing the national bank currency. It is true. If you will read what Thomas Benton said, you will find that he said that in searching history he could find but one parallel to Andrew Jackson. That was Cicero, who destroyed the conspiracies of Cataline and saved Rome. He did for Rome what Jackson did when he destroyed the bank conspiracy and saved America.
We say in our platform that we believe that the right to coin money and issue money is a function of government. We believe it. We believe it is a part of sovereignty and can no more with safety be delegated to private individuals than can the power to make penal statutes or levy laws for taxation.
Mr. Carlisle said in 1878 that this was a struggle between the idle holders of idle capital and the struggling masses who produce the wealth and pay the taxes of the country; and my friends, it is simply a question that we shall decide upon which side shall the Democratic Party fight. Upon the side of the idle holders of idle capital, or upon the side of the struggling masses? That is the question that the party must answer first; and then it must be answered by each individual hereafter. The sympathies of the Democratic Party, as described by the platform, are on the side of the struggling masses, who have ever been the foundation of the Democratic Party.
There are two ideas of government. There are those who believe that if you just legislate to make the well-to-do prosperous, that their prosperity will leak through on those below. The Democratic idea has been that if you legislate to make the masses prosperous their prosperity will find its way up and through every class that rests upon it.
You come to us and tell us that the great cities are in favor of the gold standard. I tell you that the great cities rest upon these broad and fertile prairies. Burn down your cities and leave our farms, and your cities will spring up again as if by magic. But destroy our farms and the grass will grow in the streets of every city in the country.
If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us the producing masses of the nation and the world. Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.
WJB's biography follows, he is my new hero:
William Jennings Bryan (March 19, 1860 – July 26, 1925) was the Democratic Party nominee for President of the United States in 1896, 1900 and 1908, a lawyer, and the Secretary of State under President Woodrow Wilson. One of the most popular speakers in American history, he was noted for a deep, commanding voice. Bryan was a devout Presbyterian, a supporter of popular democracy, a critic of banks and railroads, a leader of the silverite movement in the 1890s, a leading figure in the Democratic Party, a peace advocate, a prohibitionist, an opponent of Darwinism, and one of the most prominent leaders of Populism in the late 19th - and early 20th century. Because of his faith in the goodness and rightness of the common people, he was called "The Great Commoner."
The question remains more pressing than ever: who stands up for the common man? In Bryant's day, the Democratic Party proudly stood up for the average worker. Today, the same party actively engineers massive transfers of wealth to the investment classes. It is unreal. The common man has no one, absolutely no one.
Exerpts from his 1896 speech:
But we stand here representing people who are the equals before the law of the largest cities in the state of Massachusetts. When you come before us and tell us that we shall disturb your business interests, we reply that you have disturbed our business interests by your action. We say to you that you have made too limited in its application the definition of a businessman. The man who is employed for wages is as much a businessman as his employer. The attorney in a country town is as much a businessman as the corporation counsel in a great metropolis. The merchant at the crossroads store is as much a businessman as the merchant of New York. The farmer who goes forth in the morning and toils all day, begins in the spring and toils all summer, and by the application of brain and muscle to the natural resources of this country creates wealth, is as much a businessman as the man who goes upon the Board of Trade and bets upon the price of grain. The miners who go 1,000 feet into the earth or climb 2,000 feet upon the cliffs and bring forth from their hiding places the precious metals to be poured in the channels of trade are as much businessmen as the few financial magnates who in a backroom corner the money of the world.
We come to speak for this broader class of businessmen. My friends, we say not one word against those who live upon the Atlantic Coast; but those hardy pioneers who braved all the dangers of the wilderness, who have made the desert to blossom as the rose—those pioneers away out there, rearing their children near to nature’s heart, where they can mingle their voices with the voices of the birds—out there where they have erected schoolhouses for the education of their children and churches where they praise their Creator, and the cemeteries where sleep the ashes of their dead—are as deserving of the consideration of this party as any people in this country.
It is for these that we speak. We do not come as aggressors. Our war is not a war of conquest. We are fighting in the defense of our homes, our families, and posterity. We have petitioned, and our petitions have been scorned. We have entreated, and our entreaties have been disregarded. We have begged, and they have mocked when our calamity came.
We beg no longer; we entreat no more; we petition no more. We defy them!
The gentleman from Wisconsin has said he fears a Robespierre. My friend, in this land of the free you need fear no tyrant who will spring up from among the people. What we need is an Andrew Jackson to stand as Jackson stood, against the encroachments of aggregated wealth.
He says that we are opposing the national bank currency. It is true. If you will read what Thomas Benton said, you will find that he said that in searching history he could find but one parallel to Andrew Jackson. That was Cicero, who destroyed the conspiracies of Cataline and saved Rome. He did for Rome what Jackson did when he destroyed the bank conspiracy and saved America.
We say in our platform that we believe that the right to coin money and issue money is a function of government. We believe it. We believe it is a part of sovereignty and can no more with safety be delegated to private individuals than can the power to make penal statutes or levy laws for taxation.
Mr. Carlisle said in 1878 that this was a struggle between the idle holders of idle capital and the struggling masses who produce the wealth and pay the taxes of the country; and my friends, it is simply a question that we shall decide upon which side shall the Democratic Party fight. Upon the side of the idle holders of idle capital, or upon the side of the struggling masses? That is the question that the party must answer first; and then it must be answered by each individual hereafter. The sympathies of the Democratic Party, as described by the platform, are on the side of the struggling masses, who have ever been the foundation of the Democratic Party.
There are two ideas of government. There are those who believe that if you just legislate to make the well-to-do prosperous, that their prosperity will leak through on those below. The Democratic idea has been that if you legislate to make the masses prosperous their prosperity will find its way up and through every class that rests upon it.
You come to us and tell us that the great cities are in favor of the gold standard. I tell you that the great cities rest upon these broad and fertile prairies. Burn down your cities and leave our farms, and your cities will spring up again as if by magic. But destroy our farms and the grass will grow in the streets of every city in the country.
If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us the producing masses of the nation and the world. Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.
South Park calls for Jubilee
Everyone had a chance to see the new South Park episode about the economic crisis (go here if you haven't http://dailybail.com/home/financial-comedy-genius-south-park-is-in-recession-and-needs.html)?
In the end, guess what solves the economic crisis? One kid pays everyone's debt off. Makes sense, doesn't it? If no one is in debt anymore, the economy can recover.
Still have yet to hear anything about debt cancelation by anyone in government. Just more bailouts of the finance industry.
So, given the choice between helping the common man and helping the mega-rich, our government chooses the rich. Hmmm, weird how that works.
In the end, guess what solves the economic crisis? One kid pays everyone's debt off. Makes sense, doesn't it? If no one is in debt anymore, the economy can recover.
Still have yet to hear anything about debt cancelation by anyone in government. Just more bailouts of the finance industry.
So, given the choice between helping the common man and helping the mega-rich, our government chooses the rich. Hmmm, weird how that works.
The 4th Branch of Government: the Banking System
Lawmakers have often believed they could ignore the big questions on how our money system is structured. Right from the Constitutional Convention delegates ignored society’s monetary power and the excellent record of government issued money in building colonial infrastructure and giving us a nation. They left the money power up for grabs instead of properly placing it in a fourth, monetary branch of government.
History shows that the money power will be a fourth branch whether we recognize it as such or not. It’s not safe to leave so much power and privilege in private hands! It’s counter to our system of checks and balances. The developing financial crisis requires us to re-evaluate and focus on it now. Lets fulfill our responsibility to get a real understanding of this problem and the solution.
As the late Congressman Wright Patman, Chairman of the House Committee on Banking and Currency for over 16 years, said,
"I have never yet had anyone who could, through the use of logic and reason, justify the Federal Government borrowing the use of its own money....I believe the time will come when people will demand that this be changed. I believe the time will come in this country when they will actually blame you and me and everyone else connected with the Congress for sitting idly by and permitting such an idiotic system to continue."
http://www.monetary.org/amacolorpamphlet.pdf (page 3)
History shows that the money power will be a fourth branch whether we recognize it as such or not. It’s not safe to leave so much power and privilege in private hands! It’s counter to our system of checks and balances. The developing financial crisis requires us to re-evaluate and focus on it now. Lets fulfill our responsibility to get a real understanding of this problem and the solution.
As the late Congressman Wright Patman, Chairman of the House Committee on Banking and Currency for over 16 years, said,
"I have never yet had anyone who could, through the use of logic and reason, justify the Federal Government borrowing the use of its own money....I believe the time will come when people will demand that this be changed. I believe the time will come in this country when they will actually blame you and me and everyone else connected with the Congress for sitting idly by and permitting such an idiotic system to continue."
http://www.monetary.org/amacolorpamphlet.pdf (page 3)
Friday, March 27, 2009
China's Solution: Invest in America
Everyone is talking about China as a prisoner of the current currency problems, as the dollar gets devalued, wiping out their dollar reserves.
Here's a crazy idea: why don't the Chinese use their dollars the way international trade is supposed to work, and buy American. Why is everyone acting like their only choice is to buy more financial securities?
They should do like the Japanese in the 80's: invest in America. Specifically, use their dollars to build factories in America. Especially targeting things that the Chinese people need.
Lord, its like international balance of trade is a frickin' alien concept to the universe...
Newsflash to the Chinese, stop buying paper and debt, which only encourages our idiot politicians to do fiscally unsound things, and invest directly in American industry, which will both expand your bottom line and give you a great ability to trade with America.
Here's a crazy idea: why don't the Chinese use their dollars the way international trade is supposed to work, and buy American. Why is everyone acting like their only choice is to buy more financial securities?
They should do like the Japanese in the 80's: invest in America. Specifically, use their dollars to build factories in America. Especially targeting things that the Chinese people need.
Lord, its like international balance of trade is a frickin' alien concept to the universe...
Newsflash to the Chinese, stop buying paper and debt, which only encourages our idiot politicians to do fiscally unsound things, and invest directly in American industry, which will both expand your bottom line and give you a great ability to trade with America.
Wednesday, March 25, 2009
Sign the Petition to Cancel National Debt
http://www.petitiononline.com/repudiat/petition.html
To: US Congress and State Legislatures
We, the undersigned Americans, hereby call upon both houses of the US Congress to promptly pass, and upon the state legislatures to ratify, a constitutional amendment repealing section 4 of the 14th amendment, prohibiting future indebtedness and deficit spending on the part of the federal government, and repudiating all federal government debt and debt service obligations accrued prior to the ratification of said amendment.
Sincerely,
The Undersigned
go here to sign the petition
http://www.petitiononline.com/repudiat/petition-sign.html
The Repudiation of the US National Debt Petition to US Congress and State Legislatures was created by and written by Thomas L. Knapp (kubby.communications@gmail.com).
update 4/16/09 noon: 11 signatures
To: US Congress and State Legislatures
We, the undersigned Americans, hereby call upon both houses of the US Congress to promptly pass, and upon the state legislatures to ratify, a constitutional amendment repealing section 4 of the 14th amendment, prohibiting future indebtedness and deficit spending on the part of the federal government, and repudiating all federal government debt and debt service obligations accrued prior to the ratification of said amendment.
Sincerely,
The Undersigned
go here to sign the petition
http://www.petitiononline.com/repudiat/petition-sign.html
The Repudiation of the US National Debt Petition to US Congress and State Legislatures was created by and written by Thomas L. Knapp (kubby.communications@gmail.com).
update 4/16/09 noon: 11 signatures
Campaign to Cancel the National Debt
Join the Campaign to Cancel the Washington National Debt
We hereby resolve that most of the national debt is not a legitimate debt of the American people nor the future generations who would otherwise find their prosperity and financial security sacrificed for the profit of a few corrupt global financial elites and the politicians they own and control.
Thankfully, our Patriot Founding Fathers provided Article Five of the United States Constitution for a future time of congressional, judicial and presidential tyranny which provides for an option to assemble a national Convention to propose amendments to the United States Constitution as an alternative to the process of securing two-thirds approval in both houses of Congress.
We must work to pass "The Washington National Debt Constitutional Amendment" and repudiate much of the Washington government debt before it bankrupts every private American citizen. We fear the massive increase in the level of indebtedness due to the meltdown and depression will first bring down the Treasury market followed by the US dollar and this will destroy the American economy for years to come.
Washington’s illegitimate national debt is growing exponentially due to the bailouts as Congress tries to jumpstart a depression threatened economy but the added debt load will soon bankrupt our nation and impoverish every productive, working American.
To stop the economic tidal wave that will destroy the financial security and wealth of every American along with their savings, real estate, retirement plans, investments and their promised Social Security and Medicare benefits we have established "The Washington National Debt Constitutional Amendment Campaign" to cancel much of Washington’s debt before it is too late.
The Campaign will bypass a corrupt Congress and the leadership of both political parties often controlled by special interests at the national level and seek a debt solution through the constitutional amendment process starting at the state level which will repudiate any Treasury debt issued or rolled over after the deadline of 12/22/2013, exactly 100 years after the establishment of the Federal Reserve System.
The proposed constitutional amendment will first call upon the state legislatures to ratify an amendment repealing Section 4 of the 14th Amendment which outlawed even questioning the validity of the national debt; "The validity of the public debt of the United States, authorized by law….shall not be questioned", followed by language to further prohibit future indebtedness and deficit spending by the federal government and repudiate all federal government debt (except for obligations for Social Security Trust Funds) and debt and interest service obligations accrued after the 12/22/2013 deadline regardless of when the amendment is ratified by 2/3 of the states.
Contact us now at cancelthewashingtondebt@yahoo.com
We hereby resolve that most of the national debt is not a legitimate debt of the American people nor the future generations who would otherwise find their prosperity and financial security sacrificed for the profit of a few corrupt global financial elites and the politicians they own and control.
Thankfully, our Patriot Founding Fathers provided Article Five of the United States Constitution for a future time of congressional, judicial and presidential tyranny which provides for an option to assemble a national Convention to propose amendments to the United States Constitution as an alternative to the process of securing two-thirds approval in both houses of Congress.
We must work to pass "The Washington National Debt Constitutional Amendment" and repudiate much of the Washington government debt before it bankrupts every private American citizen. We fear the massive increase in the level of indebtedness due to the meltdown and depression will first bring down the Treasury market followed by the US dollar and this will destroy the American economy for years to come.
Washington’s illegitimate national debt is growing exponentially due to the bailouts as Congress tries to jumpstart a depression threatened economy but the added debt load will soon bankrupt our nation and impoverish every productive, working American.
To stop the economic tidal wave that will destroy the financial security and wealth of every American along with their savings, real estate, retirement plans, investments and their promised Social Security and Medicare benefits we have established "The Washington National Debt Constitutional Amendment Campaign" to cancel much of Washington’s debt before it is too late.
The Campaign will bypass a corrupt Congress and the leadership of both political parties often controlled by special interests at the national level and seek a debt solution through the constitutional amendment process starting at the state level which will repudiate any Treasury debt issued or rolled over after the deadline of 12/22/2013, exactly 100 years after the establishment of the Federal Reserve System.
The proposed constitutional amendment will first call upon the state legislatures to ratify an amendment repealing Section 4 of the 14th Amendment which outlawed even questioning the validity of the national debt; "The validity of the public debt of the United States, authorized by law….shall not be questioned", followed by language to further prohibit future indebtedness and deficit spending by the federal government and repudiate all federal government debt (except for obligations for Social Security Trust Funds) and debt and interest service obligations accrued after the 12/22/2013 deadline regardless of when the amendment is ratified by 2/3 of the states.
Contact us now at cancelthewashingtondebt@yahoo.com
Tuesday, March 24, 2009
Weimar Hyperinflation Details
How Does Inflation Get out of Control?
Many people consider Weimar Germany to be the worst hyperinflation ever, but it was just the best publicized. In fact, there have been hundreds of hyperinflations recorded in world history. According to Dollar Daze, the majority of all national currencies ever issued have been destroyed by hyperinflation.
So, what exactly causes a hyperinflation? Essentially, it boils down to a psychology in the government, a refusal to balance the budget combined with widespread financial guarantees to its citizens. Rather than balance expenditures with taxes or cut expenses, the government simply prints the money to make it's budget work. The printing of money causes a gradual inflation, which feeds itself. The alternative to inflation is unemployment and liquidation, which the government cannot abide, so the ever-widening budget gap is funded with ever-greater money printing.
Obviously, it is impossible not to notice that we have embarked upon that path today. Our government has determined to spend, borrow, and print its way out of an economic downturn. It is a first for the American government, which has one of the oldest stable currencies in the world, younger than only the British Pound. It is also a first time in the history of the world that the international reserve currency has flirted with hyperinflationary policies.
The following are some excerpts from a book on the Weimar hyperinflation, vignettes of the people's experiences, and their psychology which both enabled and sought to cope with the economic catastrophe. In the end, the German authorities did not choose to end their hyperinflation. Right to the very end, they consciously chose the path of hyperinflation to avoid the alternative of economic downturn. They considered inflation to be stimulation and dealt with its consequences, right up until the point when they could no longer forestall unemployment with stimulation, because they reached the point of both monetary insolvency AND high unemployment. At that point, the country's economic basis was nigh-well destroyed. The longer they delayed the economic adjustment, the more painful it finally was, and that on top of years of accumulated pain brought on by the hyper-inflation itself.
http://www.mises.org/resources/4016
Much as it may have been recognised that stability would have to be arranged some day, and that the greater the delay the harder it would be, there never seemed to be a good time to invite trouble of that order. Day by day through 1920, 1921 and 1922 the reckoning was postponed, the more (not the less) readily as the prospective consequences of inflation became more frightening. The conflicting objectives of avoiding unemployment and avoiding insolvency ceased at last to conflict when Germany had both.
The take-off point in the inflationary progress, after which the advent of hyperinflation was but a matter of time, the point indeed when it became self-generating and politically irreducible except for short periods, was not indeed to be found on the graph of the currency depreciation, or of the velocity of its circulation, or of the balance of payments deficit. Nor in Germany's case did it notably coincide with some ultimate crisis of confidence in the mark, at home or abroad — Rathenau's murder, or the occupation of the Rhine ports, or the London Ultimatum, all of which had immediate seismic effects upon it. Rather it lay on the falling curve of political possibility, with which was closely linked the degree of political power and courage that the government, sorely pressed as it was, was able to muster.
What really broke Germany was the constant taking of the soft political option in respect of money. The take-off point therefore was not a financial but a moral one; and the political excuse was despicable, for no imaginable political circumstances could have been more unsuited to the imposition of a new financial order than those pertaining in November 1923, when inflation was no longer an option. The Rentenmark was itself hardly more than an expedient then, and could scarcely have been introduced successfully had not the mark lost its entire meaning. Stability came only when the abyss had been plumbed, when the credible mark could fall no more, when everything that four years of financial cowardice, wrong-headedness and mismanagement had been fashioned to avoid had in fact taken place, when the inconceivable had ineluct-ably arrived.
...
If prices went up, people demanded not a stable purchasing power for the marks they had, but more marks to buy what they needed. More marks were printed, and more, and more. Inflation, already in its fourth year when revolution overthrew the old regime, added a new, overwhelming uncertainty to the many uncertainties that attended the birth of the Weimar Republic.
Thus were the Government's plans drawn up, wilfully and simply, for financing the war — not by taxation, but by borrowing; and with the printing press as the well to supply both the needs of the Government and the growing credit demand of private business. Taxation was to play not the smallest part in meeting the costs of war before 1916. Helfferich had actually announced to the Reichstag in March 1915 that the war was to be financed exclusively by borrowing. Issue after issue of War Loan transformed the greater part of German private fortunes into paper claims on the State. Our enemies, especially Britain, took another line. They met the cost of war with taxes aimed primarily at those industries and groups to whom the war spelled prosperity. Britain's policy of taxation proved socially more equitable than Germany's policy of War Loans which lost their value after the war was over …
As the war machine lumbered expensively on, circumstances and policies combined to pull the wool over the financial eyes of the German people, not least those classes who had most to lose. Every German stock exchange was closed for the duration, so that the effect of Reichsbank policies on stocks and shares was unknown. Further, foreign exchange rates were not published, and only those in contact with neutral markets such as Amsterdam or Zurich could guess what was going on. It was never clear how much the steep rise in domestic prices was due to economy measures and war shortages rather than to inflation — and even the relevance of those prices was rendered dubious by the much higher black market rates. Only when the war was over, with the veil of censorship lifted but the Allied blockade continuing, did it become clear to all with eyes to read that Germany had already met an economic disaster nearly as shattering as her military one. The scales may have fallen at last from German eyes with the coming of peace, but that did not mean that the difficulties and injustices created by war-time inflation had passed unnoticed.
It must be admitted generally now that the cause of the depreciation of our currency and of the purchasing power of the mark was neither the commercial balance during the war nor the estimate of our military situation abroad; but in the exploitation of our currency for the purpose of obtaining money for the Treasury, that is to say in a fictitious increase of our total income. In as much as the country issued milliards in the form of extraordinary levies, War Loans, Treasury bills, and so on, without withdrawing from circulation corresponding amounts in the shape of taxes, it created new paper income and wealth incessantly, while the real national wealth was steadily being diminished by the war.
Even the most respectable of Austrian citizens now breaks the law, unless he is prepared to starve for the sake of obeying it … The fact that the future is so uncertain has led to stagnation in industry and public works, and swelling numbers of unemployed supported by the State … yet it is impossible to get domestic servants or indeed any sort of workers …
The State has been obliged to put 10,000 kronen notes into circulation — each equivalent to two years' income from my capital. A suit costs about six times what it was in 1913, but some things like food are a hundred or two hundred times as much … Paper clothes are being sold. Never had I dreamed it possible that one could purchase so little for 10,000 kronen … Jealousy and envy flourish in this atmosphere, and if one has procured some harmless article of food, one is careful to conceal the fact from one's fellow men. Hunger reigns inexorably and selects its dumb and uncomplaining victims above all from the middle classes …
Twice a day we are all forced to await the quotation of the Zurich bourse. Every fresh drop in its value is followed by a wave of rising prices … The confidence of Austrian citizens in the currency administration of the State is shaken to its foundation. The State which is perpetually printing new banknotes deceives us with the face value … A housewife who has had no experience of the horrors of currency depreciation has no idea what a blessing stable money is, and how glorious it is to be able to buy with the note in one's purse the article one had intended to buy at the price one had intended to pay.
Speculation on the stock exchange has spread to all ranks of the population and shares rise like air balloons to limitless heights … My banker congratulates me on every new rise, but he does not dispel the secret uneasiness which my growing wealth arouses in me … it already amounts to millions.
The cost of living since the outbreak of the war had risen by nearly twelve times (compared with three times in the United States, almost four times in Britain and seven times in France). Food had accounted for half the family budget then, but now nearly three-quarters of any family's income went on it. The food for a family of four persons which cost 60 marks a week in April 1919, cost 198 marks by September 1920, and 230 marks by November 1920. Certain items such as lard, ham, tea and eggs rose to between thirty and forty times the pre-war price. On the bright side - in contrast to Austria - the official unemployed figure was low, and only 375,000 people were on the dole.
Indeed, the apparent health of industry was one of the factors which most effectively confused the inflation issue. Bolstered by a financial programme geared to subsidising in various vital ways an industrial front which continuous depreciation of the currency had already made highly competitive in foreign markets, the lot of German industry had materially improved over the previous twelve months.
Inflation provided the answer to the equation. If a budget did not balance, the deficit had to be made good somehow. In October 1920 Germany's national debt stood at 287,800 million marks. At the old 1914 parities this sum equalled £14,400 million; but at the new it represented only £1,200 million.* (Great Britain's national debt amounted then to £8,075 million.) A year before Germany's great inflation is generally thought to have started, Germany's national debt had all but been wiped out.
The daily creation of fresh paper money which the government requires in order to meet its obligations both at home and abroad (services and goods which it is 'obliged both to render and deliver') inevitably decreases the purchasing value of the mark and leads to fresh demands, which in turn bring about a further decline, and so on ad infinitum.
Even progressive increases in taxation could not completely meet the situation, since new impositions meant an increased cost of living, which automatically reduced the purchasing value of the mark, and in turn brought about more inflation and budget instability.
The newspaper complained of the 'quite small capitalist upper class' making huge profits by taking advantage of the exchange fluctuations, while foreigners were using the discrepancy between the home and foreign values of the mark 'to purchase our goods en masse'. It demanded that profits on exchange and dollar speculations be taxed intensively, and went on:
Blackett noted that the rent restriction Acts hit much the same classes, who were 'forced to starvation in order to subsidise the German workman's wages and the employer's profits'. The bread and rail subsidies, financed by inflation, combined with the rent restriction, enabled the foreigner to buy German goods well below world prices and, if he lived in or visited Germany, to travel, eat and occupy houses at ridiculously cheap rates. 'A gradual process of buying up and carrying off Germany's movable capital, secondhand furniture, pianos, etc., is taking place at the expense of Germany as a whole.'
SOCIAL unrest was one of the obvious symptoms of inflation. The disease, the Austrian and German financial world seemed to agree, was itself not containable without international goodwill and a significant relaxation of the obligations under the peace treaties. Germany's politicians therefore set about relieving the symptoms wherever possible. More measures were brought in so that the government might be seen publicly to be dealing with profiteering. The Prime Minister of Bavaria even submitted a Bill to the Reichsrat to make gluttony a penal offence.
But in this respect conditions are hopelessly unhealthy, and the public will continue to be swayed by rumours and to speculate either in goods or in stocks and shares.
The previous fall in the mark had also produced unfortunate results by driving the population in shoals into the shops in a mania of purchasing. While abusing the foreigner for buying out Germany with his profitable rate of exchange, the native has been no whit behind in emptying the shops of their stocks … Many thought that their money would soon have no value whatever and that it must be exchanged for goods while there was yet time: others realised that the purchasing mania would help the falling rate of exchange to raise prices, and they therefore bought on speculative grounds.
The press pointed out that a disastrous slump in trade could not but ensue when the purchasing power of the population was exhausted, and that meanwhile the poorer classes were suffering. All efforts, however, were in vain to drive sense into a panic-stricken people, and articles in the shops could be seen being marked up to a higher price day by day.
In the eight years since 1913, the price of rye bread had risen by 13 times; of beef by 17. Those were the commodities which had fared best. Sugar, milk (at 4.40 marks a litre), pork and even potatoes (at 1.50 marks a Ib.) had risen between 23 and 28 times; butter had gone up by 33 times. These were only the official prices — real prices were often a third higher — and all these prices were roughly half as much again as in October, only two months before.
The brief December recovery of the mark brought no relief. That event, which caused unemployment transiently to treble to 3 per cent, gave another warning of what would inevitably have to be suffered when, one day, the printing presses stopped printing banknotes to order. Before the war, when the mark was sound, there were normally about 9,500 bankruptcies a year. As wartime inflation increased, the number regularly dropped, from 7,739 in 1914, to 807 in 1918. The total number in 1921, during the first seven months of which the mark was fairly stable, was 2,975, more than double the 1920 figure and three times that of 1919.* (The annual bankruptcy figures from 1912 were: 9,218, 9,725, 7,739, 4,594, 2,279, 1,240, 807, 1,015, 1,324, 2,975.) The 1921 figures were the most indicative; for in comparing the number of bankruptcies during the various months of the year it could be shown that a falling mark was associated with a decline in bankruptcies, and vice-versa. The largest number, 845, was in the spring when the mark stood highest; but after it reached its lowest in November the number was 150. The Frankfurter Zeitung commented: 'It gives some inkling of the awful debacle which may be expected if a rapid and permanent improvement of the mark actually takes place.'
It was natural that a people in the grip of raging inflation should look about for someone to blame. They picked upon other classes, other races, other political parties, other nations. In blaming the greed of tourists, or the peasants, or the wage demands of labour, or the selfishness of the industrialists and profiteers, or the sharpness of the Jews, or the speculators making fortunes in the money markets, they were in large measure still blaming not the disease but the symptoms.
It was significant enough that union, demands were still for higher wages to meet rising prices rather than, before all else, stable prices and a stable currency. A few of the financially sophisticated could be heard blaming the government, and the Finance Minister in particular, but a typical view was that prices went up because the foreign exchange went up, that the exchange rate went up because of speculation on the Stock Exchange, and that this was obviously the fault of the Jews. Although the price of the dollar was a matter for almost universal discussion, it still appeared to most Germans that the dollar was going up, not that the mark was falling; that the price of food and clothing was being forcibly increased daily, not that the value of money was permanently sinking as the flood of paper marks diluted the purchasing power of the number already in circulation.
Most successful businessmen, however, stuck happily to the heresy that only by a continually falling exchange rate could Germany compete in neutral markets. After them, the deluge. Neither they, nor the politicians, nor the bankers — with distressingly few exceptions — perceived any direct connection between inflation and depreciation. And yet, as the printing presses churned out bank notes the exchange continued rapidly to fall. What impressed the ordinary politician was the danger of social unrest which would, in his opinion, inevitably arise if there were any scarcity of currency. He could not see, or intentionally ignored, the obvious danger which proceeded from continuous inflation. Social unrest appeared, just the same.
ONLY the country people were surviving in Germany in any comfort: anyone who lived off the land had the readiest access to real values. It was not surprising that even when they ensured that the money receipts for their goods were no more than equivalent in purchasing power to what they were used to, they were accused of extortion — the more so if they delayed the sales of produce in the full knowledge that prices would be higher the longer they waited. Erna von Pustau went to stay in the country and asked her hosts bluntly what they were doing with all the money they were squeezing out of the townspeople. They replied candidly that they were paying off their mortgages. The principle of Mark gleich Mark had helped agriculture enormously: for the country people, landowners, farmers or peasants, life had started again. At the end of August 1922 when the mark passed 2,000 to the dollar — 9,000 to the pound — a mortgage of seven or eight years' standing had been 399/4OOths paid off. When Frau von Pustau returned home the talk in the family was about prices going up, about the credits which had to be reduced, about the middle-class party, about big business and the workers who always asked for more … The contrast between country and city was so enormous that it cannot be understood by people who have not lived through it.
To condemn the individual's struggle for survival in such chaotic circumstances as either selfish, or unnatural, or wrong, was in many ways unjust. When people do not understand what is happening, or why it is happening, and have no idea about what to do about it, and are not told, panic must follow. Even so, that the countrypeople were behaving naturally brought no comfort to townspeople who had no goods to barter, and whose incomes remained static.
On September 9 the financial authorities announced that in the previous ten days 23 milliard marks had been printed and distributed, representing 10 per cent of the total circulation of paper in the country. 'The daily production of the Federal printing press,' the newspapers dutifully recorded, 'has now risen to 2.6 milliards of paper marks. In the course of this month it will be increased to almost 4 milliards of paper marks, at which figure it is hoped the shortage of money will be definitely overcome.'
Shortage of liquid cash, indeed, was acute, and the July emergency money law was coming into its own. Large industrial concerns began to pay their workmen partly in notes and partly in coupons of their own, which were accepted by local tradesmen on the understanding that they would be redeemed within a very short time. Municipalities, too, started to issue their own currencies, aware that any delay in receiving their pay packets would dangerously aggravate workers whose main concern was to spend them before they depreciated. The cities and towns developed a parallel fear of unemployment which on a large scale might lead to outbreaks of Communist-inspired disorder, and so began artificially to create employment for their staff. The citizens of Frankfort noted with alarm that large tracts of quite serviceable road were being repaired outside the town and that the overhead system of telephone wires was being converted into an underground one.
At home in Germany, where people were resorting to trade by barter and progressively turning to foreign currencies as the only reliable medium of exchange, new Orders were brought in relating to the purchase of foreign bills and the use of foreign exchange to settle inland payments. In addition to imprisonment, fines could now be imposed of up to ten times the amount of an illegal deal.
Sure enough, in the Ruhr, numerous factories were using various devices to avoid having to put men out on the streets. Bochumer Verein, in Essen, for example, engaged 1,500 men making stock articles for railways although there was no immediate requirement for them. Such measures, however, were only possible for firms with big financial reserves, and small firms were already dismissing workers in small numbers. With the November price increases -butter at 800 marks a lb., eggs at 22 marks each — shops were also cutting down on assistants because sales were dropping off.
The disparity between the rise in the cost of living and the rise in wages had now become very marked. Whereas since the war the former had gone up by about 1,500 times, the wages of the miner — in November 1922 the best paid worker — had gone up by barely 200 times. With the mark in mid-November at 27,000 to the pound and 6,400 to the dollar, and with prices following the course of both with unfailing regularity, not only were wages in general failing to keep pace but the workers were not even being paid what was their due. Owing to the shortage of paper money of all kinds, federal currency or Not geld, they were finding that by the time the balance was paid it had lost 50 per cent of its value. The best-paid workers were unable to purchase the barest necessities of life. The others and — as ever — those on fixed incomes or dependent on savings suffered accordingly.
Bonar Law, who fully appreciated that the stabilisation of the mark meant, for Germany, unemployment, an industrial crisis and enormous financial strain, whereas failure to stabilise meant catastrophe, was now equally unable to convince the French Prime Minister of the futility of amassing vast quantities of German paper marks by means of retortionary or extortionary measures.
'Inflation is like a drug in more ways than one,' remarked Lord D'Abernon. 'It is fatal in the end, but it gets its votaries over many difficult moments.' Hopelessly addicted, the Reichsbank ploughed on.
Petty crimp? the crime of desperation, was flourishing. Pilfering had of course been rife since the war, but now it began to occur on a larger, commercial scale. Metal plaques on national monuments had to be removed for safe-keeping. The brass bell plates were stolen from the front doors of the British Embassy in Berlin, part of a systematic campaign unpreventable by the police even in the Wilhelmstrasse and Unter den Linden. That members and families of the British Army of the Rhine suffered severely from burglaries probably reflected the fact, not that thieves had particular animus against the forces of occupation, but that these days foreigners were so much more robbable than anyone else. Over most of Germany the lead was beginning to disappear overnight from roofs. Petrol was syphoned from the tanks of motor cars. Barter was already a usual form of exchange; but now commodities such as brass and fuel were becoming the currency of ordinary purchase and payment. A cinema seat cost a lump of coal. With a bottle of paraffin one might buy a shirt; with that shirt, the potatoes needed by one's family. Herr von der Osten kept a girl friend in the provincial Capital, for whose room in 1922 he had paid half a pound of butter a month: by the summer of 1923 it was costing him a whole pound. 'The Middle Ages came back,' Erna von Pustau said.
Communities printed their own money, based on goods, on a certain amount of potatoes, or rye, for instance. Shoe factories paid their workers in bonds for shoes which they could exchange at the bakery for bread or the meat market for meat.
DR SCHACHT, the author of the reform, had no illusions about its shortcomings. He understood that the Rentenmark could hold the tide only so long, that new credits from abroad were essential, and that for that reason no departure could be made (despite the pleadings of the government, desperate for money) from the strictest discipline. Nothing could be done that would put at risk the currency stability or the budgetary balance. 'After a long devaluation,' Schacht held on January 24, 1924, 'stability can only be regained at the cost of a severe crisis. We are in the midst of this crisis. External commerce is at a standstill. The balance of trade is active [i.e. in Germany's favour] only because imports have ceased as importers have no means of paying. Industry is living on old stocks.'
Their numbers amounted to millions, and none was on the list of receivers of unemployed or short-time relief. They were the ones who had had their wealth shot away by the war, without knowing it. They looked in vain for charity to help, but the charitable institutions and the religious societies, just like the literary and scientific foundations and many of the universities and hospitals, had equally had the fountains of their incomes reduced to a trickle or less. Any who had held industrial debentures had lost their capital, to the benefit of industries who redeemed those debts with worthless paper. Any who had held industrial shares in 1913 would have had their capital reduced by three-quarters, and a pittance paid in dividend totals over the years -- but in practice most people had panicked long since and sold the bulk of their shares for what they could get for them to the industrial profiteers and speculators who amassed the nation's wealth to themselves, paying themselves not dividends, but 'fees'. Germany's capital had been redistributed in the most cruel way, no longer spread reasonably evenly among millions, but largely in coagulated blobs among the new plutocracy.
It was widely remarked that the destitution inflicted by the inflationary process was not general. The very evidence, indeed, of great wealth — ostentatiously flaunted by the new rich who had it -misled many observers, including the French, into supposing that Germany's refusal to pay reparations on the nail was Teutonic knavery. The existence until the Ruhr invasion of full employment, an obviously prosperous working class, a buoyant economy, a booming home market, a strongly competitive position in foreign markets, factories bursting with production — all made possible by the vast scale of Germany's borrowing — could have fooled anybody.
Once more, however, here was a false dawn. Germany's trouble was that the inflation boom had never been liquidated. Stabilisation had ended the period when entrepreneurs could borrow as much as they wished at the expense of everyone else. A vast number of enterprises, established or expanded during monetary plenty, rapidly became unproductive when capital grew short. More realistic transport, fuel and food prices, and the return of rents to economic levels meant that wages, too, had to be raised substantially in real terms.
Firms that mushroomed during the inflation now found that the real interest they paid on loans for the first time was positive rather than negative, lower though the rates appeared to be. Perhaps most significant, for the first time they were obliged to pay real taxes, many of which were extremely high because of the necessity rapidly to balance the budget and to bring official salaries, which had fallen disastrously, up to an acceptable level again. Companies were often unable to buy new machinery after stabilisation came, so much so that huge stocks of unsold iron and coal began to build up in the Ruhr. Not even the foreign loans flowing in were able to prevent the seizing up once again of the Ruhr mining industry where pit after pit, especially any producing poor quality coal, was forced to close. Workers were to flock from pit to agriculture, from mines and quarries and engineering to the production of food and direct consumer goods, and to building. Hugo Stinnes himself had been deceived by the artificial prosperity of inflation into a fanatical confidence in the future of coal. It was the post-stabilisation depression in the coal, iron and steel industries, contriving even the depopulation of Ruhr townships, which led eventually in June 1925 to the collapse of the Stinnes empire.
The Stinnes debacle demonstrated above all that great industrial possessions could not be held without adequate liquid resources (as early as June 1924, Stinnes had been trying to pledge Bochumer Verein and Gelsenkirchen shares against Dutch loans); and that vertical combines were inefficient and unprofitable except under the exceptional conditions which had bred them.
Germany which had undergone almost every conceivable form of collapse during the previous six years — military, political, social, financial, economic — now crashed downwards again just as her many times demoralised people had supposed that, with international help, she was beginning to rise from her knees. Confidence was shattered. The flow of foreign money slackened. The Reichs-bank policy of credit restriction was maintained as firmly as ever to counteract a net outflow of gold and foreign exchange. The shifting of the working population was accompanied by a new, terrifying increase in unemployment and short-time working. Because labour was a buyers' market, those with work were nonetheless often compelled to work a 54-hour week. There was such an alarming rise in the cost of living that to prevent agitation the index had to be cooked. And there was a new, spectacular toll of bankruptcies. Much though public works were instituted to try to mop up labour, the unemployed figure had passed 1,300,000 by December 1925, and was gathering pace daily. The return of rational conditions had brought a necessary but brutal slimming of the immensely swollen public services: those who had been dismissed from the posts and the railways were now being joined not only by former miners and steel-workers but by the many who had started businesses on their own.
In the inflationary period new factories were built, old establishments reorganised and extended, new plant laid down, participations in all fields of industrial activity bought up, and the great amorphous concerns founded. Too late, it was found that this process had undermined the capital structure of the country: capital was frozen in factories for which, because of the extermination of the rentier and the reduction of the real wages of so many of the great consumer classes, there was no economic demand. Once the demand for goods was shut off and the flow of cash dammed, the fate of the productive apparatus was sealed. Even in 1924, firms of undoubted solidity and large assets were unable to pay out trifling sums of money. In 1926 that apparatus was still too great in relation to the working capital and the nation's power of consumption. Thus, whereas in 1913 there were 7,700 bankruptcies, and in 1924 only 5,700, the figure for 1925 was 10,800; and between the third quarter of 1925 and the second of 1927, bankruptcies numbered 31,000 — a rate of 15,000 a year.
In practice, furthermore, a great many bankruptcies were refused by the courts in the absence of assets with which to meet claims. Between May and November 1925, the number of protested bills per week doubled from 2,691 to 5,406. Many banks were immobilised by having had to lend to their industrial customers who had had to be kept alive but now could not repay. The banks found it prohibitively hard and unrewarding to liquidate securities, and under those conditions were unwilling to take over bankrupt factories in lieu of money. With shares now at far below value in a moribund Stock Market, there were endless sellers and no buyers.
Throughout the later inflationary years the shrill argument had gone on over who was to blame and what was the cause of the unceasing, increasing financial crisis — never a true crisis because instead of coming to a head it always did the impossible by getting even worse. Month upon month every excuse was found for it but the right one; every attempt made to stem the fall of the mark but the fundamental one.
Nor was German honour inflation-proof. The corruption among officials in 1924, Lord D'Abernon reported, was 'appalling', whereas before the war bribery had been almost unknown, and a high degree of uncorruptibility evident in public and private, if not always in commercial, life. There were few in any class of society who were not infected by, or prey to, the pervasive, soul-destroying influence of the constant erosion of capital or earnings and uncertainty about the future. From tax-evasion, food-hoarding, currency speculation, or illegal exchange transactions — all crimes against the State, each of which to a greater or less degree became for individuals a matter of survival — it was a short step to breaching one or other of the Ten Commandments.
In Germany not until well after the return to stability did the nature and extent of the corruption in high places begin to be known. Events like the sentencing in March 1924 to three years' gaol of Dr Zeigner, the egregious ex-Premier of Saxony, for corrupt practices and bribery had raised scarcely a ripple. The end of the year brought to light a far more formidable array of financial scandals, enough to confirm the view that the old universal integrity had sunk in the whirlpool of inflation, and to deliver another stunning blow to the nation's morale.
How great does inflation have to be before a government can no longer control it? Most economists accept that mild inflation has certain therapeutic advantages for a nation which must deal with the social and economic problems to which industrial democracies are usually subject. Most electorates still accept the statements of their politicians' pious intentions in regard to controlling ever rising prices: and yet the Deutschmark, the currency of the country which had most reason to fear inflation, lost two-thirds of its purchasing power between 1948 and 1975. The pound lost almost half its purchasing power between 1970 and 1975. In neither instance, however, did such depreciation represent a deliberate, cynical policy; which, no doubt, would also have been claimed by the German bankers and governments of the early 1920, who looked for causes of their monetary difficulties beyond their own printing press and tax system — and found them, without difficulty and to their complete intellectual satisfaction. It remains so that once an inflation is well under way (as Schmb'lders has it) 'it develops a powerful lobby that has no interest in rational arguments.' This was as true for Austria and Hungary as for Germany.
There came a stage when it was politically impossible to halt inflation. In the middle of 1920, after the brief post-Kapp Putsch period of the mark's stability, the competitiveness of German exports declined, with unemployment beginning to build up as a result. The point was presumably not lost on the inflators. Recovery of the mark could not be achieved without immediate repercussions in terms of bankruptcies, redundancies, short-time working, unemployment, strikes, hunger, demonstrations, Communist agitation, violence, the collapse of civil order, and thus (so it was believed) insurrection and revolution itself.
In war, boots; in flight, a place in a boat or a seat on a lorry may be the most vital thing in the world, more desirable than untold millions. In hyperinflation, a kilo of potatoes was worth, to some, more than the family silver; a side of pork more than the grand piano. A prostitute in the family was better than an infant corpse; theft was preferable to starvation; warmth was finer than honour, clothing more essential than democracy, food more needed than freedom.
Many people consider Weimar Germany to be the worst hyperinflation ever, but it was just the best publicized. In fact, there have been hundreds of hyperinflations recorded in world history. According to Dollar Daze, the majority of all national currencies ever issued have been destroyed by hyperinflation.
So, what exactly causes a hyperinflation? Essentially, it boils down to a psychology in the government, a refusal to balance the budget combined with widespread financial guarantees to its citizens. Rather than balance expenditures with taxes or cut expenses, the government simply prints the money to make it's budget work. The printing of money causes a gradual inflation, which feeds itself. The alternative to inflation is unemployment and liquidation, which the government cannot abide, so the ever-widening budget gap is funded with ever-greater money printing.
Obviously, it is impossible not to notice that we have embarked upon that path today. Our government has determined to spend, borrow, and print its way out of an economic downturn. It is a first for the American government, which has one of the oldest stable currencies in the world, younger than only the British Pound. It is also a first time in the history of the world that the international reserve currency has flirted with hyperinflationary policies.
The following are some excerpts from a book on the Weimar hyperinflation, vignettes of the people's experiences, and their psychology which both enabled and sought to cope with the economic catastrophe. In the end, the German authorities did not choose to end their hyperinflation. Right to the very end, they consciously chose the path of hyperinflation to avoid the alternative of economic downturn. They considered inflation to be stimulation and dealt with its consequences, right up until the point when they could no longer forestall unemployment with stimulation, because they reached the point of both monetary insolvency AND high unemployment. At that point, the country's economic basis was nigh-well destroyed. The longer they delayed the economic adjustment, the more painful it finally was, and that on top of years of accumulated pain brought on by the hyper-inflation itself.
http://www.mises.org/resources/4016
Much as it may have been recognised that stability would have to be arranged some day, and that the greater the delay the harder it would be, there never seemed to be a good time to invite trouble of that order. Day by day through 1920, 1921 and 1922 the reckoning was postponed, the more (not the less) readily as the prospective consequences of inflation became more frightening. The conflicting objectives of avoiding unemployment and avoiding insolvency ceased at last to conflict when Germany had both.
The take-off point in the inflationary progress, after which the advent of hyperinflation was but a matter of time, the point indeed when it became self-generating and politically irreducible except for short periods, was not indeed to be found on the graph of the currency depreciation, or of the velocity of its circulation, or of the balance of payments deficit. Nor in Germany's case did it notably coincide with some ultimate crisis of confidence in the mark, at home or abroad — Rathenau's murder, or the occupation of the Rhine ports, or the London Ultimatum, all of which had immediate seismic effects upon it. Rather it lay on the falling curve of political possibility, with which was closely linked the degree of political power and courage that the government, sorely pressed as it was, was able to muster.
What really broke Germany was the constant taking of the soft political option in respect of money. The take-off point therefore was not a financial but a moral one; and the political excuse was despicable, for no imaginable political circumstances could have been more unsuited to the imposition of a new financial order than those pertaining in November 1923, when inflation was no longer an option. The Rentenmark was itself hardly more than an expedient then, and could scarcely have been introduced successfully had not the mark lost its entire meaning. Stability came only when the abyss had been plumbed, when the credible mark could fall no more, when everything that four years of financial cowardice, wrong-headedness and mismanagement had been fashioned to avoid had in fact taken place, when the inconceivable had ineluct-ably arrived.
...
If prices went up, people demanded not a stable purchasing power for the marks they had, but more marks to buy what they needed. More marks were printed, and more, and more. Inflation, already in its fourth year when revolution overthrew the old regime, added a new, overwhelming uncertainty to the many uncertainties that attended the birth of the Weimar Republic.
Thus were the Government's plans drawn up, wilfully and simply, for financing the war — not by taxation, but by borrowing; and with the printing press as the well to supply both the needs of the Government and the growing credit demand of private business. Taxation was to play not the smallest part in meeting the costs of war before 1916. Helfferich had actually announced to the Reichstag in March 1915 that the war was to be financed exclusively by borrowing. Issue after issue of War Loan transformed the greater part of German private fortunes into paper claims on the State. Our enemies, especially Britain, took another line. They met the cost of war with taxes aimed primarily at those industries and groups to whom the war spelled prosperity. Britain's policy of taxation proved socially more equitable than Germany's policy of War Loans which lost their value after the war was over …
As the war machine lumbered expensively on, circumstances and policies combined to pull the wool over the financial eyes of the German people, not least those classes who had most to lose. Every German stock exchange was closed for the duration, so that the effect of Reichsbank policies on stocks and shares was unknown. Further, foreign exchange rates were not published, and only those in contact with neutral markets such as Amsterdam or Zurich could guess what was going on. It was never clear how much the steep rise in domestic prices was due to economy measures and war shortages rather than to inflation — and even the relevance of those prices was rendered dubious by the much higher black market rates. Only when the war was over, with the veil of censorship lifted but the Allied blockade continuing, did it become clear to all with eyes to read that Germany had already met an economic disaster nearly as shattering as her military one. The scales may have fallen at last from German eyes with the coming of peace, but that did not mean that the difficulties and injustices created by war-time inflation had passed unnoticed.
It must be admitted generally now that the cause of the depreciation of our currency and of the purchasing power of the mark was neither the commercial balance during the war nor the estimate of our military situation abroad; but in the exploitation of our currency for the purpose of obtaining money for the Treasury, that is to say in a fictitious increase of our total income. In as much as the country issued milliards in the form of extraordinary levies, War Loans, Treasury bills, and so on, without withdrawing from circulation corresponding amounts in the shape of taxes, it created new paper income and wealth incessantly, while the real national wealth was steadily being diminished by the war.
Even the most respectable of Austrian citizens now breaks the law, unless he is prepared to starve for the sake of obeying it … The fact that the future is so uncertain has led to stagnation in industry and public works, and swelling numbers of unemployed supported by the State … yet it is impossible to get domestic servants or indeed any sort of workers …
The State has been obliged to put 10,000 kronen notes into circulation — each equivalent to two years' income from my capital. A suit costs about six times what it was in 1913, but some things like food are a hundred or two hundred times as much … Paper clothes are being sold. Never had I dreamed it possible that one could purchase so little for 10,000 kronen … Jealousy and envy flourish in this atmosphere, and if one has procured some harmless article of food, one is careful to conceal the fact from one's fellow men. Hunger reigns inexorably and selects its dumb and uncomplaining victims above all from the middle classes …
Twice a day we are all forced to await the quotation of the Zurich bourse. Every fresh drop in its value is followed by a wave of rising prices … The confidence of Austrian citizens in the currency administration of the State is shaken to its foundation. The State which is perpetually printing new banknotes deceives us with the face value … A housewife who has had no experience of the horrors of currency depreciation has no idea what a blessing stable money is, and how glorious it is to be able to buy with the note in one's purse the article one had intended to buy at the price one had intended to pay.
Speculation on the stock exchange has spread to all ranks of the population and shares rise like air balloons to limitless heights … My banker congratulates me on every new rise, but he does not dispel the secret uneasiness which my growing wealth arouses in me … it already amounts to millions.
The cost of living since the outbreak of the war had risen by nearly twelve times (compared with three times in the United States, almost four times in Britain and seven times in France). Food had accounted for half the family budget then, but now nearly three-quarters of any family's income went on it. The food for a family of four persons which cost 60 marks a week in April 1919, cost 198 marks by September 1920, and 230 marks by November 1920. Certain items such as lard, ham, tea and eggs rose to between thirty and forty times the pre-war price. On the bright side - in contrast to Austria - the official unemployed figure was low, and only 375,000 people were on the dole.
Indeed, the apparent health of industry was one of the factors which most effectively confused the inflation issue. Bolstered by a financial programme geared to subsidising in various vital ways an industrial front which continuous depreciation of the currency had already made highly competitive in foreign markets, the lot of German industry had materially improved over the previous twelve months.
Inflation provided the answer to the equation. If a budget did not balance, the deficit had to be made good somehow. In October 1920 Germany's national debt stood at 287,800 million marks. At the old 1914 parities this sum equalled £14,400 million; but at the new it represented only £1,200 million.* (Great Britain's national debt amounted then to £8,075 million.) A year before Germany's great inflation is generally thought to have started, Germany's national debt had all but been wiped out.
The daily creation of fresh paper money which the government requires in order to meet its obligations both at home and abroad (services and goods which it is 'obliged both to render and deliver') inevitably decreases the purchasing value of the mark and leads to fresh demands, which in turn bring about a further decline, and so on ad infinitum.
Even progressive increases in taxation could not completely meet the situation, since new impositions meant an increased cost of living, which automatically reduced the purchasing value of the mark, and in turn brought about more inflation and budget instability.
The newspaper complained of the 'quite small capitalist upper class' making huge profits by taking advantage of the exchange fluctuations, while foreigners were using the discrepancy between the home and foreign values of the mark 'to purchase our goods en masse'. It demanded that profits on exchange and dollar speculations be taxed intensively, and went on:
Blackett noted that the rent restriction Acts hit much the same classes, who were 'forced to starvation in order to subsidise the German workman's wages and the employer's profits'. The bread and rail subsidies, financed by inflation, combined with the rent restriction, enabled the foreigner to buy German goods well below world prices and, if he lived in or visited Germany, to travel, eat and occupy houses at ridiculously cheap rates. 'A gradual process of buying up and carrying off Germany's movable capital, secondhand furniture, pianos, etc., is taking place at the expense of Germany as a whole.'
SOCIAL unrest was one of the obvious symptoms of inflation. The disease, the Austrian and German financial world seemed to agree, was itself not containable without international goodwill and a significant relaxation of the obligations under the peace treaties. Germany's politicians therefore set about relieving the symptoms wherever possible. More measures were brought in so that the government might be seen publicly to be dealing with profiteering. The Prime Minister of Bavaria even submitted a Bill to the Reichsrat to make gluttony a penal offence.
But in this respect conditions are hopelessly unhealthy, and the public will continue to be swayed by rumours and to speculate either in goods or in stocks and shares.
The previous fall in the mark had also produced unfortunate results by driving the population in shoals into the shops in a mania of purchasing. While abusing the foreigner for buying out Germany with his profitable rate of exchange, the native has been no whit behind in emptying the shops of their stocks … Many thought that their money would soon have no value whatever and that it must be exchanged for goods while there was yet time: others realised that the purchasing mania would help the falling rate of exchange to raise prices, and they therefore bought on speculative grounds.
The press pointed out that a disastrous slump in trade could not but ensue when the purchasing power of the population was exhausted, and that meanwhile the poorer classes were suffering. All efforts, however, were in vain to drive sense into a panic-stricken people, and articles in the shops could be seen being marked up to a higher price day by day.
In the eight years since 1913, the price of rye bread had risen by 13 times; of beef by 17. Those were the commodities which had fared best. Sugar, milk (at 4.40 marks a litre), pork and even potatoes (at 1.50 marks a Ib.) had risen between 23 and 28 times; butter had gone up by 33 times. These were only the official prices — real prices were often a third higher — and all these prices were roughly half as much again as in October, only two months before.
The brief December recovery of the mark brought no relief. That event, which caused unemployment transiently to treble to 3 per cent, gave another warning of what would inevitably have to be suffered when, one day, the printing presses stopped printing banknotes to order. Before the war, when the mark was sound, there were normally about 9,500 bankruptcies a year. As wartime inflation increased, the number regularly dropped, from 7,739 in 1914, to 807 in 1918. The total number in 1921, during the first seven months of which the mark was fairly stable, was 2,975, more than double the 1920 figure and three times that of 1919.* (The annual bankruptcy figures from 1912 were: 9,218, 9,725, 7,739, 4,594, 2,279, 1,240, 807, 1,015, 1,324, 2,975.) The 1921 figures were the most indicative; for in comparing the number of bankruptcies during the various months of the year it could be shown that a falling mark was associated with a decline in bankruptcies, and vice-versa. The largest number, 845, was in the spring when the mark stood highest; but after it reached its lowest in November the number was 150. The Frankfurter Zeitung commented: 'It gives some inkling of the awful debacle which may be expected if a rapid and permanent improvement of the mark actually takes place.'
It was natural that a people in the grip of raging inflation should look about for someone to blame. They picked upon other classes, other races, other political parties, other nations. In blaming the greed of tourists, or the peasants, or the wage demands of labour, or the selfishness of the industrialists and profiteers, or the sharpness of the Jews, or the speculators making fortunes in the money markets, they were in large measure still blaming not the disease but the symptoms.
It was significant enough that union, demands were still for higher wages to meet rising prices rather than, before all else, stable prices and a stable currency. A few of the financially sophisticated could be heard blaming the government, and the Finance Minister in particular, but a typical view was that prices went up because the foreign exchange went up, that the exchange rate went up because of speculation on the Stock Exchange, and that this was obviously the fault of the Jews. Although the price of the dollar was a matter for almost universal discussion, it still appeared to most Germans that the dollar was going up, not that the mark was falling; that the price of food and clothing was being forcibly increased daily, not that the value of money was permanently sinking as the flood of paper marks diluted the purchasing power of the number already in circulation.
Most successful businessmen, however, stuck happily to the heresy that only by a continually falling exchange rate could Germany compete in neutral markets. After them, the deluge. Neither they, nor the politicians, nor the bankers — with distressingly few exceptions — perceived any direct connection between inflation and depreciation. And yet, as the printing presses churned out bank notes the exchange continued rapidly to fall. What impressed the ordinary politician was the danger of social unrest which would, in his opinion, inevitably arise if there were any scarcity of currency. He could not see, or intentionally ignored, the obvious danger which proceeded from continuous inflation. Social unrest appeared, just the same.
ONLY the country people were surviving in Germany in any comfort: anyone who lived off the land had the readiest access to real values. It was not surprising that even when they ensured that the money receipts for their goods were no more than equivalent in purchasing power to what they were used to, they were accused of extortion — the more so if they delayed the sales of produce in the full knowledge that prices would be higher the longer they waited. Erna von Pustau went to stay in the country and asked her hosts bluntly what they were doing with all the money they were squeezing out of the townspeople. They replied candidly that they were paying off their mortgages. The principle of Mark gleich Mark had helped agriculture enormously: for the country people, landowners, farmers or peasants, life had started again. At the end of August 1922 when the mark passed 2,000 to the dollar — 9,000 to the pound — a mortgage of seven or eight years' standing had been 399/4OOths paid off. When Frau von Pustau returned home the talk in the family was about prices going up, about the credits which had to be reduced, about the middle-class party, about big business and the workers who always asked for more … The contrast between country and city was so enormous that it cannot be understood by people who have not lived through it.
To condemn the individual's struggle for survival in such chaotic circumstances as either selfish, or unnatural, or wrong, was in many ways unjust. When people do not understand what is happening, or why it is happening, and have no idea about what to do about it, and are not told, panic must follow. Even so, that the countrypeople were behaving naturally brought no comfort to townspeople who had no goods to barter, and whose incomes remained static.
On September 9 the financial authorities announced that in the previous ten days 23 milliard marks had been printed and distributed, representing 10 per cent of the total circulation of paper in the country. 'The daily production of the Federal printing press,' the newspapers dutifully recorded, 'has now risen to 2.6 milliards of paper marks. In the course of this month it will be increased to almost 4 milliards of paper marks, at which figure it is hoped the shortage of money will be definitely overcome.'
Shortage of liquid cash, indeed, was acute, and the July emergency money law was coming into its own. Large industrial concerns began to pay their workmen partly in notes and partly in coupons of their own, which were accepted by local tradesmen on the understanding that they would be redeemed within a very short time. Municipalities, too, started to issue their own currencies, aware that any delay in receiving their pay packets would dangerously aggravate workers whose main concern was to spend them before they depreciated. The cities and towns developed a parallel fear of unemployment which on a large scale might lead to outbreaks of Communist-inspired disorder, and so began artificially to create employment for their staff. The citizens of Frankfort noted with alarm that large tracts of quite serviceable road were being repaired outside the town and that the overhead system of telephone wires was being converted into an underground one.
At home in Germany, where people were resorting to trade by barter and progressively turning to foreign currencies as the only reliable medium of exchange, new Orders were brought in relating to the purchase of foreign bills and the use of foreign exchange to settle inland payments. In addition to imprisonment, fines could now be imposed of up to ten times the amount of an illegal deal.
Sure enough, in the Ruhr, numerous factories were using various devices to avoid having to put men out on the streets. Bochumer Verein, in Essen, for example, engaged 1,500 men making stock articles for railways although there was no immediate requirement for them. Such measures, however, were only possible for firms with big financial reserves, and small firms were already dismissing workers in small numbers. With the November price increases -butter at 800 marks a lb., eggs at 22 marks each — shops were also cutting down on assistants because sales were dropping off.
The disparity between the rise in the cost of living and the rise in wages had now become very marked. Whereas since the war the former had gone up by about 1,500 times, the wages of the miner — in November 1922 the best paid worker — had gone up by barely 200 times. With the mark in mid-November at 27,000 to the pound and 6,400 to the dollar, and with prices following the course of both with unfailing regularity, not only were wages in general failing to keep pace but the workers were not even being paid what was their due. Owing to the shortage of paper money of all kinds, federal currency or Not geld, they were finding that by the time the balance was paid it had lost 50 per cent of its value. The best-paid workers were unable to purchase the barest necessities of life. The others and — as ever — those on fixed incomes or dependent on savings suffered accordingly.
Bonar Law, who fully appreciated that the stabilisation of the mark meant, for Germany, unemployment, an industrial crisis and enormous financial strain, whereas failure to stabilise meant catastrophe, was now equally unable to convince the French Prime Minister of the futility of amassing vast quantities of German paper marks by means of retortionary or extortionary measures.
'Inflation is like a drug in more ways than one,' remarked Lord D'Abernon. 'It is fatal in the end, but it gets its votaries over many difficult moments.' Hopelessly addicted, the Reichsbank ploughed on.
Petty crimp? the crime of desperation, was flourishing. Pilfering had of course been rife since the war, but now it began to occur on a larger, commercial scale. Metal plaques on national monuments had to be removed for safe-keeping. The brass bell plates were stolen from the front doors of the British Embassy in Berlin, part of a systematic campaign unpreventable by the police even in the Wilhelmstrasse and Unter den Linden. That members and families of the British Army of the Rhine suffered severely from burglaries probably reflected the fact, not that thieves had particular animus against the forces of occupation, but that these days foreigners were so much more robbable than anyone else. Over most of Germany the lead was beginning to disappear overnight from roofs. Petrol was syphoned from the tanks of motor cars. Barter was already a usual form of exchange; but now commodities such as brass and fuel were becoming the currency of ordinary purchase and payment. A cinema seat cost a lump of coal. With a bottle of paraffin one might buy a shirt; with that shirt, the potatoes needed by one's family. Herr von der Osten kept a girl friend in the provincial Capital, for whose room in 1922 he had paid half a pound of butter a month: by the summer of 1923 it was costing him a whole pound. 'The Middle Ages came back,' Erna von Pustau said.
Communities printed their own money, based on goods, on a certain amount of potatoes, or rye, for instance. Shoe factories paid their workers in bonds for shoes which they could exchange at the bakery for bread or the meat market for meat.
DR SCHACHT, the author of the reform, had no illusions about its shortcomings. He understood that the Rentenmark could hold the tide only so long, that new credits from abroad were essential, and that for that reason no departure could be made (despite the pleadings of the government, desperate for money) from the strictest discipline. Nothing could be done that would put at risk the currency stability or the budgetary balance. 'After a long devaluation,' Schacht held on January 24, 1924, 'stability can only be regained at the cost of a severe crisis. We are in the midst of this crisis. External commerce is at a standstill. The balance of trade is active [i.e. in Germany's favour] only because imports have ceased as importers have no means of paying. Industry is living on old stocks.'
Their numbers amounted to millions, and none was on the list of receivers of unemployed or short-time relief. They were the ones who had had their wealth shot away by the war, without knowing it. They looked in vain for charity to help, but the charitable institutions and the religious societies, just like the literary and scientific foundations and many of the universities and hospitals, had equally had the fountains of their incomes reduced to a trickle or less. Any who had held industrial debentures had lost their capital, to the benefit of industries who redeemed those debts with worthless paper. Any who had held industrial shares in 1913 would have had their capital reduced by three-quarters, and a pittance paid in dividend totals over the years -- but in practice most people had panicked long since and sold the bulk of their shares for what they could get for them to the industrial profiteers and speculators who amassed the nation's wealth to themselves, paying themselves not dividends, but 'fees'. Germany's capital had been redistributed in the most cruel way, no longer spread reasonably evenly among millions, but largely in coagulated blobs among the new plutocracy.
It was widely remarked that the destitution inflicted by the inflationary process was not general. The very evidence, indeed, of great wealth — ostentatiously flaunted by the new rich who had it -misled many observers, including the French, into supposing that Germany's refusal to pay reparations on the nail was Teutonic knavery. The existence until the Ruhr invasion of full employment, an obviously prosperous working class, a buoyant economy, a booming home market, a strongly competitive position in foreign markets, factories bursting with production — all made possible by the vast scale of Germany's borrowing — could have fooled anybody.
Once more, however, here was a false dawn. Germany's trouble was that the inflation boom had never been liquidated. Stabilisation had ended the period when entrepreneurs could borrow as much as they wished at the expense of everyone else. A vast number of enterprises, established or expanded during monetary plenty, rapidly became unproductive when capital grew short. More realistic transport, fuel and food prices, and the return of rents to economic levels meant that wages, too, had to be raised substantially in real terms.
Firms that mushroomed during the inflation now found that the real interest they paid on loans for the first time was positive rather than negative, lower though the rates appeared to be. Perhaps most significant, for the first time they were obliged to pay real taxes, many of which were extremely high because of the necessity rapidly to balance the budget and to bring official salaries, which had fallen disastrously, up to an acceptable level again. Companies were often unable to buy new machinery after stabilisation came, so much so that huge stocks of unsold iron and coal began to build up in the Ruhr. Not even the foreign loans flowing in were able to prevent the seizing up once again of the Ruhr mining industry where pit after pit, especially any producing poor quality coal, was forced to close. Workers were to flock from pit to agriculture, from mines and quarries and engineering to the production of food and direct consumer goods, and to building. Hugo Stinnes himself had been deceived by the artificial prosperity of inflation into a fanatical confidence in the future of coal. It was the post-stabilisation depression in the coal, iron and steel industries, contriving even the depopulation of Ruhr townships, which led eventually in June 1925 to the collapse of the Stinnes empire.
The Stinnes debacle demonstrated above all that great industrial possessions could not be held without adequate liquid resources (as early as June 1924, Stinnes had been trying to pledge Bochumer Verein and Gelsenkirchen shares against Dutch loans); and that vertical combines were inefficient and unprofitable except under the exceptional conditions which had bred them.
Germany which had undergone almost every conceivable form of collapse during the previous six years — military, political, social, financial, economic — now crashed downwards again just as her many times demoralised people had supposed that, with international help, she was beginning to rise from her knees. Confidence was shattered. The flow of foreign money slackened. The Reichs-bank policy of credit restriction was maintained as firmly as ever to counteract a net outflow of gold and foreign exchange. The shifting of the working population was accompanied by a new, terrifying increase in unemployment and short-time working. Because labour was a buyers' market, those with work were nonetheless often compelled to work a 54-hour week. There was such an alarming rise in the cost of living that to prevent agitation the index had to be cooked. And there was a new, spectacular toll of bankruptcies. Much though public works were instituted to try to mop up labour, the unemployed figure had passed 1,300,000 by December 1925, and was gathering pace daily. The return of rational conditions had brought a necessary but brutal slimming of the immensely swollen public services: those who had been dismissed from the posts and the railways were now being joined not only by former miners and steel-workers but by the many who had started businesses on their own.
In the inflationary period new factories were built, old establishments reorganised and extended, new plant laid down, participations in all fields of industrial activity bought up, and the great amorphous concerns founded. Too late, it was found that this process had undermined the capital structure of the country: capital was frozen in factories for which, because of the extermination of the rentier and the reduction of the real wages of so many of the great consumer classes, there was no economic demand. Once the demand for goods was shut off and the flow of cash dammed, the fate of the productive apparatus was sealed. Even in 1924, firms of undoubted solidity and large assets were unable to pay out trifling sums of money. In 1926 that apparatus was still too great in relation to the working capital and the nation's power of consumption. Thus, whereas in 1913 there were 7,700 bankruptcies, and in 1924 only 5,700, the figure for 1925 was 10,800; and between the third quarter of 1925 and the second of 1927, bankruptcies numbered 31,000 — a rate of 15,000 a year.
In practice, furthermore, a great many bankruptcies were refused by the courts in the absence of assets with which to meet claims. Between May and November 1925, the number of protested bills per week doubled from 2,691 to 5,406. Many banks were immobilised by having had to lend to their industrial customers who had had to be kept alive but now could not repay. The banks found it prohibitively hard and unrewarding to liquidate securities, and under those conditions were unwilling to take over bankrupt factories in lieu of money. With shares now at far below value in a moribund Stock Market, there were endless sellers and no buyers.
Throughout the later inflationary years the shrill argument had gone on over who was to blame and what was the cause of the unceasing, increasing financial crisis — never a true crisis because instead of coming to a head it always did the impossible by getting even worse. Month upon month every excuse was found for it but the right one; every attempt made to stem the fall of the mark but the fundamental one.
Nor was German honour inflation-proof. The corruption among officials in 1924, Lord D'Abernon reported, was 'appalling', whereas before the war bribery had been almost unknown, and a high degree of uncorruptibility evident in public and private, if not always in commercial, life. There were few in any class of society who were not infected by, or prey to, the pervasive, soul-destroying influence of the constant erosion of capital or earnings and uncertainty about the future. From tax-evasion, food-hoarding, currency speculation, or illegal exchange transactions — all crimes against the State, each of which to a greater or less degree became for individuals a matter of survival — it was a short step to breaching one or other of the Ten Commandments.
In Germany not until well after the return to stability did the nature and extent of the corruption in high places begin to be known. Events like the sentencing in March 1924 to three years' gaol of Dr Zeigner, the egregious ex-Premier of Saxony, for corrupt practices and bribery had raised scarcely a ripple. The end of the year brought to light a far more formidable array of financial scandals, enough to confirm the view that the old universal integrity had sunk in the whirlpool of inflation, and to deliver another stunning blow to the nation's morale.
How great does inflation have to be before a government can no longer control it? Most economists accept that mild inflation has certain therapeutic advantages for a nation which must deal with the social and economic problems to which industrial democracies are usually subject. Most electorates still accept the statements of their politicians' pious intentions in regard to controlling ever rising prices: and yet the Deutschmark, the currency of the country which had most reason to fear inflation, lost two-thirds of its purchasing power between 1948 and 1975. The pound lost almost half its purchasing power between 1970 and 1975. In neither instance, however, did such depreciation represent a deliberate, cynical policy; which, no doubt, would also have been claimed by the German bankers and governments of the early 1920, who looked for causes of their monetary difficulties beyond their own printing press and tax system — and found them, without difficulty and to their complete intellectual satisfaction. It remains so that once an inflation is well under way (as Schmb'lders has it) 'it develops a powerful lobby that has no interest in rational arguments.' This was as true for Austria and Hungary as for Germany.
There came a stage when it was politically impossible to halt inflation. In the middle of 1920, after the brief post-Kapp Putsch period of the mark's stability, the competitiveness of German exports declined, with unemployment beginning to build up as a result. The point was presumably not lost on the inflators. Recovery of the mark could not be achieved without immediate repercussions in terms of bankruptcies, redundancies, short-time working, unemployment, strikes, hunger, demonstrations, Communist agitation, violence, the collapse of civil order, and thus (so it was believed) insurrection and revolution itself.
In war, boots; in flight, a place in a boat or a seat on a lorry may be the most vital thing in the world, more desirable than untold millions. In hyperinflation, a kilo of potatoes was worth, to some, more than the family silver; a side of pork more than the grand piano. A prostitute in the family was better than an infant corpse; theft was preferable to starvation; warmth was finer than honour, clothing more essential than democracy, food more needed than freedom.
Student Loan Jubilee
Student loans contribute to the problem of over-priced and unaffordable education. Additionally, they lead people to wrack up debt that can't be paid off, at a time when they are too young to understand the long-term implications. And, most unjustly of all, student loan debt cannot be discharged, ever, not even in bankruptcy. All in all, it is a very unjust and exploitative system, and student loan debt should be high on the list of areas for Jubilee forgiveness.
http://news.yahoo.com/s/bw/20090324/bs_bw/mar2009bs20090323558993
In just two short months, Robert Applebaum has become something of a spokesman for a generation of people burdened with student loan debt. Applebaum, a 35-year-old attorney in New York, started a Facebook group in January called "Cancel Student Loan Debt to Stimulate the Economy," fed up with news reports about bank executives spending millions to redecorate their offices and receiving hefty bonuses. "I wanted to rant, so instead of sending an e-mail to a couple of my friends, I decided to start a Facebook group," says Applebaum, who finished law school owing $80,000 in student loans. "I figured maybe just a few of my friends would join."
He was wrong. By the end of the second week 2,500 people had joined, and the group now has more than 138,500 members, many of whom are pressing their representatives in Congress for legislation that would forgive student loan debt. "It's just snowballed," says Applebaum.
Student loan repayment can be difficult for young people starting off their careers and has become even more challenging now with the economic downturn, as recent graduates lose their jobs or struggle to land one. Groups like Applebaum's on Facebook, and other organizations such as StudentLoanJustice.org, are part of a new movement advocating for an overhaul of the country's troubled student loan system. Frustrated with often unaffordable monthly payments, loans that are nearly impossible to discharge, and restrictive loan repayment plans, student borrowers are pushing the government and private loan companies to devise new solutions.
Assets of a Couch and a TV
"I think the economic crisis and the sort of clamor from borrowers like we see on that Facebook group should help make that case," says Edie Irons, a spokeswoman for the Project on Student Debt, a Berkeley (Calif.)-based nonprofit that raises awareness about student financial aid. "The size of the group really illustrates how concerned people are."
Applebaum, who graduated from Fordham Law School in 1998, took a job as an attorney at the Brooklyn District Attorney's Office after graduation, at a starting salary of $36,000 a year. His salary was so low that he put his loans in forbearance for five years, until they ballooned to $100,000. "Despite having a law degree, I'm middle class and I don't have any money at all," he says. "I don't own a house or a car. My only assets are my couch and television."
Applebaum is one of thousands of graduates struggling with the repercussions of student loans years after graduation. There were nearly $131 billion in outstanding private loans in 2008, according to Mark Kantrowitz, founder of FinAid.org, which tracks the college financial aid industry. In addition, there is $544 billion in outstanding federal loans for fiscal year 2009, up from $502 billion in 2008, according to the Education Dept.
Shackled by Student Loans
Meanwhile, the average debts of students graduating with loans rose from $18,796 in 2006 to $20,098 in 2007, according to the Project on Student Debt.
For some, the debt is unshakable. Mel Crow of American Fork, Utah, owes $60,000 in student loans from his days at the Academy of Art University in San Francisco. He has spent the last five years struggling to find a computer animation job in his field, with no luck. His parents had to refinance their home so he could consolidate his loans, and he now pays them $500 a month with the $10.50-per-hour he earns at a local cosmetic company. If he defaults on his loan, his parents will lose their home, Crow says. Meanwhile, he and his wife, an algebra teacher, are barely scraping by, living in the basement of her parents' home. Because of Crow's debt, he says the couple will have to delay buying a home and having kids for several years.
"Sometimes I think going to school is the worst single mistake I've ever made," says Crow, a member of Applebaum's Facebook group and the first in his family to attend college. "I could have worked at Wal-Mart (NYSE:WMT - News) for four years and been in a better position than I am now. I feel like I'm almost a slave to this debt."
Signs of Change
Others, like Eric Zapata, an aircraft mechanic in California, say their student debt is a constant worry. Zapata owes about $48,000 in student loans and worries he won't be able to afford an engagement ring for his girlfriend. "I've been saving now for two years, but I haven't been able to get the ring yet," he says. "The $400 in monthly (debt) payments just kills me."
There are already some signs that change is on the way, at least for those with federal loans. The Income-Based Repayment plan, part of the College Cost Reduction and Access Act of 2007, will provide some relief to federal student loan borrowers when it goes into effect on July 1. The program will cap most borrowers' monthly payments at less than 10% of their gross income for 25 years, after which any remaining debt will be forgiven. Another program, the Public Service Loan Forgiveness, allows borrowers to make income-based repayments and have their debt discharged after 10 years. "These programs actually provide some major help now and in the immediate future," says Irons of the Project on Student Debt.
But the situation is not quite as rosy for private loan borrowers. Many of these debtors have been unable to meet their monthly payments, putting their loans in forbearance for several years or, in the worst-case scenario, defaulting on their loans. Making matters worse for private borrowers is a clause in the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act that included private student loans as one of 10 debts that can't be forgiven in bankruptcy cases.
Continuing the Fight
Alan Collinge, author of The Student Loan Scam and founder of StudentLoanJustice.org, has been a student loan activist for nearly four years. He is working to reverse the bankruptcy laws and establish limits on how lenders pursue borrowers. Collinge graduated with three degrees in aerospace engineering from the University of California several years ago and $38,000 in student debt, which he's still working to pay off. He's traveled around the country talking to elected officials and working to restore what he considers "basic consumer" rights. As of yet, he's had no luck, but he hasn't given up hope. "Until someone shows me why student loans should specifically be exempt from bankruptcy protections, it's definitely a fight worth fighting," he says.
http://news.yahoo.com/s/bw/20090324/bs_bw/mar2009bs20090323558993
In just two short months, Robert Applebaum has become something of a spokesman for a generation of people burdened with student loan debt. Applebaum, a 35-year-old attorney in New York, started a Facebook group in January called "Cancel Student Loan Debt to Stimulate the Economy," fed up with news reports about bank executives spending millions to redecorate their offices and receiving hefty bonuses. "I wanted to rant, so instead of sending an e-mail to a couple of my friends, I decided to start a Facebook group," says Applebaum, who finished law school owing $80,000 in student loans. "I figured maybe just a few of my friends would join."
He was wrong. By the end of the second week 2,500 people had joined, and the group now has more than 138,500 members, many of whom are pressing their representatives in Congress for legislation that would forgive student loan debt. "It's just snowballed," says Applebaum.
Student loan repayment can be difficult for young people starting off their careers and has become even more challenging now with the economic downturn, as recent graduates lose their jobs or struggle to land one. Groups like Applebaum's on Facebook, and other organizations such as StudentLoanJustice.org, are part of a new movement advocating for an overhaul of the country's troubled student loan system. Frustrated with often unaffordable monthly payments, loans that are nearly impossible to discharge, and restrictive loan repayment plans, student borrowers are pushing the government and private loan companies to devise new solutions.
Assets of a Couch and a TV
"I think the economic crisis and the sort of clamor from borrowers like we see on that Facebook group should help make that case," says Edie Irons, a spokeswoman for the Project on Student Debt, a Berkeley (Calif.)-based nonprofit that raises awareness about student financial aid. "The size of the group really illustrates how concerned people are."
Applebaum, who graduated from Fordham Law School in 1998, took a job as an attorney at the Brooklyn District Attorney's Office after graduation, at a starting salary of $36,000 a year. His salary was so low that he put his loans in forbearance for five years, until they ballooned to $100,000. "Despite having a law degree, I'm middle class and I don't have any money at all," he says. "I don't own a house or a car. My only assets are my couch and television."
Applebaum is one of thousands of graduates struggling with the repercussions of student loans years after graduation. There were nearly $131 billion in outstanding private loans in 2008, according to Mark Kantrowitz, founder of FinAid.org, which tracks the college financial aid industry. In addition, there is $544 billion in outstanding federal loans for fiscal year 2009, up from $502 billion in 2008, according to the Education Dept.
Shackled by Student Loans
Meanwhile, the average debts of students graduating with loans rose from $18,796 in 2006 to $20,098 in 2007, according to the Project on Student Debt.
For some, the debt is unshakable. Mel Crow of American Fork, Utah, owes $60,000 in student loans from his days at the Academy of Art University in San Francisco. He has spent the last five years struggling to find a computer animation job in his field, with no luck. His parents had to refinance their home so he could consolidate his loans, and he now pays them $500 a month with the $10.50-per-hour he earns at a local cosmetic company. If he defaults on his loan, his parents will lose their home, Crow says. Meanwhile, he and his wife, an algebra teacher, are barely scraping by, living in the basement of her parents' home. Because of Crow's debt, he says the couple will have to delay buying a home and having kids for several years.
"Sometimes I think going to school is the worst single mistake I've ever made," says Crow, a member of Applebaum's Facebook group and the first in his family to attend college. "I could have worked at Wal-Mart (NYSE:WMT - News) for four years and been in a better position than I am now. I feel like I'm almost a slave to this debt."
Signs of Change
Others, like Eric Zapata, an aircraft mechanic in California, say their student debt is a constant worry. Zapata owes about $48,000 in student loans and worries he won't be able to afford an engagement ring for his girlfriend. "I've been saving now for two years, but I haven't been able to get the ring yet," he says. "The $400 in monthly (debt) payments just kills me."
There are already some signs that change is on the way, at least for those with federal loans. The Income-Based Repayment plan, part of the College Cost Reduction and Access Act of 2007, will provide some relief to federal student loan borrowers when it goes into effect on July 1. The program will cap most borrowers' monthly payments at less than 10% of their gross income for 25 years, after which any remaining debt will be forgiven. Another program, the Public Service Loan Forgiveness, allows borrowers to make income-based repayments and have their debt discharged after 10 years. "These programs actually provide some major help now and in the immediate future," says Irons of the Project on Student Debt.
But the situation is not quite as rosy for private loan borrowers. Many of these debtors have been unable to meet their monthly payments, putting their loans in forbearance for several years or, in the worst-case scenario, defaulting on their loans. Making matters worse for private borrowers is a clause in the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act that included private student loans as one of 10 debts that can't be forgiven in bankruptcy cases.
Continuing the Fight
Alan Collinge, author of The Student Loan Scam and founder of StudentLoanJustice.org, has been a student loan activist for nearly four years. He is working to reverse the bankruptcy laws and establish limits on how lenders pursue borrowers. Collinge graduated with three degrees in aerospace engineering from the University of California several years ago and $38,000 in student debt, which he's still working to pay off. He's traveled around the country talking to elected officials and working to restore what he considers "basic consumer" rights. As of yet, he's had no luck, but he hasn't given up hope. "Until someone shows me why student loans should specifically be exempt from bankruptcy protections, it's definitely a fight worth fighting," he says.
Wednesday, March 18, 2009
Debt Spending Inflation is Taxation, not Stimulus
Fantastic piece below about government-caused inflation. Printing money, as the Fed today calls it, quantitative easing or buying bank assets or whatever, is legal counterfeiting! It is a form of taxation. As this article brilliantly puts it, it is not placing a debt burden on a future generation, it is really stealing money from people today.
Think about it! The government prints the money today (the so-called debt) to co-opt economic resources now. That money removes wealth from people's pockets today, by debasing the value of their dollars because of the inflation of the money supply. It is the ultimate trickery. People think they are getting a stimulus, but in reality, they are getting screwed because of of their money is worth less. Rather than declare a Jubilee, which would honestly and openly cancel debt to the benefit of the common man, the government is determined to inflate the dollar to clear our debt, to the disadvantage of the common man.
Legal counterfeit blends with the genuine money supply and is indistinguishable from it. It is, therefore, more insidious and, through sheer volume, vastly more destructive of the power of the monetary unit than is illegal counterfeit. It inevitably manifests itself in higher prices of goods and services. The public is bewildered by the higher prices, and it requires but slight propaganda by the author of the inflation, the Government, to deflect criticism onto private business which, in the end, is always obliged to bring the bad news of rising prices to the people. The public does not realize that it is, in effect, indirectly paying taxes over the merchant's counter instead of paying them directly to the tax collector. The Government finds this a ready way to increase taxation without being detected.
To collect sufficient taxes to balance an extravagant budget brings citizen resistance if the tax collection is obvious. However, inflation taxation is not only covert; it operates by seemingly putting a dollar into the taxpayer's pocket instead of taking one out. By lavish counterfeiting and spending, the Government increases the number of dollars in circulation and thereby creates an appearance of prosperity.
We delude ourselves, moreover, if we think that deficits, or government "debts," are deferred taxes to be paid by future generations. They are current taxes, paid not only by the non-bondholders to the bondholders as interest, but by the bondholders themselves through the depreciation of the purchasing power of the dollars represented by the very securities that they hold.
Strictly speaking, there is never and there cannot be a government deficit. All government expenses are and must be paid by taxes. What is commonly called taxes is merely that shown in formal tax revenues, whereas the amount which is called deficit is in reality another bracket of taxes—inflation taxes—and this the most vicious form, since it disturbs and ultimately destroys the monetary system upon which the entire economy depends.
Even tax-conscious persons think only of the taxes shown by government revenue receipts. They tell us that the United States is approaching the danger point of a tax collection rate that is thirty per cent of the national income. They do not realize that it has already passed beyond this point, because they do not reckon the unaccounted taxation, actual and potential, through the depreciation of the dollar -- inflation taxation. As inflation accelerates, the rate at which conventional taxes are levied will not be able to keep up with the national income—this despite the false dollar prosperity floating the citizenry into progressively higher income tax brackets. The relative percentage will decline, giving to those who take this narrow view the impression of a decline in taxation. It is but a fool's paradise. Can anyone blame the politician for employing this painless way of plucking the goose?
Thus it may be seen that more than fifty per cent of today's dollar is "water" injected by government-created "dollars." But this is not to say that the total supply of counterfeit has yet manifested itself. Actual inflation and potential inflation are two different things. Prices are determined not by the total monetary unit supply relative to the total goods supply, but rather by the amount of each that actually meet in the market. All of these dollars are being held out of the market, hoarded under the illusion that they will grow through savings. But even with a moderate rise in prices, more is lost from the principal than accrues from interest or dividends. Gradually, this will become more and more evident to more and more people, thus causing holders of government securities and savings deposits to convert into goods and property. This will bring into the market a flood of dollars that are now inactive.
The resulting price rise will pinch the population of low and fixed incomes and thus throw upon the government the obligation (under the now prevalent idea that the government owes every man a living) to issue additional counterfeit dollars. This in turn will cause further price rises, calling for further counterfeit and so forth until the dollar is completely extinguished.
Realism therefore compels us to recognize that inflation will continue until the point is reached at which the dollar will be worthless. The Government will find it much easier to let taxation by inflation wipe out its debt than to liquidate its debt through direct taxes by running a surplus budget. The nation born under the slogan, "No taxation without representation," is now practicing taxation by misrepresentation.
http://www.newapproachtofreedom.info/ffi/chapter05.html
Think about it! The government prints the money today (the so-called debt) to co-opt economic resources now. That money removes wealth from people's pockets today, by debasing the value of their dollars because of the inflation of the money supply. It is the ultimate trickery. People think they are getting a stimulus, but in reality, they are getting screwed because of of their money is worth less. Rather than declare a Jubilee, which would honestly and openly cancel debt to the benefit of the common man, the government is determined to inflate the dollar to clear our debt, to the disadvantage of the common man.
Legal counterfeit blends with the genuine money supply and is indistinguishable from it. It is, therefore, more insidious and, through sheer volume, vastly more destructive of the power of the monetary unit than is illegal counterfeit. It inevitably manifests itself in higher prices of goods and services. The public is bewildered by the higher prices, and it requires but slight propaganda by the author of the inflation, the Government, to deflect criticism onto private business which, in the end, is always obliged to bring the bad news of rising prices to the people. The public does not realize that it is, in effect, indirectly paying taxes over the merchant's counter instead of paying them directly to the tax collector. The Government finds this a ready way to increase taxation without being detected.
To collect sufficient taxes to balance an extravagant budget brings citizen resistance if the tax collection is obvious. However, inflation taxation is not only covert; it operates by seemingly putting a dollar into the taxpayer's pocket instead of taking one out. By lavish counterfeiting and spending, the Government increases the number of dollars in circulation and thereby creates an appearance of prosperity.
We delude ourselves, moreover, if we think that deficits, or government "debts," are deferred taxes to be paid by future generations. They are current taxes, paid not only by the non-bondholders to the bondholders as interest, but by the bondholders themselves through the depreciation of the purchasing power of the dollars represented by the very securities that they hold.
Strictly speaking, there is never and there cannot be a government deficit. All government expenses are and must be paid by taxes. What is commonly called taxes is merely that shown in formal tax revenues, whereas the amount which is called deficit is in reality another bracket of taxes—inflation taxes—and this the most vicious form, since it disturbs and ultimately destroys the monetary system upon which the entire economy depends.
Even tax-conscious persons think only of the taxes shown by government revenue receipts. They tell us that the United States is approaching the danger point of a tax collection rate that is thirty per cent of the national income. They do not realize that it has already passed beyond this point, because they do not reckon the unaccounted taxation, actual and potential, through the depreciation of the dollar -- inflation taxation. As inflation accelerates, the rate at which conventional taxes are levied will not be able to keep up with the national income—this despite the false dollar prosperity floating the citizenry into progressively higher income tax brackets. The relative percentage will decline, giving to those who take this narrow view the impression of a decline in taxation. It is but a fool's paradise. Can anyone blame the politician for employing this painless way of plucking the goose?
Thus it may be seen that more than fifty per cent of today's dollar is "water" injected by government-created "dollars." But this is not to say that the total supply of counterfeit has yet manifested itself. Actual inflation and potential inflation are two different things. Prices are determined not by the total monetary unit supply relative to the total goods supply, but rather by the amount of each that actually meet in the market. All of these dollars are being held out of the market, hoarded under the illusion that they will grow through savings. But even with a moderate rise in prices, more is lost from the principal than accrues from interest or dividends. Gradually, this will become more and more evident to more and more people, thus causing holders of government securities and savings deposits to convert into goods and property. This will bring into the market a flood of dollars that are now inactive.
The resulting price rise will pinch the population of low and fixed incomes and thus throw upon the government the obligation (under the now prevalent idea that the government owes every man a living) to issue additional counterfeit dollars. This in turn will cause further price rises, calling for further counterfeit and so forth until the dollar is completely extinguished.
Realism therefore compels us to recognize that inflation will continue until the point is reached at which the dollar will be worthless. The Government will find it much easier to let taxation by inflation wipe out its debt than to liquidate its debt through direct taxes by running a surplus budget. The nation born under the slogan, "No taxation without representation," is now practicing taxation by misrepresentation.
http://www.newapproachtofreedom.info/ffi/chapter05.html
Financial Survival Strategies - International and Local
It is amazing to read about China's and Russia's current financial strategies, because they are the exact same as mine. For the exact same reasons, too: the impending dollar collapse.
China is using its dollars to buy up cheap hard assets, just as I am. Russia is attempting to create a new non-dollar exchange system, just as I am.
Clearly, the writing is on the wall. Everyone who isn't blinded by wishful thinking can see it. There is no magical happy ending in the works for the dollar-denominated economic system.
If you don't like my advice, take it from the Chinese and Russians: stock up on hard assets and productive capacity, and get involved in a non-dollar exchange system. At least then you will be partially insulated from the coming economic shocks.
If you have the capital, investing in productive capacity will be especially profitable after the dollar collapse. After the dollar collapse, imports will no longer be cheap, in fact, the price of everything will skyrocket. The updside is, made-in-America will make economic sense again. The US manufacturing base will have the opportunity to rebuild itself from the ground up. Unfortunately, in the meantime, we will face massive unemployment, and the economy will be hampered by the government's socialist policies.
China inoculates itself against dollar collapse
http://www.atimes.com/atimes/China_Business/KC18Cb02.html
At G20, Kremlin to Pitch New Currency
http://www.themoscowtimes.com/article/600/42/375364.htm
China is using its dollars to buy up cheap hard assets, just as I am. Russia is attempting to create a new non-dollar exchange system, just as I am.
Clearly, the writing is on the wall. Everyone who isn't blinded by wishful thinking can see it. There is no magical happy ending in the works for the dollar-denominated economic system.
If you don't like my advice, take it from the Chinese and Russians: stock up on hard assets and productive capacity, and get involved in a non-dollar exchange system. At least then you will be partially insulated from the coming economic shocks.
If you have the capital, investing in productive capacity will be especially profitable after the dollar collapse. After the dollar collapse, imports will no longer be cheap, in fact, the price of everything will skyrocket. The updside is, made-in-America will make economic sense again. The US manufacturing base will have the opportunity to rebuild itself from the ground up. Unfortunately, in the meantime, we will face massive unemployment, and the economy will be hampered by the government's socialist policies.
China inoculates itself against dollar collapse
http://www.atimes.com/atimes/China_Business/KC18Cb02.html
At G20, Kremlin to Pitch New Currency
http://www.themoscowtimes.com/article/600/42/375364.htm
Jim Rogers Warns of Serious Inflation
The U.S. risks sending the world into a depression as its bailouts of failed companies rob healthy businesses of capital, investor Jim Rogers said.
“The U.S. is taking assets from competent people and giving them to incompetent people,” said Rogers, chairman of Singapore-based Rogers Holdings and the author of books including “Investment Biker” and “Adventure Capitalist.” “That’s bad economics.”
People should be prepared for inflation as governments worldwide are printing money to prop up economies at a time when commodities supply is under pressure, Rogers said.
“We’re going to have serious, serious inflation down the road,” said Rogers, who owns gold and silver. “I wish I knew when.”
Calls to return to the gold standard, when currencies were backed by bullion owned by governments, are flawed because it is “not going to solve our problems,” he also said.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a3kTp0KUJWWE&refer=worldwide
“The U.S. is taking assets from competent people and giving them to incompetent people,” said Rogers, chairman of Singapore-based Rogers Holdings and the author of books including “Investment Biker” and “Adventure Capitalist.” “That’s bad economics.”
People should be prepared for inflation as governments worldwide are printing money to prop up economies at a time when commodities supply is under pressure, Rogers said.
“We’re going to have serious, serious inflation down the road,” said Rogers, who owns gold and silver. “I wish I knew when.”
Calls to return to the gold standard, when currencies were backed by bullion owned by governments, are flawed because it is “not going to solve our problems,” he also said.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a3kTp0KUJWWE&refer=worldwide
Monday, March 16, 2009
Alert - Treasury Capital Flow Negative
Well, this is the beginning of the end for the dollar. Appropriate that we are hearing about this just days after the Chinese publicly question their dollar denominated investments. They have been in sell mode for at least a month. Even the mainstream AP article mentions how catastrophic this will be for the dollar. The Greater Depression mentality won't really set in until the current wave of bailout plans completely fail because they can't be financed. When state governments are laying people off by the thousands, public works are slashed, and the cost of everything is skyrocketing, THEN people will begin to realize how bad it is.
WASHINGTON (AFP) – Foreign investors sold a net 43 billion dollars in long-term US securities in January as the flow of capital turned negative, US Treasury data showed Monday.
The decline in foreign holdings was the steepest since August 2007.
The decline came after a revised capital surplus of 34.7 billion dollars December.
If the decline persists, it could spell trouble for the United States, which is issuing massive amounts of debt to finance its economic recovery efforts.
The Treasury data showed a decline in both private purchase and official government or central bank purchases of US securities, including US Treasury and agency bonds, and to a smaller degree, equities.
When short-term securities are added to the figures, it shows a capital deficit of 148.9 billion dollars.
For all of 2008, the US had a capital surplus of 609.9 billion dollars including 514.8 billion in long-term debt held by foreigners.
Last week, US officials scrambled to assure China that its hundreds of billions of dollars in US bonds were safe, after Premier Wen Jiabao expressed concerns about "the safety" of its investments.
Analysts say a loss of confidence in US Treasury securities could cause a dramatic drop in the dollar and force Washington to pay higher interest rates.
http://news.yahoo.com/s/afp/20090316/pl_afp/useconomyfinancebond
WASHINGTON (AFP) – Foreign investors sold a net 43 billion dollars in long-term US securities in January as the flow of capital turned negative, US Treasury data showed Monday.
The decline in foreign holdings was the steepest since August 2007.
The decline came after a revised capital surplus of 34.7 billion dollars December.
If the decline persists, it could spell trouble for the United States, which is issuing massive amounts of debt to finance its economic recovery efforts.
The Treasury data showed a decline in both private purchase and official government or central bank purchases of US securities, including US Treasury and agency bonds, and to a smaller degree, equities.
When short-term securities are added to the figures, it shows a capital deficit of 148.9 billion dollars.
For all of 2008, the US had a capital surplus of 609.9 billion dollars including 514.8 billion in long-term debt held by foreigners.
Last week, US officials scrambled to assure China that its hundreds of billions of dollars in US bonds were safe, after Premier Wen Jiabao expressed concerns about "the safety" of its investments.
Analysts say a loss of confidence in US Treasury securities could cause a dramatic drop in the dollar and force Washington to pay higher interest rates.
http://news.yahoo.com/s/afp/20090316/pl_afp/useconomyfinancebond
Sunday, March 15, 2009
Alternative Money Systems and Barter
Found a few nice resources online providing a discussion of a number of different potential monetary systems and barter networks.
I do not think a system that declares all labor to be equal is workable. Nor, frankly, do I think a fully-backed money system would work. Raw barter is especially cumbersome and must be made more efficient.
I think a real bill system with cash redemption backing, combined with a barter network, is the best alternative system. But these systems provide a nice ground for brainstorming:
http://www.transaction.net/money/index.html
http://projects.exeter.ac.uk/RDavies/arian/local.html
http://barternews.com/community_barter-pg1.htm
The current barter exchange groups are really not suitable for mass consumption, as they are limited to a select group of businesses, and are run on a for-profit basis.
A real bills clearinghouse and barter network for the masses needs to be super cheap, as close to transparent as possible, and open to all.
I do not think a system that declares all labor to be equal is workable. Nor, frankly, do I think a fully-backed money system would work. Raw barter is especially cumbersome and must be made more efficient.
I think a real bill system with cash redemption backing, combined with a barter network, is the best alternative system. But these systems provide a nice ground for brainstorming:
http://www.transaction.net/money/index.html
http://projects.exeter.ac.uk/RDavies/arian/local.html
http://barternews.com/community_barter-pg1.htm
The current barter exchange groups are really not suitable for mass consumption, as they are limited to a select group of businesses, and are run on a for-profit basis.
A real bills clearinghouse and barter network for the masses needs to be super cheap, as close to transparent as possible, and open to all.
Real Bills of Personal Credit in Practice
This was quite the amazing find for me, as it precisely summarized a system that I had independently came up with myself. In fact, it adds a number of key elements that make it better than what I had envisioned. The one thing their paper had not envisioned, that I had, is the vital role of the real bills clearing house in maintaining a book of customer ratings. It is essentially like an e-bay rating, or Amazon rating, a compilation of the opinions of the many people you have done business with.
http://www.mitra.biz/blog/archives/2005/03/couthored_paper.html
For dealing with times of monetary chaos, these little real bills of personal credit will be like gold. For a nation dealing with the basic problem that few people do anything economically productive, being all cubicle critters, the basic question for many of us will be: what can I do, what can I offer you? What exactly am I going to fill out on this slip of paper for my trading service?
Our new economy will be based much more heavily on personal services, much like the economies of old. Our standard of living going down means our wages will fall, which sounds real bad but has some nice upside. When wages fall, all kinds of economic services become feasible again that have been wiped out of the market in the last 30 years. Think of maids and housekeepers for example. 100 years ago, such services were quite common, but as the cost of labor skyrocketed, the service disappeared.
Thus, if you are a displaced cubicle worker, your service may be "Mending clothes", or "Cleaning house" and that may be a worthwhile economic trade. As a general rule, all the repair skills will roar back to life, as the cost of new and imported goods rises it will become sensible to keep repairing old things rather than always replacing them.
http://www.mitra.biz/blog/archives/2005/03/couthored_paper.html
For dealing with times of monetary chaos, these little real bills of personal credit will be like gold. For a nation dealing with the basic problem that few people do anything economically productive, being all cubicle critters, the basic question for many of us will be: what can I do, what can I offer you? What exactly am I going to fill out on this slip of paper for my trading service?
Our new economy will be based much more heavily on personal services, much like the economies of old. Our standard of living going down means our wages will fall, which sounds real bad but has some nice upside. When wages fall, all kinds of economic services become feasible again that have been wiped out of the market in the last 30 years. Think of maids and housekeepers for example. 100 years ago, such services were quite common, but as the cost of labor skyrocketed, the service disappeared.
Thus, if you are a displaced cubicle worker, your service may be "Mending clothes", or "Cleaning house" and that may be a worthwhile economic trade. As a general rule, all the repair skills will roar back to life, as the cost of new and imported goods rises it will become sensible to keep repairing old things rather than always replacing them.
Thursday, March 12, 2009
Europe Needs a Jubilee too
Europe is also facing a financial catastrophe because of excessive debt, in their case given to Eastern European countries. The economies in the region are collapsing because of the withdrawal of funding and the collapse of prices (i.e. deflation). Yup, debt deflation depression there too, and the only solution is Jubilee! Why is no one talking about this???
The headline writers are calling it Europe's own subprime. Basically, what has happened is that banks in the more developed Western Europe have lent huge amounts of money to consumers in Eastern Europe.
The banks which have lent money belong to countries like Austria, Belgium, Greece, Italy and Sweden. Consumers who have borrowed from these banks belong to countries like Poland, Hungary, Romania, Ukraine and other countries which were a part of the erstwhile Union of Soviet Socialist Republics (USSR).
Stephen Jen, managing director and chief currency economist, Morgan Stanley estimates that Eastern Europe has borrowed around $1.7 trillion and needs to repay or roll over around $400 billion this year, which is around one-third of the entire gross domestic product (GDP) of the region. That's a lot of money to be repaid.
But how did it start in the first place? As the stock market and the real estate market boomed across the world, Western European banks saw a huge opportunity in lending in Eastern European countries where the financial system was not very developed. A majority of the lending happened for construction and consumer loans. With real estate prices on their way up, people were happy to go out and borrow.
Also, these loans were made primarily in euros or Swiss francs, and not in the local currencies of the countries. These loans were also at a lower rate of interest compared with local currency loans.
What also encouraged people to borrow in foreign currencies is something experts are now calling "convergence play." Most Eastern European countries over the next few years were hoping to move to euro as their currency from their current currencies. This encouraged borrowers to borrow in euros, and pay a lower interest rate, rather than borrow in their domestic currencies and pay a higher interest rate. Banks giving out these loans assumed that as these countries moved to the euro currency, the standard of living will also move towards the more developed, Western European countries.
And now, it is this foreign currency borrowing that is causing all the problems. Take the case of a country like Poland, where almost 60% of the home loans taken were in Swiss francs. Around one year back, 100 Polish zlotys (the currency of Poland) fetched 45 Swiss francs; today, 100 Polish zlotys are worth 30 Swiss francs.
What does that do for a Polish citizen who is earning in zlotys and is expected to repay his loan in Swiss francs? Let us say the equated monthly instalment (EMI) to repay a loan stood at 1,000 Swiss francs a month. Around a year back, he would have needed 2,222 zloty (1000 x 100/45) to buy 1000 Swiss francs. Now, he would need 3,333 zloty (1000 x 100/30) to buy 1000 Swiss francs. This means the EMI has gone up by 1,111 zloty or 50% in just one year.
Why has this happened? As I mentioned earlier, most of the loans given out in Eastern European countries were given out as real estate loans and consumer loans. The real estate bubble the world over burst around one and a half years back and since then, prices have been falling. Western European banks obviously saw this, and more or less stopped lending in Eastern European countries. Also, with so much of debt denominated in foreign currencies, there was a mad scramble among the citizens of Eastern European countries to buy and hold foreign currencies like euro and the Swiss franc. When that happened, the demand for the foreign currencies increased, leading to their value against currencies like the Polish zloty going up. This basically meant that people who were earning in zlotys and had borrowed in euros or Swiss francs saw their EMIs go up dramatically.
This humongous increase in EMIs does not go down well for economies whose GDP is contracting, which basically means that people are losing jobs and those who have jobs are seeing their incomes come down. This increases the chance of people defaulting on these loans. Take the case of a country like Ukraine, whose economy contracted by 12% in the three months from October to December. This has primarily been on account of steel prices crashing. Steel is a major export for the country.
Or take the case of Latvia, whose economy shrank by 10.5% in the December quarter. Most of these Eastern European countries are essentially commodity exporters and as you would know, commodity prices the world over have crashed. On the whole, these countries are expected to contract by 3% this year.
So banks which have lent to borrowers in these countries are in huge trouble. Take the case of Austrian banks. Estimates suggest that they have lent $289 billion to Eastern Europe. A large portion of this lending is in Swiss francs, which these Austrian banks have borrowed from Swiss banks. The Austrian finance minister, Joseph Proll, recently said that even if 10% of this lending goes bad, the Austrian financial system will go broke. With much of this money borrowed from the Swiss, the Swiss might also get into some trouble.
Now you might ask, why not just rescue these banks, like they have in the United States and the United Kingdom, by simply printing money?
The trouble is most of the Western European nations have euro as there currency. For the European Central Bank to print money, it would need each of its 16 members to say "Yes" to the decision. And that, as you would agree, is easier said than done.
The other problem is that most of these banks are too big for the countries they are domiciled in. The lending of the Austrian banks to Eastern European banks stands at $289 billion, as I mentioned earlier. This is equivalent to 70% of the Austrian GDP.
Given this, it is very difficult for the host countries to rescue these banks. They would need help from larger countries like France and Germany, which are steeped in their own problems, and are not in a mood to oblige. Other than this, most European banks have exposure to all the trouble in the United States. Not a good scene at all.
How about the International Monetary Fund (IMF) coming to the rescue of these countries? I guess it's well beyond the IMF as well. The IMF has reserves of around $200 billion. Of this, it has already exhausted a huge amount in rescuing countries such as Belarus, Hungary, Iceland and Ukraine.
Most of the Eastern European countries were formerly communist countries and have only recently moved to be being democracies with elected governments. Some experts feel the governments in these countries could pass laws to allow repayment of foreign loans in local currencies, and that would hurt the Western European banks even more.
And as if all this was not enough, European banks have given out nearly three-fourth of the loans worth $4.9 trillion given out to the emerging markets. Most emerging markets are in big trouble now. I guess I will leave that for the next email. Or maybe you could tell me about it.
That's it for now. I'll try to miss you, as much as you do.
Take care.
http://www.dnaindia.com/report.asp?newsid=1238246
The headline writers are calling it Europe's own subprime. Basically, what has happened is that banks in the more developed Western Europe have lent huge amounts of money to consumers in Eastern Europe.
The banks which have lent money belong to countries like Austria, Belgium, Greece, Italy and Sweden. Consumers who have borrowed from these banks belong to countries like Poland, Hungary, Romania, Ukraine and other countries which were a part of the erstwhile Union of Soviet Socialist Republics (USSR).
Stephen Jen, managing director and chief currency economist, Morgan Stanley estimates that Eastern Europe has borrowed around $1.7 trillion and needs to repay or roll over around $400 billion this year, which is around one-third of the entire gross domestic product (GDP) of the region. That's a lot of money to be repaid.
But how did it start in the first place? As the stock market and the real estate market boomed across the world, Western European banks saw a huge opportunity in lending in Eastern European countries where the financial system was not very developed. A majority of the lending happened for construction and consumer loans. With real estate prices on their way up, people were happy to go out and borrow.
Also, these loans were made primarily in euros or Swiss francs, and not in the local currencies of the countries. These loans were also at a lower rate of interest compared with local currency loans.
What also encouraged people to borrow in foreign currencies is something experts are now calling "convergence play." Most Eastern European countries over the next few years were hoping to move to euro as their currency from their current currencies. This encouraged borrowers to borrow in euros, and pay a lower interest rate, rather than borrow in their domestic currencies and pay a higher interest rate. Banks giving out these loans assumed that as these countries moved to the euro currency, the standard of living will also move towards the more developed, Western European countries.
And now, it is this foreign currency borrowing that is causing all the problems. Take the case of a country like Poland, where almost 60% of the home loans taken were in Swiss francs. Around one year back, 100 Polish zlotys (the currency of Poland) fetched 45 Swiss francs; today, 100 Polish zlotys are worth 30 Swiss francs.
What does that do for a Polish citizen who is earning in zlotys and is expected to repay his loan in Swiss francs? Let us say the equated monthly instalment (EMI) to repay a loan stood at 1,000 Swiss francs a month. Around a year back, he would have needed 2,222 zloty (1000 x 100/45) to buy 1000 Swiss francs. Now, he would need 3,333 zloty (1000 x 100/30) to buy 1000 Swiss francs. This means the EMI has gone up by 1,111 zloty or 50% in just one year.
Why has this happened? As I mentioned earlier, most of the loans given out in Eastern European countries were given out as real estate loans and consumer loans. The real estate bubble the world over burst around one and a half years back and since then, prices have been falling. Western European banks obviously saw this, and more or less stopped lending in Eastern European countries. Also, with so much of debt denominated in foreign currencies, there was a mad scramble among the citizens of Eastern European countries to buy and hold foreign currencies like euro and the Swiss franc. When that happened, the demand for the foreign currencies increased, leading to their value against currencies like the Polish zloty going up. This basically meant that people who were earning in zlotys and had borrowed in euros or Swiss francs saw their EMIs go up dramatically.
This humongous increase in EMIs does not go down well for economies whose GDP is contracting, which basically means that people are losing jobs and those who have jobs are seeing their incomes come down. This increases the chance of people defaulting on these loans. Take the case of a country like Ukraine, whose economy contracted by 12% in the three months from October to December. This has primarily been on account of steel prices crashing. Steel is a major export for the country.
Or take the case of Latvia, whose economy shrank by 10.5% in the December quarter. Most of these Eastern European countries are essentially commodity exporters and as you would know, commodity prices the world over have crashed. On the whole, these countries are expected to contract by 3% this year.
So banks which have lent to borrowers in these countries are in huge trouble. Take the case of Austrian banks. Estimates suggest that they have lent $289 billion to Eastern Europe. A large portion of this lending is in Swiss francs, which these Austrian banks have borrowed from Swiss banks. The Austrian finance minister, Joseph Proll, recently said that even if 10% of this lending goes bad, the Austrian financial system will go broke. With much of this money borrowed from the Swiss, the Swiss might also get into some trouble.
Now you might ask, why not just rescue these banks, like they have in the United States and the United Kingdom, by simply printing money?
The trouble is most of the Western European nations have euro as there currency. For the European Central Bank to print money, it would need each of its 16 members to say "Yes" to the decision. And that, as you would agree, is easier said than done.
The other problem is that most of these banks are too big for the countries they are domiciled in. The lending of the Austrian banks to Eastern European banks stands at $289 billion, as I mentioned earlier. This is equivalent to 70% of the Austrian GDP.
Given this, it is very difficult for the host countries to rescue these banks. They would need help from larger countries like France and Germany, which are steeped in their own problems, and are not in a mood to oblige. Other than this, most European banks have exposure to all the trouble in the United States. Not a good scene at all.
How about the International Monetary Fund (IMF) coming to the rescue of these countries? I guess it's well beyond the IMF as well. The IMF has reserves of around $200 billion. Of this, it has already exhausted a huge amount in rescuing countries such as Belarus, Hungary, Iceland and Ukraine.
Most of the Eastern European countries were formerly communist countries and have only recently moved to be being democracies with elected governments. Some experts feel the governments in these countries could pass laws to allow repayment of foreign loans in local currencies, and that would hurt the Western European banks even more.
And as if all this was not enough, European banks have given out nearly three-fourth of the loans worth $4.9 trillion given out to the emerging markets. Most emerging markets are in big trouble now. I guess I will leave that for the next email. Or maybe you could tell me about it.
That's it for now. I'll try to miss you, as much as you do.
Take care.
http://www.dnaindia.com/report.asp?newsid=1238246
Wednesday, March 11, 2009
Hayek on Inflation, Unemployment, and Money
Inflation causes Depressions. The solution is stable money, which Hayek sees guaranteed by competing money (a gold standard no longer being possible, in his opinion). Fascinating dialog, and our theories of where to go forward should start here.
Hayek's one sentence statement about the destructive effects of inflation bode very ill for us today. The giant inflationary bubble economy of the last 20 years has left us a legacy of massive restructuring that needs to occur. America has been artificially held high by the status of the dollar as reserve currency, enabling our entire debt- and deficit-based economic-governmental structure.
Hazlett: How does inflation cause unemployment?
Hayek: By drawing people into jobs which exist only because the relative demand for the particular things is temporarily increased, and these employments must disappear as soon as the increase in the quantity of money ceases.
Hazlett: Yet, if the United States, for example, went through a period of temporarily high unemployment--say we have double the current rate of unemployment for one to two years--wouldn't all the automatic income-maintenance programs, such as unemployment insurance, welfare, etc., run up such an enormous bill as to bankrupt the federal government, which already runs a deficit of S50 billion or $60 billion in a so-called recovery period?
Hayek: Yes, they probably would. There would be an enormous political struggle on the question of whether social-security benefits ought to be adapted to inflation or cut down. I don't think that you can effect a permanent cure without a substantial alteration of the social-security system.
Hayek: Yes, they do occasionallv. The trouble is, in the mechanical system what forces politicians is the gold standard. The gold standard, even if it were nominally adopted now, would never work because people are not willing to play by the rules of the game. The rules of the game that the gold standard requires [say] that if you have an unfavorable balance of trade, you contract your currency. That's what no government can do--they'd rather go off the gold standard. In fact, I'm con- vinced that if we restored the gold standard now, within six months the first country would be off it and, within three years. it would completely disappear.
The gold standard was based on what was essentially an irrational superstition. As long as people believed there was no salvation but the gold standard, the thing could work. That illusion or superstition has been lost. We now can never successfully run a gold standard. I wish we could. Its largely as a result of this that I have been thinking of alternatives.
Hazlett: You have, at various times, championed a commodity-reserve monetary system and competition in the money supply. Are these practical alternatives to a govemment con- trolled central banking system?
Hayek: Yes. I have been convinced that while the idea of the commodity-reserve system is a good one, practically it is unmanageable. The idea of accumulating actual stocks of com- modities as reserves is so complex and impractical that it just cannot be done.
Then I came to the conclusion that the necessity of actual redemption of the real commodities is only necessary if you have to place a discipline on an authority which otherwise has no interest in keeping its currency stable. If you place the issue of money in the hands of firms whose business depends upon their success in keeping the money they issue stable, the situation changes completely. In that case, there is no necessity of depending upon their obligation to redeem in commoditei: it depends on the fact that they must so regulate the supply of their money that the public will accept the money for its stability. This is better than anything else.
From an interview in 1977.
http://www.reason.com/news/show/33304.html
Hayek's one sentence statement about the destructive effects of inflation bode very ill for us today. The giant inflationary bubble economy of the last 20 years has left us a legacy of massive restructuring that needs to occur. America has been artificially held high by the status of the dollar as reserve currency, enabling our entire debt- and deficit-based economic-governmental structure.
Hazlett: How does inflation cause unemployment?
Hayek: By drawing people into jobs which exist only because the relative demand for the particular things is temporarily increased, and these employments must disappear as soon as the increase in the quantity of money ceases.
Hazlett: Yet, if the United States, for example, went through a period of temporarily high unemployment--say we have double the current rate of unemployment for one to two years--wouldn't all the automatic income-maintenance programs, such as unemployment insurance, welfare, etc., run up such an enormous bill as to bankrupt the federal government, which already runs a deficit of S50 billion or $60 billion in a so-called recovery period?
Hayek: Yes, they probably would. There would be an enormous political struggle on the question of whether social-security benefits ought to be adapted to inflation or cut down. I don't think that you can effect a permanent cure without a substantial alteration of the social-security system.
Hayek: Yes, they do occasionallv. The trouble is, in the mechanical system what forces politicians is the gold standard. The gold standard, even if it were nominally adopted now, would never work because people are not willing to play by the rules of the game. The rules of the game that the gold standard requires [say] that if you have an unfavorable balance of trade, you contract your currency. That's what no government can do--they'd rather go off the gold standard. In fact, I'm con- vinced that if we restored the gold standard now, within six months the first country would be off it and, within three years. it would completely disappear.
The gold standard was based on what was essentially an irrational superstition. As long as people believed there was no salvation but the gold standard, the thing could work. That illusion or superstition has been lost. We now can never successfully run a gold standard. I wish we could. Its largely as a result of this that I have been thinking of alternatives.
Hazlett: You have, at various times, championed a commodity-reserve monetary system and competition in the money supply. Are these practical alternatives to a govemment con- trolled central banking system?
Hayek: Yes. I have been convinced that while the idea of the commodity-reserve system is a good one, practically it is unmanageable. The idea of accumulating actual stocks of com- modities as reserves is so complex and impractical that it just cannot be done.
Then I came to the conclusion that the necessity of actual redemption of the real commodities is only necessary if you have to place a discipline on an authority which otherwise has no interest in keeping its currency stable. If you place the issue of money in the hands of firms whose business depends upon their success in keeping the money they issue stable, the situation changes completely. In that case, there is no necessity of depending upon their obligation to redeem in commoditei: it depends on the fact that they must so regulate the supply of their money that the public will accept the money for its stability. This is better than anything else.
From an interview in 1977.
http://www.reason.com/news/show/33304.html
Tuesday, March 10, 2009
Jubilee Political Movement
Obviously, in order to implement Jubilee, a political movement is necessary.
The financial oligarchs currently control government policy, and have largely brainwashed the masses into accepting their version of economic theory.
The Jubilee movement must educate people on the reality of new economic system, while gathering a political movement to demand debt forgiveness.
The time has come, populist outrage is rising every day, setting the stage of Jubilee.
Take action in your local community to get organized, and coordinate with other Jubilee organizers to form up the national movement.
The financial oligarchs currently control government policy, and have largely brainwashed the masses into accepting their version of economic theory.
The Jubilee movement must educate people on the reality of new economic system, while gathering a political movement to demand debt forgiveness.
The time has come, populist outrage is rising every day, setting the stage of Jubilee.
Take action in your local community to get organized, and coordinate with other Jubilee organizers to form up the national movement.
$50 Trillion Lost Last Year?
So $50 Trillion in financial assets were lost last year. So what?
The weird part is, everyone acts like this is totally real. In fact, it is complete fantasy. We are acting out our own bizarre economic fantasy play, wherein financial instruments are confused with real wealth.
Unfortunately, our current economic system is based on the fantasy that financial instruments are equivalent to real wealth, and our real economy is hitch to these financial instruments like a carriage to the horse. The horse has died so the carriage just sits there.
In reality, we are no less wealthy than we were last year. We have the same skills and materials that we had then. The fantasy of money has us mesmerized, so that our real economic activity stops because of the collapse of the money system.
Given the loss of $50 trillion in paper value, how many loans will not be paid off, how much debt will now be unpayable? We desperately need to establish an economy that is unhitched from the dysfunctional money system.
The first step is to cancel the debt and allow our productive economy to escape the madness of a crushing weight of debt, which is based on fictional asset prices and expectations from bubble times.
The IMF actually quantifies the amount:
Developing nations will bear the brunt of the contraction and they will face a shortfall of between $270 billion and $700 billion to pay for imports and service debts, the Washington- based World Bank said.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aZ1kcJ7y3LDM&refer=worldwide
Friday, March 6, 2009
1 in 5 Underwater, Water Still Rising
My question is always this: what happens when everyone is underwater? What will we do then? That time is coming soon. The percentages are already mind-boggling. The problem began with housing, and the solution has to start there as well.
More American homeowners are drowning in debt, according to a new research report. As of the end of 2008:
Because home prices continue to drop across most of the country, the mortgage debt on about 20% of all U.S. single-family homes exceeded the estimated current value of those properties as of Dec. 31, says First American CoreLogic, a real estate information firm based in Santa Ana, Calif.
That proportion will rise to 25% of single-family homes if prices fall another 5%, the firm said.
The problem is most acute in Nevada, where the percentage is 55%, followed by Michigan (40%), Arizona (32%), Florida (30%) and California (30%).
Stripping out those five hard-hit states, the national percentage is about 14%. In New York State, the tally is just 4.7%.
Being underwater isn’t a huge problem for those who can afford their mortgage payments and don’t need to move any time soon. But it can make it difficult or impossible to refinance or sell a home.
And it causes some homeowners to wonder whether they would be better off walking away from their homes and renting something similar for a much smaller monthly outlay.
http://blogs.wsj.com/developments/2009/03/04/more-americans-drowning-in-mortgage-debt
More American homeowners are drowning in debt, according to a new research report. As of the end of 2008:
Because home prices continue to drop across most of the country, the mortgage debt on about 20% of all U.S. single-family homes exceeded the estimated current value of those properties as of Dec. 31, says First American CoreLogic, a real estate information firm based in Santa Ana, Calif.
That proportion will rise to 25% of single-family homes if prices fall another 5%, the firm said.
The problem is most acute in Nevada, where the percentage is 55%, followed by Michigan (40%), Arizona (32%), Florida (30%) and California (30%).
Stripping out those five hard-hit states, the national percentage is about 14%. In New York State, the tally is just 4.7%.
Being underwater isn’t a huge problem for those who can afford their mortgage payments and don’t need to move any time soon. But it can make it difficult or impossible to refinance or sell a home.
And it causes some homeowners to wonder whether they would be better off walking away from their homes and renting something similar for a much smaller monthly outlay.
http://blogs.wsj.com/developments/2009/03/04/more-americans-drowning-in-mortgage-debt
Thursday, March 5, 2009
Legal Aspects of Mortgage Jubilee
A debt jubilee could occur with a simple act of Congress. The law would simply have to declare forgiveness of debt, and include a clause to prevent lawsuits. It is that simple. As the following article indicates, the threat of lawsuit by investors is keeping many mortgage servicers from modifying notes. Unless they have legal protections from lawsuits, people are not going to put themselves at risk. A Jubilee Proclamation would have to contain language preventing lawsuits.
http://money.cnn.com/news/newsfeeds/articles/djf500/200903041759DOWJONESDJONLINE000962_FORTUNE5.htm
WASHINGTON -(Dow Jones)- The success of the Obama administration's plan to cut mortgage payments for millions of at-risk homeowners hinges on congressional action to shield mortgage servicers against lawsuits from investors, a top mortgage industry official said.
The plan, which the administration kicked off Wednesday, is heavy on incentives for mortgage servicers and borrowers, but provides no protection for servicers against lawsuits from mortgage investors who might become angry about the modifications.
Roughly 60% of seriously delinquent U.S. mortgage loans are concentrated in " private label" mortgage-backed securities, or MBS, which are not issued by Fannie Mae (FNM) and Freddie Mac (FRE).
Such mortgages "probably won't be modified until there's a safe harbor," David G. Kittle, the chairman of the Mortgage Bankers Association, said. "The incentives are not enough to protect anyone from a lawsuit."
Under the program, the government would pay mortgage servicers a $1,000 one- time fee to reduce borrowers' mortgage payments to 38% of their income for five years. The government would then match the cost of further interest rate reductions or other measures intended to bring mortgage payments down to 31% of borrowers' income.
The government would make generous annual payments to servicers and borrowers if the loan stays current. The only incentive for mortgage investors is a $1,500 payment for modifying loans that are not yet delinquent.
The program does nothing to address what has been one of the biggest impediments to loan modifications during the housing crisis - the misalignment of the interests of mortgage servicers and mortgage investors in private-label securities.
Companies servicing pools of mortgages packaged as private-label securities are bound by contracts with investors in the securities. The contracts vary, but typically require servicers to act in the best interest of the investors. That is often not a simple calculation. For example, a loss modification action by a servicer could potentially benefit some investors of the pool at the expense of others.
Mortgage investors have mounted lawsuits against servicers who have performed loan modifications they deemed against their interest.
Under the administration's program, participating mortgage servicers are required to "use reasonable efforts" to waive the contracts where they bar modification. However, the program does not override the contracts.
The administration, which estimates its program could help as many as 3-4 million people obtain more affordable mortgage payments, supports legislation pending in the U.S. House that would give mortgage servicers a safe harbor against investor lawsuits. "We would expect the legislation process to continue, " a senior White House official told reporters during a background briefing Wednesday.
Some housing experts said the program is likely to reach its targets despite the lack of a safe harbor because the payments to servicers are so generous they will tip the scales in favor of modifying a loan.
"They need the servicers to cooperate. They've sweetened the pot enough that that's going to happen to a large degree," National Community Reinvestment Coalition President John Taylor said. He called the lawsuit issue an " exaggerated problem."
Thomas Lawler, a housing economist from Leesburg, Va., said the incentives would spur mortgage servicers to modify loans by giving them the funds to staff up. Servicers haven't been aggressive "because they haven't been adequately staffed and they haven't been incentivized to do so" in a tanking housing market, he argued.
A feature of the program that would institute a "net present value" test could also help spur more loan modifications by giving mortgage servicers some cover from investors, Taylor said.
Participating servicers must run all loans that are at least 60 days delinquent or deemed at risk of imminent default through the test. They are required to modify loans where the net present value of the cash flows under a modification scenario exceed the net present value of the cash flows in the absence of modification.
The mortgage industry offered praise for the plan. Officials have exhorted borrowers to be patient with lenders as they cope with an expected deluge of modification requests.
"The plan appropriately balances the interest of homeowners, mortgage servicers and investors," Jamie Dimon, chief executive of JPMorgan Chase & Co. ( JPM), one of the largest servicers, said in a statement.
http://money.cnn.com/news/newsfeeds/articles/djf500/200903041759DOWJONESDJONLINE000962_FORTUNE5.htm
WASHINGTON -(Dow Jones)- The success of the Obama administration's plan to cut mortgage payments for millions of at-risk homeowners hinges on congressional action to shield mortgage servicers against lawsuits from investors, a top mortgage industry official said.
The plan, which the administration kicked off Wednesday, is heavy on incentives for mortgage servicers and borrowers, but provides no protection for servicers against lawsuits from mortgage investors who might become angry about the modifications.
Roughly 60% of seriously delinquent U.S. mortgage loans are concentrated in " private label" mortgage-backed securities, or MBS, which are not issued by Fannie Mae (FNM) and Freddie Mac (FRE).
Such mortgages "probably won't be modified until there's a safe harbor," David G. Kittle, the chairman of the Mortgage Bankers Association, said. "The incentives are not enough to protect anyone from a lawsuit."
Under the program, the government would pay mortgage servicers a $1,000 one- time fee to reduce borrowers' mortgage payments to 38% of their income for five years. The government would then match the cost of further interest rate reductions or other measures intended to bring mortgage payments down to 31% of borrowers' income.
The government would make generous annual payments to servicers and borrowers if the loan stays current. The only incentive for mortgage investors is a $1,500 payment for modifying loans that are not yet delinquent.
The program does nothing to address what has been one of the biggest impediments to loan modifications during the housing crisis - the misalignment of the interests of mortgage servicers and mortgage investors in private-label securities.
Companies servicing pools of mortgages packaged as private-label securities are bound by contracts with investors in the securities. The contracts vary, but typically require servicers to act in the best interest of the investors. That is often not a simple calculation. For example, a loss modification action by a servicer could potentially benefit some investors of the pool at the expense of others.
Mortgage investors have mounted lawsuits against servicers who have performed loan modifications they deemed against their interest.
Under the administration's program, participating mortgage servicers are required to "use reasonable efforts" to waive the contracts where they bar modification. However, the program does not override the contracts.
The administration, which estimates its program could help as many as 3-4 million people obtain more affordable mortgage payments, supports legislation pending in the U.S. House that would give mortgage servicers a safe harbor against investor lawsuits. "We would expect the legislation process to continue, " a senior White House official told reporters during a background briefing Wednesday.
Some housing experts said the program is likely to reach its targets despite the lack of a safe harbor because the payments to servicers are so generous they will tip the scales in favor of modifying a loan.
"They need the servicers to cooperate. They've sweetened the pot enough that that's going to happen to a large degree," National Community Reinvestment Coalition President John Taylor said. He called the lawsuit issue an " exaggerated problem."
Thomas Lawler, a housing economist from Leesburg, Va., said the incentives would spur mortgage servicers to modify loans by giving them the funds to staff up. Servicers haven't been aggressive "because they haven't been adequately staffed and they haven't been incentivized to do so" in a tanking housing market, he argued.
A feature of the program that would institute a "net present value" test could also help spur more loan modifications by giving mortgage servicers some cover from investors, Taylor said.
Participating servicers must run all loans that are at least 60 days delinquent or deemed at risk of imminent default through the test. They are required to modify loans where the net present value of the cash flows under a modification scenario exceed the net present value of the cash flows in the absence of modification.
The mortgage industry offered praise for the plan. Officials have exhorted borrowers to be patient with lenders as they cope with an expected deluge of modification requests.
"The plan appropriately balances the interest of homeowners, mortgage servicers and investors," Jamie Dimon, chief executive of JPMorgan Chase & Co. ( JPM), one of the largest servicers, said in a statement.
Mortgage Principal Reduction is the Only Solution
The pressure is building on bankers right now. They are starting to realize the necessity of principal reductions, although they are still resisting. If you are a homeowner, your best alternative is to join a homeowner's union, and use the power of collective bargaining and striking. That's right, striking. As in, time for a mortgage strike. The fat cats need to do the right thing and write down the mortgage principal for honest hard working home owners, or it is time for a mortgage strike.
http://www.bloomberg.com/apps/news?pid=20601109&sid=aoXvQxGD5ChU
One in five borrowers in the $10.5 trillion U.S. mortgage market owes more than their property is worth, according to First American CoreLogic Inc., a real estate data company based in Santa Ana, California. Just one in 10 have received the principal reductions that research demonstrates is more effective at preventing defaults than the temporary payment reductions promoted by banks and the federal government. “You have to take the poison out of the water at the source,” says Ron D’Vari, 50, the former head of structured finance at New York-based investment adviser BlackRock Inc. and now chief executive officer of his own investment advisory firm, NewOak Capital LLC. “You have to go to the borrower, and you need to create liquidity at the borrower level.”
One reason banks resist lowering borrowers’ principal is that doing so could threaten their solvency. In the worst slump since the Great Depression, the banks’ unrealized losses exceed their capital cushions by $400 billion, according to Nouriel Roubini, a professor of economics at New York University’s Leonard N. Stern School of business. When three of the biggest mortgage lenders, Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. announced plans late last year to modify as many as 1.3 million mortgages, only Charlotte, North Carolina-based Bank of America explicitly pledged reductions of principal on some loans. Under an agreement with states investigating the lending practices of its Countrywide Financial Corp. unit, the bank said it would modify 400,000 Countrywide mortgages at a cost of $8.4 billion.
Home prices have dropped 30 percent since the market peak in June 2007, according to New York-based Radar Logic Inc., which tracks real estate sales in 25 markets. December 2009 contracts traded on the company’s RPX index signal a further 16.5 percent decline this year. “If your collateral is worth significantly less than the loan, it may be better to compromise and get half a loaf than hold out for the whole loaf and get nothing,” says David Dietze, president of Point View Financial Services Inc., an investment adviser based in Summit, New Jersey.
While the government and banks agree that loan restructurings are their best defense against an increase in the record 2.3 million foreclosures last year, so far they have focused on temporary rate reductions and deferred payment plans that rely on economic recovery and rebounding home values. President Barack Obama announced a $75 billion rescue plan Feb. 18 that promotes more affordable monthly payments for as many as 9 million borrowers through government-subsidized interest rates and extended loan terms up to 40 years. The administration today issued guidelines for the program. Obama also endorsed “cramdown” legislation that would authorize bankruptcy judges to renegotiate the terms of distressed borrowers’ mortgages closer to market values. Homeowners would have to exhaust all other options before using the bankruptcy court to reduce their loan payments, House Majority Leader Steny Hoyer said yesterday. Lenders also say that reducing homeowners’ mortgage balances precludes them from sharing in the properties’ eventual recovery and creates an incentive for all borrowers to seek concessions, even those who aren’t in danger of defaulting. “It suggests enormous and lasting damage to our mortgage markets and real estate values, which as a homeowner I don’t particularly want to see,” says Gary Townsend, 57, a former federal banking examiner who is now CEO of the investment firm Hill-Townsend Capital LLC in Chevy Chase, Maryland.
Bank resistance to more aggressive action was reflected in a December study by the Comptroller of the Currency, a federal banking regulator. After six months, more than 55 percent of the loans modified last year re-defaulted, that report showed. By comparison, 28 percent of homeowners whose modifications trimmed their principal by a fifth or more were late after six months, according to research by Diane Pendley, a managing director of Fitch Ratings in New York.
The Obama administration’s failure to close the negative- equity gap means that its plan “will likely join the dud parade of federal rescues,” says John Kiff, an International Monetary Fund economist in Washington. While buying time for the financial system to stabilize and the economy to recover, the government program steers clear of restoring homeowners’ lost equity, a more effective method of stemming foreclosures, according to research by Credit Suisse Group AG, Goldman Sachs Group Inc. Less than 1 percent of the 88,830 modifications tracked by the California Department of Corporations from January through September last year included reductions of principal. By comparison, 47 percent of the restructurings lowered borrowers’ interest rates, according to the state agency. One in 10 revisions from a national sample in November included decreases in principal, wrote Alan M. White, an assistant law professor at Valparaiso University in Valparaiso, Indiana, in the paper, “Deleveraging the American Homeowner: The Failure of 2008 Voluntary Mortgage Contract Modifications.”
DellaCamera, 55, the principal of DellaCamera Capital Management LLC, says that government reluctance to force banks to write down the value of distressed loans and securities to prices that buyers are willing to pay creates “gridlock,” delaying bad-debt workouts and an eventual recovery. “We felt there was going to be an opportunity going forward, not anticipating that it would be as bad and ugly as it is,” says DellaCamera. He says he has bought about $125 million in distressed mortgages, a 10th of his target, through affiliate National Asset Direct Inc., based in San Diego.
Dietze, 53, of Point View Financial, says he still expects banks to bounce back and says that discipline in the credit markets is important to both borrower and lender. “I think there’s no traditional banking business in the world that’s better than lending a good borrower money that they must pay back under pain of losing their roof overhead. “Right now, everyone is concerned about the value of mortgages and depreciating residential real estate that secures it,” Dietze says. “But from an investor’s standpoint, you know that business is going to come back.”
“The banks need to flush out all the bad assets", says Louis Amaya, 44, NAD’s chief investment officer. “Let guys like us buy them, service them, reliquefy them into good loans.” The process will “put a lot of them out of business,” Amaya says. “There’s going to be some hard, short-term pain that needs to happen in order for us to start rebounding.”
http://www.bloomberg.com/apps/news?pid=20601109&sid=aoXvQxGD5ChU
One in five borrowers in the $10.5 trillion U.S. mortgage market owes more than their property is worth, according to First American CoreLogic Inc., a real estate data company based in Santa Ana, California. Just one in 10 have received the principal reductions that research demonstrates is more effective at preventing defaults than the temporary payment reductions promoted by banks and the federal government. “You have to take the poison out of the water at the source,” says Ron D’Vari, 50, the former head of structured finance at New York-based investment adviser BlackRock Inc. and now chief executive officer of his own investment advisory firm, NewOak Capital LLC. “You have to go to the borrower, and you need to create liquidity at the borrower level.”
One reason banks resist lowering borrowers’ principal is that doing so could threaten their solvency. In the worst slump since the Great Depression, the banks’ unrealized losses exceed their capital cushions by $400 billion, according to Nouriel Roubini, a professor of economics at New York University’s Leonard N. Stern School of business. When three of the biggest mortgage lenders, Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. announced plans late last year to modify as many as 1.3 million mortgages, only Charlotte, North Carolina-based Bank of America explicitly pledged reductions of principal on some loans. Under an agreement with states investigating the lending practices of its Countrywide Financial Corp. unit, the bank said it would modify 400,000 Countrywide mortgages at a cost of $8.4 billion.
Home prices have dropped 30 percent since the market peak in June 2007, according to New York-based Radar Logic Inc., which tracks real estate sales in 25 markets. December 2009 contracts traded on the company’s RPX index signal a further 16.5 percent decline this year. “If your collateral is worth significantly less than the loan, it may be better to compromise and get half a loaf than hold out for the whole loaf and get nothing,” says David Dietze, president of Point View Financial Services Inc., an investment adviser based in Summit, New Jersey.
While the government and banks agree that loan restructurings are their best defense against an increase in the record 2.3 million foreclosures last year, so far they have focused on temporary rate reductions and deferred payment plans that rely on economic recovery and rebounding home values. President Barack Obama announced a $75 billion rescue plan Feb. 18 that promotes more affordable monthly payments for as many as 9 million borrowers through government-subsidized interest rates and extended loan terms up to 40 years. The administration today issued guidelines for the program. Obama also endorsed “cramdown” legislation that would authorize bankruptcy judges to renegotiate the terms of distressed borrowers’ mortgages closer to market values. Homeowners would have to exhaust all other options before using the bankruptcy court to reduce their loan payments, House Majority Leader Steny Hoyer said yesterday. Lenders also say that reducing homeowners’ mortgage balances precludes them from sharing in the properties’ eventual recovery and creates an incentive for all borrowers to seek concessions, even those who aren’t in danger of defaulting. “It suggests enormous and lasting damage to our mortgage markets and real estate values, which as a homeowner I don’t particularly want to see,” says Gary Townsend, 57, a former federal banking examiner who is now CEO of the investment firm Hill-Townsend Capital LLC in Chevy Chase, Maryland.
Bank resistance to more aggressive action was reflected in a December study by the Comptroller of the Currency, a federal banking regulator. After six months, more than 55 percent of the loans modified last year re-defaulted, that report showed. By comparison, 28 percent of homeowners whose modifications trimmed their principal by a fifth or more were late after six months, according to research by Diane Pendley, a managing director of Fitch Ratings in New York.
The Obama administration’s failure to close the negative- equity gap means that its plan “will likely join the dud parade of federal rescues,” says John Kiff, an International Monetary Fund economist in Washington. While buying time for the financial system to stabilize and the economy to recover, the government program steers clear of restoring homeowners’ lost equity, a more effective method of stemming foreclosures, according to research by Credit Suisse Group AG, Goldman Sachs Group Inc. Less than 1 percent of the 88,830 modifications tracked by the California Department of Corporations from January through September last year included reductions of principal. By comparison, 47 percent of the restructurings lowered borrowers’ interest rates, according to the state agency. One in 10 revisions from a national sample in November included decreases in principal, wrote Alan M. White, an assistant law professor at Valparaiso University in Valparaiso, Indiana, in the paper, “Deleveraging the American Homeowner: The Failure of 2008 Voluntary Mortgage Contract Modifications.”
DellaCamera, 55, the principal of DellaCamera Capital Management LLC, says that government reluctance to force banks to write down the value of distressed loans and securities to prices that buyers are willing to pay creates “gridlock,” delaying bad-debt workouts and an eventual recovery. “We felt there was going to be an opportunity going forward, not anticipating that it would be as bad and ugly as it is,” says DellaCamera. He says he has bought about $125 million in distressed mortgages, a 10th of his target, through affiliate National Asset Direct Inc., based in San Diego.
Dietze, 53, of Point View Financial, says he still expects banks to bounce back and says that discipline in the credit markets is important to both borrower and lender. “I think there’s no traditional banking business in the world that’s better than lending a good borrower money that they must pay back under pain of losing their roof overhead. “Right now, everyone is concerned about the value of mortgages and depreciating residential real estate that secures it,” Dietze says. “But from an investor’s standpoint, you know that business is going to come back.”
“The banks need to flush out all the bad assets", says Louis Amaya, 44, NAD’s chief investment officer. “Let guys like us buy them, service them, reliquefy them into good loans.” The process will “put a lot of them out of business,” Amaya says. “There’s going to be some hard, short-term pain that needs to happen in order for us to start rebounding.”
Systemic Bank Failures Looming
So, while the banking system is groaning under the weight of a collapsing housing market and economy, our federal government is going to add more weight to their backs to support the FDIC system. This is exactly like taxing the people more in order to stimulate the economy: totally ass-backwards.
So what happens later this year when the FDIC goes broke? If you are not preparing for that eventuality, you should be. You think 2009 is looking bad. In 2010, you will look back to now as the good times. Prepare yourself now by getting involved in a local currency, and encouraging your state to set up its own public bank. IF we can get the alternative infrastructure in place before the collapse, collateral damage can be limited. Otherwise, if the collapse happens with no contingency plans in place, the forecast is dark, very dark.
http://news.yahoo.com/s/afp/20090305/bs_afp/financeeconomyusbankinggovernment
The US government is warning banks that its deposit insurance fund could go broke this year as bank failures mount.
The head of the Federal Deposit Insurance Corporation, Sheila Bair, in a letter to bank chief executives dated March 2, defended the FDIC's plan to raise fees on banks and assess an emergency fee to shore up the fund and maintain investor confidence.
Bair acknowledged the new fees, announced Friday, would put additional pressure on banks at time of financial crisis and a deepening recession, but insisted they were critical to keep the insurance fund solvent and protect.
"Without these assessments, the deposit insurance fund could become insolvent this year," Bair wrote.
The FDIC chief said in the letter that the rapidly deteriorating economic conditions raised the prospects of "a large number" of bank failures through 2010.
"Without substantial amounts of additional assessment revenue in the near future, current projections indicate that the fund balance will approach zero or even become negative," she wrote.
The FDIC last Friday announced it would impose a temporary emergency fee on lenders and raise its regular assessments to shore up the rapidly depleting deposit insurance fund that insures individual customer deposits up to 250,000 dollars.
A week ago the FDIC reported a sharp depletion of the deposit insurance fund in the fourth quarter due to actual and anticipated bank failures, to 19 billion dollars from 34.6 billion in the third quarter.
The FDIC said it had set aside an additional 22 billion dollars for estimated losses on failures anticipated in 2009.
So what happens later this year when the FDIC goes broke? If you are not preparing for that eventuality, you should be. You think 2009 is looking bad. In 2010, you will look back to now as the good times. Prepare yourself now by getting involved in a local currency, and encouraging your state to set up its own public bank. IF we can get the alternative infrastructure in place before the collapse, collateral damage can be limited. Otherwise, if the collapse happens with no contingency plans in place, the forecast is dark, very dark.
http://news.yahoo.com/s/afp/20090305/bs_afp/financeeconomyusbankinggovernment
The US government is warning banks that its deposit insurance fund could go broke this year as bank failures mount.
The head of the Federal Deposit Insurance Corporation, Sheila Bair, in a letter to bank chief executives dated March 2, defended the FDIC's plan to raise fees on banks and assess an emergency fee to shore up the fund and maintain investor confidence.
Bair acknowledged the new fees, announced Friday, would put additional pressure on banks at time of financial crisis and a deepening recession, but insisted they were critical to keep the insurance fund solvent and protect.
"Without these assessments, the deposit insurance fund could become insolvent this year," Bair wrote.
The FDIC chief said in the letter that the rapidly deteriorating economic conditions raised the prospects of "a large number" of bank failures through 2010.
"Without substantial amounts of additional assessment revenue in the near future, current projections indicate that the fund balance will approach zero or even become negative," she wrote.
The FDIC last Friday announced it would impose a temporary emergency fee on lenders and raise its regular assessments to shore up the rapidly depleting deposit insurance fund that insures individual customer deposits up to 250,000 dollars.
A week ago the FDIC reported a sharp depletion of the deposit insurance fund in the fourth quarter due to actual and anticipated bank failures, to 19 billion dollars from 34.6 billion in the third quarter.
The FDIC said it had set aside an additional 22 billion dollars for estimated losses on failures anticipated in 2009.
Mortgage Meltdown - 1 in 8 Now Behind
The home value crisis is spreading nationwide, no longer contained to the big four bubble states (CA, AZ, NV, FL). Nor is it contained to sub-prime. The mortgage crisis is spreading throughout the nation, and to prime borrowers.
This is yet another sign of the deflationary death spiral our economy has entered. On debt jubilee can end the destructive spiral. When will our leaders begin to discuss it? Not until we force them to.
http://news.yahoo.com/s/ap/20090305/ap_on_bi_ge/states_foreclosures
A record 5.4 million American homeowners with a mortgage of any kind, or nearly 12 percent, were at least one month late or in foreclosure at the end of last year, the Mortgage Bankers Association reported. That's up from 10 percent at the end of the third quarter, and up from 8 percent at the end of 2007.
48% percent of the nation's homeowners who have a subprime, adjustable-rate mortgage are behind on their payments or in foreclosure,
The rate for homeowners with all mortgage types hit a new record.
The foreclosure crisis now is being fueled by a spike in defaults in states like Louisiana, New York, Georgia and Texas, where the economies are rapidly deteriorating and thousands are losing their jobs. Prime and subprime fixed-rate loans saw sharp increases in the fourth quarter, a sign that the problem is now the economy. "We're seeing increases in fixed-rate categories and that's where the problems are coming from," said Jay Brinkmann, the group's chief economist. "The foreclosure picture is more clearly driven by the jobs market."
That trend highlights one of the biggest challenges confronting the Obama administration's mortgage relief plan launched this week. While the $75 billion plan could help change the loan terms or refinance up to 9 million homeowners, unemployed borrowers will have a hard time qualifying. On Thursday, the Labor Department said new unemployment claims last week totaled 639,000, lower than expected, but still at elevated levels. Factory orders also slipped for the sixth month in a row in January, the Commerce Department reported. "There can be no doubt that employers continue to shed labor at a frightening pace, with no end in sight," Ian Shepherdson, chief U.S. economist at High Frequency Economics, wrote in a client note Wednesday. The key is what kind of workers are losing their jobs, Brinkmann said. Unemployment for people with college degrees, some college education or technical training — those most likely to own homes and have prime fixed-rate loans — has nearly doubled over the past six months. In New York, for example, where the financial industry is handing out pink slips like ticker tape, homeowners who once had good credit are defaulting at an increasing clip.
The only bright spot in the report is the devastation wrought by subprime ARMs appears to be waning. Their 30-day delinquency rate continues to fall and is at the lowest point since the first quarter of 2007. That offers little reassurance to Florida, where 60 percent of homeowners who have a subprime ARM are at least one payment behind and one in five of all mortgage holders aren't current.
This is yet another sign of the deflationary death spiral our economy has entered. On debt jubilee can end the destructive spiral. When will our leaders begin to discuss it? Not until we force them to.
http://news.yahoo.com/s/ap/20090305/ap_on_bi_ge/states_foreclosures
A record 5.4 million American homeowners with a mortgage of any kind, or nearly 12 percent, were at least one month late or in foreclosure at the end of last year, the Mortgage Bankers Association reported. That's up from 10 percent at the end of the third quarter, and up from 8 percent at the end of 2007.
48% percent of the nation's homeowners who have a subprime, adjustable-rate mortgage are behind on their payments or in foreclosure,
The rate for homeowners with all mortgage types hit a new record.
The foreclosure crisis now is being fueled by a spike in defaults in states like Louisiana, New York, Georgia and Texas, where the economies are rapidly deteriorating and thousands are losing their jobs. Prime and subprime fixed-rate loans saw sharp increases in the fourth quarter, a sign that the problem is now the economy. "We're seeing increases in fixed-rate categories and that's where the problems are coming from," said Jay Brinkmann, the group's chief economist. "The foreclosure picture is more clearly driven by the jobs market."
That trend highlights one of the biggest challenges confronting the Obama administration's mortgage relief plan launched this week. While the $75 billion plan could help change the loan terms or refinance up to 9 million homeowners, unemployed borrowers will have a hard time qualifying. On Thursday, the Labor Department said new unemployment claims last week totaled 639,000, lower than expected, but still at elevated levels. Factory orders also slipped for the sixth month in a row in January, the Commerce Department reported. "There can be no doubt that employers continue to shed labor at a frightening pace, with no end in sight," Ian Shepherdson, chief U.S. economist at High Frequency Economics, wrote in a client note Wednesday. The key is what kind of workers are losing their jobs, Brinkmann said. Unemployment for people with college degrees, some college education or technical training — those most likely to own homes and have prime fixed-rate loans — has nearly doubled over the past six months. In New York, for example, where the financial industry is handing out pink slips like ticker tape, homeowners who once had good credit are defaulting at an increasing clip.
The only bright spot in the report is the devastation wrought by subprime ARMs appears to be waning. Their 30-day delinquency rate continues to fall and is at the lowest point since the first quarter of 2007. That offers little reassurance to Florida, where 60 percent of homeowners who have a subprime ARM are at least one payment behind and one in five of all mortgage holders aren't current.
Wednesday, March 4, 2009
Urban Sharecropping
Many people now foresee the need to acquire personal food security, but do not have an adequate space to garden. Other people are interested in the economic advantages of being a food producer in the upcoming times of food shortages, but again, are stuck in the city with no real land to begin growing on.
Sharecropping is a potential solution to the problem of lack of personal wealth, capital, or land. In short, you don't have to own your own farm, or even your own equipment, to become a farmer. Sharecropping means that you rent someone else's land to produce the food on. The rent can be a cash payment, or, more traditionally, cutting the land owner in on a share of the profit when the harvest is sold. Or you can simply offer them a certain amount of the food harvested.
Usually, the percent you pay to the landowner depends of how much you bring to the table versus how much they are supplying, in terms of equipment and supplies. Sharecropping as a widespread economic feature of American pretty much died off in the first half of the 20th century, so there is no comparative market today. In short, you will just have to negotiate with whoever you can, and come to any agreement that seems reasonable.
For example, in the ritzy part of your town, there are well-off people living on large plots of land, who are growing nothing but grass. You could approach them and ask if you could grow food on their property. They might be willing to do so, merely for the promise of the fresh organic vegetables you will grow. If they are enthusiastic about it, they might even cover the cost of a tiller, or let you use their tools, or cover the cost of your seeds or fertilizer, or whatever. You can easily imagine how this would work, and the possible benefits for all parties. Good luck, and let me know what systems you work out.
In short, just because you are young and poor does not mean you cannot join in the urban food revolution. Becoming a sharecropper could also be a wise choice if your are otherwise unemployed. Instead of sitting around all day doing nothing, get out and get some economically productive work done. It will also get you out in the community, meeting people, and establishing networks of support, which might prove vital in tough times, or an emergency.
Sharecropping is a potential solution to the problem of lack of personal wealth, capital, or land. In short, you don't have to own your own farm, or even your own equipment, to become a farmer. Sharecropping means that you rent someone else's land to produce the food on. The rent can be a cash payment, or, more traditionally, cutting the land owner in on a share of the profit when the harvest is sold. Or you can simply offer them a certain amount of the food harvested.
Usually, the percent you pay to the landowner depends of how much you bring to the table versus how much they are supplying, in terms of equipment and supplies. Sharecropping as a widespread economic feature of American pretty much died off in the first half of the 20th century, so there is no comparative market today. In short, you will just have to negotiate with whoever you can, and come to any agreement that seems reasonable.
For example, in the ritzy part of your town, there are well-off people living on large plots of land, who are growing nothing but grass. You could approach them and ask if you could grow food on their property. They might be willing to do so, merely for the promise of the fresh organic vegetables you will grow. If they are enthusiastic about it, they might even cover the cost of a tiller, or let you use their tools, or cover the cost of your seeds or fertilizer, or whatever. You can easily imagine how this would work, and the possible benefits for all parties. Good luck, and let me know what systems you work out.
In short, just because you are young and poor does not mean you cannot join in the urban food revolution. Becoming a sharecropper could also be a wise choice if your are otherwise unemployed. Instead of sitting around all day doing nothing, get out and get some economically productive work done. It will also get you out in the community, meeting people, and establishing networks of support, which might prove vital in tough times, or an emergency.
A Rise in Bartering
An upswing in the practice of borrowing has already been noticed. Craigslist was specifically mentioned as the enabler for this new cashless economy. As our monetary troubles kick into high gear, the efficiency of the bartering economy will need to improve to take up the slack.
http://www.baltimoresun.com/business/bal-bartering0302,0,2106316.story
http://www.baltimoresun.com/business/bal-bartering0302,0,2106316.story
Tuesday, March 3, 2009
How Debt Destroys Commerce: case study San Diego
Classic real life example of how a high-debt deflation wipes out the economy. Unfortunately, the reporter in the newspaper article does not grasp the root cause. Like everyone else, it is just assumed to be a force of nature, unstoppable.
In fact, if there was less debt at the root level, rents could be reduced, allowing these businesses to stay open. Instead, retailers are forced out of business by the land owners, who are struggling to maintain payments on their notes. It is entirely predictable, and easily solved: lower the debt on the underlying asset.
A mortgage Jubilee would allow marginal businesses to stay afloat instead of liquidating, which puts further pressure on the remaining retailers and real-estate owners, not to mention undermining the health of the overall economy.
It's the perplexing problem afflicting many shopping malls, strip malls and retail complexes across the United States: Owners of commercial properties are trying to preserve cash flow to maintain their mortgage obligations and make a profit. Retail tenants, hard-hit by the recession, are asking for rent reductions and in some cases are shuttering their businesses and leaving empty storefronts.
Merchants at the eclectic Seaport Village shopping complex are seeing something they've rarely seen amid the T-shirt shops and jewelry stores: empty storefronts and liquidation signs. There's the shop near the waterfront that once housed The Cabbage Tree. Its owners recently took the “midnight run” – emptying the gift store in the wee hours and disappearing, leaving landlord Terramar Retail Centers to try to collect on the lease obligation. Across the sidewalk, there's the “Closed for Inventory” sign hanging in the window of Whitt/Krauss Objects of Fine Art. The art gallery filed for Chapter 7 bankruptcy in January, owing creditors for everything from a $5,640 catering bill to about $250,000 in projected 2009 rent and maintenance fees. And a few steps away, the Big Dogs sportswear shop is holding a liquidation sale as the Santa Barbara chain prepares to close all of its 71 stores.
“In almost 25 years in business, I've not seen it this bad,” said Vince Brown, 71, owner of the Crystal Palace, a high-end gift shop at Seaport Village that has been in business since 1985. “Sales are so bad that I have to cover the rent out of my own pocket, but I don't have those kind of resources.” Like many retail tenants, Brown gave a personal guarantee on his lease and therefore is on the hook to pay the rent whether his shop remains in business or not. The only way to get out of the lease obligation, other than a settlement with the landlord, is to file for personal bankruptcy. Brown, who signed a five-year renewal on his lease in 2005 – at the height of the real estate boom, when landlords could command a premium – said he recently asked Terramar to reduce the $6,835 rent on his 980-square-foot shop. In addition to the rent, Brown also pays $2,900 in monthly fees to Terramar, which include so-called common area maintenance fees, money into the marketing pool and real estate taxes.
“They said, 'We don't do reductions; if we give you a rent reduction, it reduces our income,'” Brown said. “I said I understand – but how many empty stores do you want?”
Many analysts predict that retail bankruptcies and shopping center vacancies will accelerate sharply this year if the economy continues to deteriorate and consumers remain on the spending sideline. And as stores close, landlords will have trouble repaying loans. While no one knows the ultimate price tag, as much as $1 trillion worth of U.S. commercial property could undergo foreclosure if the economy and the credit markets don't improve, according to Stanley Tate, president of Miami-based Tate Enterprises and an adviser to the Federal Reserve.
The real estate developer said landlords and tenants need to be negotiating now to work out new lease terms or other financial breaks that will allow stores to survive, and allow landlords to maintain some cash flow on properties that might otherwise be vacant. “It's going to get worse, not better, for at least another year, and the smart landlord will do their best to work with tenants to see what they can do to keep them in business,” said Tate, who a few months ago gave all his tenants in several commercial properties a 15 percent decrease in rent.
In some cases, tenants who had weak businesses to begin with or have products particularly hard-hit by the recession can't be salvaged, Tate said. And some landlords, particularly those who bought or developed properties in the boom years, have little wiggle room to renegotiate lease terms because of their own debt, he said.
Whether some way to provide rent or other financial relief is devised, it will come too late for art gallery owner Jack Krauss. Krauss said he approached Terramar in November about reducing his rent and fees to $15,000, with an upside for the landlord if sales improved. Krauss said he was told the company would take it under consideration, but he never got a formal response. “A rent reduction would have made a big difference; it would have given us a fighting chance,” said Krauss, 72, whose business filed for Chapter 7 bankruptcy. “I was fighting to the end, and they (Terramar) were aware of it.” “This took all my reserves, my savings and the money I'd put away for retirement, and I'll probably have to sell my home,” Krauss said. “I'll have to find a good doorway to live in.”
http://www3.signonsandiego.com/stories/2009/mar/01/lz1b1seaport22537-sink-or-swim/?zIndex=59932
In fact, if there was less debt at the root level, rents could be reduced, allowing these businesses to stay open. Instead, retailers are forced out of business by the land owners, who are struggling to maintain payments on their notes. It is entirely predictable, and easily solved: lower the debt on the underlying asset.
A mortgage Jubilee would allow marginal businesses to stay afloat instead of liquidating, which puts further pressure on the remaining retailers and real-estate owners, not to mention undermining the health of the overall economy.
It's the perplexing problem afflicting many shopping malls, strip malls and retail complexes across the United States: Owners of commercial properties are trying to preserve cash flow to maintain their mortgage obligations and make a profit. Retail tenants, hard-hit by the recession, are asking for rent reductions and in some cases are shuttering their businesses and leaving empty storefronts.
Merchants at the eclectic Seaport Village shopping complex are seeing something they've rarely seen amid the T-shirt shops and jewelry stores: empty storefronts and liquidation signs. There's the shop near the waterfront that once housed The Cabbage Tree. Its owners recently took the “midnight run” – emptying the gift store in the wee hours and disappearing, leaving landlord Terramar Retail Centers to try to collect on the lease obligation. Across the sidewalk, there's the “Closed for Inventory” sign hanging in the window of Whitt/Krauss Objects of Fine Art. The art gallery filed for Chapter 7 bankruptcy in January, owing creditors for everything from a $5,640 catering bill to about $250,000 in projected 2009 rent and maintenance fees. And a few steps away, the Big Dogs sportswear shop is holding a liquidation sale as the Santa Barbara chain prepares to close all of its 71 stores.
“In almost 25 years in business, I've not seen it this bad,” said Vince Brown, 71, owner of the Crystal Palace, a high-end gift shop at Seaport Village that has been in business since 1985. “Sales are so bad that I have to cover the rent out of my own pocket, but I don't have those kind of resources.” Like many retail tenants, Brown gave a personal guarantee on his lease and therefore is on the hook to pay the rent whether his shop remains in business or not. The only way to get out of the lease obligation, other than a settlement with the landlord, is to file for personal bankruptcy. Brown, who signed a five-year renewal on his lease in 2005 – at the height of the real estate boom, when landlords could command a premium – said he recently asked Terramar to reduce the $6,835 rent on his 980-square-foot shop. In addition to the rent, Brown also pays $2,900 in monthly fees to Terramar, which include so-called common area maintenance fees, money into the marketing pool and real estate taxes.
“They said, 'We don't do reductions; if we give you a rent reduction, it reduces our income,'” Brown said. “I said I understand – but how many empty stores do you want?”
Many analysts predict that retail bankruptcies and shopping center vacancies will accelerate sharply this year if the economy continues to deteriorate and consumers remain on the spending sideline. And as stores close, landlords will have trouble repaying loans. While no one knows the ultimate price tag, as much as $1 trillion worth of U.S. commercial property could undergo foreclosure if the economy and the credit markets don't improve, according to Stanley Tate, president of Miami-based Tate Enterprises and an adviser to the Federal Reserve.
The real estate developer said landlords and tenants need to be negotiating now to work out new lease terms or other financial breaks that will allow stores to survive, and allow landlords to maintain some cash flow on properties that might otherwise be vacant. “It's going to get worse, not better, for at least another year, and the smart landlord will do their best to work with tenants to see what they can do to keep them in business,” said Tate, who a few months ago gave all his tenants in several commercial properties a 15 percent decrease in rent.
In some cases, tenants who had weak businesses to begin with or have products particularly hard-hit by the recession can't be salvaged, Tate said. And some landlords, particularly those who bought or developed properties in the boom years, have little wiggle room to renegotiate lease terms because of their own debt, he said.
Whether some way to provide rent or other financial relief is devised, it will come too late for art gallery owner Jack Krauss. Krauss said he approached Terramar in November about reducing his rent and fees to $15,000, with an upside for the landlord if sales improved. Krauss said he was told the company would take it under consideration, but he never got a formal response. “A rent reduction would have made a big difference; it would have given us a fighting chance,” said Krauss, 72, whose business filed for Chapter 7 bankruptcy. “I was fighting to the end, and they (Terramar) were aware of it.” “This took all my reserves, my savings and the money I'd put away for retirement, and I'll probably have to sell my home,” Krauss said. “I'll have to find a good doorway to live in.”
http://www3.signonsandiego.com/stories/2009/mar/01/lz1b1seaport22537-sink-or-swim/?zIndex=59932
Debt Deflation Ravages Europe
It is happening just as industrial output collapses in the eurozone's core states. Germany's economy contracted at 8.4pc annualised in the fourth quarter. ECB president Jean-Claude Trichet said on Monday that "a process of negative feedback" has set in where the banks and the real economy are pulling each other down in a self-reinforcing spiral. Eurozone credit is contracting. Banks are rationing credit as deleveraging gathers pace.
Rob Carnell, global strategist at ING, said the ECB has been painfully slow to acknowledge the global deflation tsunami sweeping across Europe.
"It seems divorced from reality. It is clearly nonsense to talk about inflation now: it has been negative on average for six months. The eurozone purchasing managers' index has fallen twice as fast as in the US, so the ECB should be acting even faster than the Fed," he said.
Mr Trichet said the ECB has increased its balance sheet by €600bn (£525bn) since the Lehman collapse in September. The bank is providing "unlimited liquidity" in exchange for a wide range of collateral, including mortgage bonds issued for the sole purpose of extracting ECB funds.
But the ECB's leading voices have adamantly refused to contemplate going to the next stage: buying bonds and other assets with "printed money". They see that as the Primrose path to hell. This week the tone has abruptly changed, suggesting that a majority of the 16 national bank governors on the ECB council are having second thoughts.
The apparent ring-leader is Cypriot member Anastasios Orphanides, a former Fed official and a world authority on deflation traps. He said on Monday that the ECB may have to go beyond "zero-bound" rates and revealed that an "internal discussion" was under way.
Italy's Mario Draghi is in the "activist-easing" camp. "The experience in the US in the 1930s and Japan in the 1990s suggests that it is necessary to fight, in the early phases of the crisis, the tendency for real interest rates to rise," he said.
Finland's Erkki Liikanen is of the same opinion. "We are facing the worst financial crisis in our time. It is important not to exclude, ex ante, any measures." [Does that include the option of Jubilee???]
http://www.telegraph.co.uk/finance/economics/4788962/ECB-faces-mutiny-from-national-bank-governors-as-recession-deepens.html
Rob Carnell, global strategist at ING, said the ECB has been painfully slow to acknowledge the global deflation tsunami sweeping across Europe.
"It seems divorced from reality. It is clearly nonsense to talk about inflation now: it has been negative on average for six months. The eurozone purchasing managers' index has fallen twice as fast as in the US, so the ECB should be acting even faster than the Fed," he said.
Mr Trichet said the ECB has increased its balance sheet by €600bn (£525bn) since the Lehman collapse in September. The bank is providing "unlimited liquidity" in exchange for a wide range of collateral, including mortgage bonds issued for the sole purpose of extracting ECB funds.
But the ECB's leading voices have adamantly refused to contemplate going to the next stage: buying bonds and other assets with "printed money". They see that as the Primrose path to hell. This week the tone has abruptly changed, suggesting that a majority of the 16 national bank governors on the ECB council are having second thoughts.
The apparent ring-leader is Cypriot member Anastasios Orphanides, a former Fed official and a world authority on deflation traps. He said on Monday that the ECB may have to go beyond "zero-bound" rates and revealed that an "internal discussion" was under way.
Italy's Mario Draghi is in the "activist-easing" camp. "The experience in the US in the 1930s and Japan in the 1990s suggests that it is necessary to fight, in the early phases of the crisis, the tendency for real interest rates to rise," he said.
Finland's Erkki Liikanen is of the same opinion. "We are facing the worst financial crisis in our time. It is important not to exclude, ex ante, any measures." [Does that include the option of Jubilee???]
http://www.telegraph.co.uk/finance/economics/4788962/ECB-faces-mutiny-from-national-bank-governors-as-recession-deepens.html
Sunday, March 1, 2009
A Third of Baby Boomers Underwater on Mortgages
Aside from all the specific meta-economic problems that are at the root of our current Depression, there is a profound philosophical one: shift responsibility. Specifically, the idea that you can shift responsibility onto future generations.
Savings, for retirement living and health care, are a basic necessity of life, yet our government has promised that it will take care of it. The bigger government has gotten, the more confident people feel in the promises of government, and the less likely, and less able, they became to save on their own.
But what does it mean to rely on government for retirement and health care, especially when financed by debt? What that really means is that they will impose it on the people to come, the future tax-paying citizens.
But what if the future people don't want to pay it?
It is morally wrong to sell your children into slavery. Yet by building up all this debt, and all these unfunded mandates (like social security) that is exactly what they have done. They have promised the wealth and labor of future generations for their own benefits today. It is outrageous, when you realize what they are really doing.
I got news for ya. The future generation is here, now, and we aren't going to settle for it.
The baby boom generation, which had so much to do with the expansion of the liberal socialist state, is now seeing their lifetime accumulated capital disappear, like a puff of smoke. Their investments disintegrating, now, even their home values negative. And their main response is to take out more debt, i.e., pile it up higher on the back of their own offspring.
With almost a third of them now underwater on their mortgages, maybe they will be more open to thinking about some economics truths, which their socialist politics have been in denial of for so long. Let's not forget, these numbers are going to get a lot worse in the coming year.
The unthinkable of yesteryear is the inevitable of today. More and more shall welcome the good news of Jubilee. Just like in religion, only those who hit rock bottom, who have been fully convicted of their sins, are open to the best of all good news. And the first step towards recovery is always the same: take personal responsibility.
http://money.cnn.com/2009/02/25/real_estate/boomer_wealth_evaporating/index.htm
Savings, for retirement living and health care, are a basic necessity of life, yet our government has promised that it will take care of it. The bigger government has gotten, the more confident people feel in the promises of government, and the less likely, and less able, they became to save on their own.
But what does it mean to rely on government for retirement and health care, especially when financed by debt? What that really means is that they will impose it on the people to come, the future tax-paying citizens.
But what if the future people don't want to pay it?
It is morally wrong to sell your children into slavery. Yet by building up all this debt, and all these unfunded mandates (like social security) that is exactly what they have done. They have promised the wealth and labor of future generations for their own benefits today. It is outrageous, when you realize what they are really doing.
I got news for ya. The future generation is here, now, and we aren't going to settle for it.
The baby boom generation, which had so much to do with the expansion of the liberal socialist state, is now seeing their lifetime accumulated capital disappear, like a puff of smoke. Their investments disintegrating, now, even their home values negative. And their main response is to take out more debt, i.e., pile it up higher on the back of their own offspring.
With almost a third of them now underwater on their mortgages, maybe they will be more open to thinking about some economics truths, which their socialist politics have been in denial of for so long. Let's not forget, these numbers are going to get a lot worse in the coming year.
The unthinkable of yesteryear is the inevitable of today. More and more shall welcome the good news of Jubilee. Just like in religion, only those who hit rock bottom, who have been fully convicted of their sins, are open to the best of all good news. And the first step towards recovery is always the same: take personal responsibility.
http://money.cnn.com/2009/02/25/real_estate/boomer_wealth_evaporating/index.htm
Saturday, February 28, 2009
Niall Ferguson calls for Debt Restructuring
The harsh reality that is being repressed is this: the Western world is suffering a crisis of excessive indebtedness. Many governments are too highly leveraged, as are many corporations. More important, households are groaning under unprecedented debt burdens.
Average household sector debt has reached 141per cent of disposable income in the US, 156per cent in Australia and 177 per cent in Britain. Worst of all are the banks in the US and Europe. Some of the best-known names in American and European finance have balance sheets 40, 60 or even 100 times the size of their capital. Average US investment bank leverage was above 25 to 1 at the end of 2008. Eurozone bank leverage was more than 30 to 1. British bank balance sheets are equal to a staggering 440 per cent of gross domestic product.
Average household sector debt has reached 141per cent of disposable income in the US, 156per cent in Australia and 177 per cent in Britain. Worst of all are the banks in the US and Europe. Some of the best-known names in American and European finance have balance sheets 40, 60 or even 100 times the size of their capital. Average US investment bank leverage was above 25 to 1 at the end of 2008. Eurozone bank leverage was more than 30 to 1. British bank balance sheets are equal to a staggering 440 per cent of gross domestic product.
The delusion that a crisis of excess debt can be solved by creating more debt is at the heart of the Great Repression. Yet that is precisely what most governments propose to do.
With the economy contracting at a rate (excluding inventory accumulation) of minus 5 per cent, we are on the eve of a public debt explosion that the CBO's forecast - $US4 trillion over the next 10 years, but peaking at 54 per cent of GDP - surely understates. The fact that so many other countries are adopting comparable measures means a flood of new issuance is about to hit national and international bond markets.
There is a better way to go, but it is in the opposite direction. The aim must be not to increase debt but to reduce it. In past debt crises - which usually affected emerging market sovereign debt - this tended to happen in one of two ways. If, say, Argentina had an excessively large domestic debt, denominated in Argentine currency, it could be inflated away. If it was an external debt, then the government simply defaulted on payments and forced the creditors to accept a rescheduling of debt and principal payments.
Today, Argentina is us. Former investment banks and German universal banks are Argentina. American households are Argentina. But it will not be so easy for us to inflate away our debts. The deflationary pressures unleashed by the financial crisis are too strong (consumer prices in the US have been falling for three consecutive months; the annualised rate of decline for the last quarter of 2008 was minus 12.7 per cent.)
The solution to the debt crisis is not more debt but less debt. Two things must happen. First, banks that are de facto insolvent need to be restructured, a word that is preferable to the old-fashioned nationalisation. Existing shareholders will have to face that they have lost their money. Too bad; they should have kept a more vigilant eye on the people running their banks. Government will take control in return for a substantial recapitalisation after losses h