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.

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!!!!

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."

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!

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.

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.

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.

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.


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.

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.

Wednesday, October 7, 2009

The Dangers and Advantages of Credit Creation

Excellent article by Peter Warburton over at Gold Eagle,, 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.

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 ( 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:

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:

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:

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’s-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.

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.

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.

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!

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.

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 ( 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.

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!

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.

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.

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.

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.

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.

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."