Jubilee Year -- Cancel Our Debt

International Gold Standard Era begins (again) - India-Iran gold for oil trade agreement

2012-01-24T14:32:00.000-08:00

India (and reportedly soon, China) will be buying Iranian oil with gold. I would expect Russian to join them as well. This truly marks the beginning of the new international gold standard.

Of course, that is assuming Iran isn't destroyed by US-Anglo-Israeli weapons in the next 6 months....

It is interesting to note that the latest EU sanctions on Iran prohibit EU contries from selling gold or other precious metals to Iran, either. In other words, it specifically closes down the possibility of trading on the gold standard with Iran to avoid the central bank clearing prohibition. (see: http://www.presstv.ir/detail/223260.html)

As reported on the PressTV website:

'India to buy Iran oil in gold not dollars'

India has agreed to pay the price of crude oil it imports from Iran in gold, which makes it the first country to drop the US dollar for purchasing the Iranian oil.

According to a report published by DEBKAfile news website, unnamed sources have stressed that China is also expected to follow suit.

India and China take about one million barrels per day (bpd), or 40 percent of Iran's total exports of 2.5 million bpd and both of them have huge reserves of gold.

The report added that by trading in gold, New Delhi and Beijing enable Tehran to bypass the upcoming freeze on its Central Bank's assets and the oil embargo which the European Union's foreign ministers agreed to impose on Monday, January 23. The EU currently buys around 20 percent of Iran's oil exports.

On the other hand, experts say the vast sums involved in these transactions are expected to boost the price of gold and depress the value of the dollar on world markets.

“An Indian delegation visited Tehran last week to discuss payment options in view of the new sanctions. The two sides were reported to have agreed that payment for the oil purchased would be partly in yen and partly in rupees. The switch to gold was kept [in the] dark,” the report stated.

India is Iran's second largest customer after China, and purchases around USD 12-billion-a-year worth of Iranian crude, or about 12 percent of its consumption. Delhi is to execute its transactions, the report said, through two state-owned banks: the Calcutta-based UCO Bank, whose board of directors is made up of the Indian government, the Reserve Bank of India representatives, and Halk Bankasi (Peoples Bank) -- Turkey's seventh largest bank which is owned by the government.

http://www.presstv.ir/detail/222857.html

Non-USD trade block grows - Iran with Japan, China, Russia, India

2012-01-09T09:55:00.000-08:00

The non-USD/FRN trade block continues to grow and expland. We are used to seeing Russia and Iran linked, sometimes with China. But now the non-dollar group includes Japan and India as well, and, you know, I thought they were allies.

Just read that list, wow. China, Japan (all of east Asia really), India, Russia, Iran.

All avoiding the dollar.

For now, they are expanding bilateral and trilateral trade swaps, but it is only a matter of time before a common currency unites them. Given their cultures of corruption and non-transparency, such a common tradting currency will almost certainly be based upon a gold standard.

news reports:
http://english.farsnews.com/newstext.php?nn=9007275648
Iran, Russia Replace Dollar with National Currencies in Trade Exchanges

"During the last two years, Iran has been replacing dollar with other currencies in its trade with the outside world. Iran has replaced dollar in its oil trade with India, China and Japan."

Steve Keen calls for Jubilee

2012-01-03T08:49:00.001-08:00

Amazingly, he proposes my Jubilee Year solution of a People's Bailout. He changes only one aspect: he would give people without any debt a cash stimulus.

Read it, within his Manifesto http://www.debtdeflation.com/blogs/2012/01/03/the-debtwatch-manifesto/

Bravo to you, Steve!

Dollar Replacement Project takes huge step forward - Japan chooses China

2011-12-27T09:01:00.000-08:00

Huge news this week: Japan and China announced direct currency swaps, completely bypassing the USD/FRN. Additionally, Japan agreed to buy and sell Chinese bonds, essentially monetizing the Chinese government debt on the international market. (See summary article here http://www.businessweek.com/news/2011-12-27/japan-turns-activist-on-reserves-as-global-economy-rank-slips.html)

Obviously, this is WAAAY bigger than Chinese-Russian agreements. Japan's economy is huge and powerful (what, number 3 in the world, I think), and they used to be considered a staunch American ally.

Effects of Dollar Replacement

When the USD is no longer used as a reserve trade currency:

--all those "international dollars" will come back to the U.S. shores, unleashing a wicked huge inflation.
-- Additionally, foreign manufacturers will no longer need to dump goods on the US market to earn trade dollars, meaning things will no longer be sold here as cheaply (even ignoring the effects of the inflation).
--Finally, the US will have to balance its budget(s), since foreigners will no longer need to recycle their trade dollars by purchasing bonds

Needless to say, it is difficult to calculate the effects on the US economy if we have to balance our trade account and balance our federal budget. Then throw in the difficulties of fighting a huge currency inflation, and paying off a huge debt.... yikes

Initiating a currency devaluation seems like a good solution, but don't count on our moneyed powers to do that. As always, Jubilee remains the best solution, but the Debt Masters would rather stay on top, even if that means riding everyone else into the ground...

Using rich foreigners to prop up housing costs

2011-11-28T09:35:00.000-08:00

It boggles the mind how much power the "real estate industry" has over media and government. Congress is considering passing a law that would attempt to drive up housing prices by luring foreign purchasers into the market! (see: http://www.eastvalleytribune.com/arizona/article_ff5515c2-17ba-11e1-96e1-001cc4c002e0.html)

The one-sidedness of the news articles on real estate topics is disturbing. The publicity given the so-called real estate crisis is the biggest example of this media bias. In reality, of course, a decrease in housing costs is anything but a "crisis", it is a blessing for the people and the economy!

The only ones who benefit from high land prices are members of the original Rentier class, the economic parasites known as land owners, as well as all of their parasitic cronies, including especially the used-house salesmen (who euphemistically refer to themselves as real estate agents).

Low land prices, and fewer restrictions on land use, are the basic planks of a sensible land policy that benefits society as a whole.

The Reformed Capitalist policy regarding land is three-fold:

-- eliminate financing of land purchases,
-- eliminate absentee ownership of land, and
-- eliminate arbitrary land-use restrictions (especially separating commercial and residential activities)

The end-goal of these policies is to create greater prosperity and freedom for all, by eliminating the economic parasitism surrounding land ownership and control.

Monetary reform and alternatives - join the Lawful Bank movement

2011-11-14T09:13:00.000-08:00

The Lawful Bank is an application of the concept of "worker-owned businesses" to the financial world.

Worker-owned businesses are the wave of the future, because by eliminating parasites from the business process (the "passive owners"), businesses can operate at lower costs. Operating at a lower cost is the bottom line in the survival of the fittest economic world, and thus, over time, worker-owned businesses will outperform and eliminate the parasitic passive-investor businesses. In their own words:

"By signing up to The lawful Bank you will (in due course) avail yourself of the benefits of membership of this unique monetary and banking system, the essence of which is to distribute to the people the grotesque profits being skimmed by greedy bankers from the nation’s economy. "

"There are no investors to satisfy and no high flying executives on million pound/dollar salaries or city slickers on astronomical bonuses. Our system plays no part in casino banking. TAMS is both safe and cost effective and serves the interest of the sovereign aspirations of individuals."

"TAMS is a mirror image of the existing monetary system – it is tried and tested... but with a crucial difference in that there is an entirely different approach as to where the profits are delivered. In the existing system, the profits go to investors, and the people running the bank - with our system the profits are distributed to our members."

One of the fascinating innovations of the Lawful Bank is the way it leverages the power of fractional reserve banking for the INDIVIDUAL:

"A positive credit system – for every £1 of cash deposited, each member creates £10 credit in their account. This credit (created by the system) on the back of the cash deposited is the property of the member and thus not a debt to the member. This will provided streams of credit to the system – and not debt."

Check out the Lawful Bank webpage at http://lawfulbank.com/HomePage

Salon calls for Jubilee Year

2011-11-02T09:53:00.000-07:00

The first element in Salon's proposed policy agenda (called a New Declaration of Independence, here http://www.salon.com/2011/10/31/a_new_declaration_of_independence/singleton/) is a Jubilee Year of debt forgiveness, especially focused on student loan debt. Couldn't agree more.

The biggest problem with Salon's proposal is the way it gets sidetracked with a Leftist cultural agenda, especially its calls for "Takle Climate Change", "End the Drug War" and "Full Equality for the Queer Community".

In order for massive and structural systemic change to progress, a broad-base coalition will need to be built, based on the principles of economic Populism. Populists can form a majority coalition against the elite, IF they leave "cultural" issues off the table.

Throwing in "Leftist" cultural issues that have nothing to do with economic reform are only going to ALIENATE conservative Populists, and keep the movement from growing.

Cris Sheridan calls for the Jubilee Cycle

2011-11-01T13:08:00.000-07:00

Writing in Financial Sense, Mr. Sheridan points out the end result of the massive overhang of debt in America: "The Inevitable Jubilee" (http://www.financialsense.com/node/6783).

It is amusing to read him quote the CEO of Goldman Sachs, Lloyd Blankfein, claiming they are doing "God's work" by putting everyone in debt: “We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It’s a virtuous cycle.”

The truth about the "virtuous cycle"

In fact, bank lending has nothing to do with a virtuous cycle. The expansion of credit into any market drives up prices. The banks, which enable this spike in prices, then profit even more by skimming their parasitic profit off the top of the credit-inflated transaction, making it even more expensive.

The healthiest, most affordable, and least distorted markets are those which are devoid of credit, as they are immune to speculation and "investment bubbles". There are far better ways to coordinate capital creation and accumulation than investment banking.

An excellent read, quoting Sheridan:

National debt is a cancer. It starts out small and then multiplies. Eventually, it reaches a point where it can’t be ignored, spreading itself through every layer of the economy until it threatens the life of its host.

...

In light of the similarities between then and now, some prominent names are beginning to warn that the only cure for our troubling situation is some form of massive debt relief, or Jubilee—a biblical commandment given to Israel to wipe away all debt every 50 years and start with a clean slate.

...

Unfortunately, what most people seem to miss, is that the original notion of a Jubilee was never intended to be applied after society has been enslaved by debt. It was meant to prevent such a scenario from ever occurring in the first place. Regardless, whether a society chooses to voluntarily rebalance its scales or not, eventually the invisible hand of the market will step in and balance them for us. Perhaps politicians should be wary of that point and take the necessary steps while certain options still exist. Let's not forget, there is already rioting in the streets.

Overcoming the flaws in Capitalism – an outline for Reform

2011-10-31T12:41:00.000-07:00

This is difficult topic because our cultural programming tells us that Capitalism = Freedom. We are also hardwired to be suspicious of any “government interventions in the market”, and we have entire schools of great thinkers telling us that “the free market knows best”.

Who could be against Freedom, right? However…. The question I am addressing is the “rules” that underlie our “free” system.

First of all, we can dispense with the intellectual fiction of “government vs free market”. The so-called “free market” is entirely dependent upon the laws that are created and enforced by government. The government establishes the rules of the economic game, that is just a fact. The only question is, “What rules shall we have?”

Complaints about “government intervention” are nothing more than the attempt to avoid rule changes by those who are advantaged by the current rules. If you are ideologically opposed to “market intervention”, because of some philosophy (such as Libertarianism, say), then you are simply brainwashed. [The definition of brainwashed is being taught to willingly support a political position that is contrary to your own self-interests.]

The crucial question of Ownership & Private Property

One of the key flaws of the current capitalist laws is the way profits are channeled to legal “ownership groups”. Absentee owners provide the clearest demonstration of this principle, as people who have literally nothing whatsoever to do with the economic process nonetheless receive the lion-share of the profits.

Clearly, there is no “natural law” basis for absentee ownership. In the natural world, such relationships are known simply as parasitism. Legally, they are a vestige of the conquest and exploitation of the feudal system, in which armed conquerors took legal possession of the land, informing its inhabitants that could “share the wealth” or be put to death.

A key feature of Reformed Capitalism is declaring null and void any practice of “absentee ownership”. You are either directly and intimately involved in the productive process, or you are not, and if you are not, you have no right to share in its profits. “Passive investment” is a legally-sanctioned oxymoron, and it should be done away with.

[Obviously, doing away with all manner of passive investment schemes will introduce large changes in the way business is done. Many people will wonder if business can be conducted at all under those conditions. This is a natural reaction people have when they face the unknown, when the rules of the game have changed. I will address these very real question in a subsequent essay, limiting my concern here with first principles only.]

The essential communality of Profit

In our current system, “ownership” implies both “control” and “reward”. The reason why the system I am detailing is called Reformed Capitalism, not going by some other or new name for an alternative economic system, is that the essential coupling of “private ownership” and “control” of Capitalism is still being maintained.

However, one of the central reforms of Reformed Capitalism is in redefining the scope of “reward” that accompanies “ownership”. Specifically, in recognition that all profit is essentially communal, Reformed Capitalism rejects the idea of “unlimited reward” for private ownership. Rather, private ownership conveys the privilege of limited reward.

The essential communality of profit is a recognition that all profit is built upon our common heritage of natural resources as well as the combined efforts of masses of people throughout time. It is a recognition that no one creates profits on their own, but depends upon hosts of others who are also doing their part.

This host of contributors includes not just the hired workers in that specific business, but all their suppliers and partners, including the people who make the computers, desks, pencils, airplanes, cars, phone lines, roads, etc that make economic activity possible, PLUS the police, teachers, firemen, judges, engineers, social workers, technicians, hospital staff, soldiers, nurses, etc that keep the social order running smoothly, not to mention all the people in the past who “tamed the land” through their hard work and dedication and who built up the capital base upon which all of our economic efforts are made.

In short, because of the fact that all profit is social and communal, no individuals will be allowed to monopolize profits under the legal fiction of ownership. Profits will be shared, by law, first with the workers in the specific business, secondarily with society as a whole. Extremes of individual profit-taking will be legally eliminated. This aspect of economic reform is not actually that radical, being partially implemented by a progressive income tax, although the scope and power of such taxation would be increased, especially to focus on parasitic economic activities such as financial trading and banking.

Real Estate Collapse Causes and Lengthens Economic Depression

2011-10-07T11:10:00.001-07:00

This is not a conclusion of ivory-tower academic researchers, this is the common sense on exhibit in The Guardian's financial pages, read it here http://www.guardian.co.uk/business/2011/oct/02/underwater-mortgages-america-could-sink-without-trace.

The author quotes the IMF as recommending partial debt cancellation to get the economy going again, and brings up the Objection #1 to any Jubilee plan: the "moral hazard".

I think it is funny how the "moral hazard" objection always gets trotted out when you hear anything about debt forgiveness, but you never seem to hear "moral hazard" mentioned when they are discussion bailouts for banks.... Funny how that works, isn't it?

Choice quotes:

The stagnant housing market continues to erode families' wealth and saddle them with ever more unpayable debts.

It's unlikely to deliver a permanent solution to the economic malaise unless the housing market can be stabilised and the legacy of mortgage debt resolved.

The underlying problem in the US housing market is that the debts run up in the years of plenty will be a millstone around the neck of the economy for many years – and may ultimately be impossible to repay.

Even the IMF, hardly known as a champion of aggressive government intervention, said in its latest world economic outlook that Washington should try to find ways of writing down the value of some of these overblown loans.

"The large number of 'underwater' mortgages poses a risk for a downward spiral of falling house prices and distress sales that further undermines consumption and labour mobility," it warned,

Each of these [proposals to write down debt] would be controversial, and they carry a risk of "moral hazard": the fear that reckless borrowers will in future feel they can take on eye-watering loans and assume the state will bail them out. But the alternative may be years of stagnation.

More Mish on the failure of Monetarists and Austrian economics

2011-09-27T09:09:00.001-07:00

Clearly, the path forward in economic theory involves the incorporation of Minski's models of debt. Unfortunately, the group that has a lot of insights to add otherwise, the Austrians, make themselves irrelevant with their doctrinal stances vis-a-vis the gold standard and constant ravings about "fiat money".

I find it illuminating that even Mish is fed up with their illiteracy regarding real economics, as on almost every other measure, he is an ideologically pure Libertarian. Read for example his recommendations at the end of the article quoted below. Mish would essentially institute a Libertarian Utopia (canceling drug laws, wage laws, union powers, tariffs, foreign wars, etc).

Mish also mentions the K-wave cycle, the long wave cycle of debt-caused depressions. I would like to point out that the Jubilee cycle of debt cancellation would perfectly eliminate the K-wave cycle of debt depressions.

Since even Mish highlights the fact that the problem is high debt levels, it is telling that he does not make the obvious call for debt cancellation. All of his recommendations would work to get the economy going strong, but none of them would directly address the debt problem. Basically, Mish's pure brand of Libertarianism prevents him from recommending the violation of any contracts, which most people think debt cancellation would involve (my Jubilee plan pays off debt payments through electronically-issued checks, in other words honoring the debt, not cancelling it).

the rest is a quoting from Mish:

But what has occurred as a result of Fed and Government "solutions" again is a classic macro deleveraging cycle response - a devalued currency and negative real interest rates has driven investors into inflation hedge assets such as gold, oil, ag assets, etc. at the margin. As opposed to having achieved the stated goal of fostering employment growth, credit creation and raising aggregate demand, etc., Fed QE has essentially succeeded in raising the cost of living in a cycle characterized by generational labor market and direct wage pressure among the middle and lower class wealth demographic.

As discussed above, monetary stimulus negatively affects the real economy for the temporary benefit of the financial economy and Wall Street. The tradeoff was not worth it except through the perverted-eyes of Wall Street.

Telling action in bank stocks says the limits of helping Wall Street may have even run out.

Many point to excess reserves as a sign of future inflation. I point to excess reserves as a sign of failed Fed policy. Commentary from Austrian economists shows they fail to understand how credit even works.

The idea those excess reserves are going to pour into the economy in a 10-1 leveraged fashion is simply wrong. Banks do not lend when they have excess reserves. Banks lend when they have credit-worthy borrowers, provided they are not capital impaired.

It is time Austrian economists finally wake up to this simple economic truth.

Economists of all sorts stick to failed models.

The Monetarist currency cranks want more monetary stimulus even though it is counterproductive
The Keynesian clowns simply will not admit end-game constraints
The Austrians for the most part either ignore credit or incorporate failed models of credit expansion into their theories.

Each camp points the finger at the others as to why the others are wrong. Ironically, none of the camps seems to understand the combined mechanics of debt-deflation, deleveraging, and attitudes.

http://globaleconomicanalysis.blogspot.com/2011/09/bernankes-waterloo-midst-of.html

Monetarist theory of deflation is dead, dead, dead

2011-09-26T18:29:00.001-07:00

Occasionally you will still see some libertarian-leaning web site quoting Friedman, "Inflation is always and everywhere a monetary phenomenon."

This has lead to a great deal of anticipation in the last few years for an extreme bout of inflation, as the Fed Reserve has continued to print out new money to capitalize the otherwise-insolvent banking industry.

Popular economic theorist Mike Shedlock has a great article concerning how both the Monetarists and the Austrians have been subject to numerous false inflation calls because of their theory of money. Quoting Mish:

Although the Keynesian and Monetarist economists have missed the boat on what is happening and why, Austrian minded folks who fail to understand the importance of credit and how little the Fed can do to revive it have blown the call as well.....

Focus on Money Supply Alone is Fatally Flawed

Deflation is about credit, it is also about attitudes that govern the demand for credit.

As I have stated many times over the years, and as stated above in the Contrary Investor, there is nothing the Fed can do to force businesses to expand or banks to lend.

That point explains why Austrian economists who focus on money supply alone have failed and will continue to fail.

Until consumer demand returns, businesses would be foolish to expand. Unfortunately, the Fed's misguided easing policies have stimulated commodity speculation thereby increasing manufacturing costs, while simultaneously clobbering those on fixed income and reducing final consumer demand. http://globaleconomicanalysis.blogspot.com/2011/09/bernankes-waterloo-midst-of.html

In other words, the key element in our modern economy is the debt demand/credit supply, which is much larger and more influential than the strictly-money supply.

The current economic catastrophe is due to a Deflationary Depression, caused by real-estate speculation, i.e., the build up of a debt bubble based on the monetization of real estate.

The best cure for this type of Debt-collapse Deflationary Depression is to liquidate the bad debt as quickly as possible. Unfortunately, our public policy today is the exact opposite of that.

Marketwatch's Bret Arends calls for national Jubilee

2011-09-12T10:08:00.001-07:00

Bret Arends is the latest to publicly call for national Jubilee. He sells the idea as a parallel to bankruptcy, and highlights the way in which excessive debt prevents economic activity, thus actually harming the economy and making us all poorer.

His article is also very good for directly answering many of the objections to debt-cancellation. He does not, however, present a practical plan for debt cancellation, just the need to do it.

As far as I know, I am still the only one who, following an analysis of the debt-based problem, has put forth a realistic and simple plan for accomplishing it. Please help spread the word. The need for Jubilee is reaching a public-awareness critical mass. We need to transition the public mind onto the ease of doing it.

The Jubilee Solution is simplicity itself:

1) The federal government issues electronic checks to pay off all debt.

2) The banking reserve ratio is raised by a proportional amount to soak up the liquidity (trapping the extra money in the banking system).

Viola! All debts cancelled, the economy reset for takeoff.

Debt cancellation, without violation of contract, without inflation.

IT CAN BE DONE!!!!

Here is his description of how the debt overhang prevents economic activity:

We have tens of millions who cannot repay their debts. But they are all trying to. That sucks huge amounts of money out of the economy. And that means these people cannot function properly as consumers or workers. That's the reason people aren't coming into your restaurant. It's the reason people aren't taking your yoga class. It's the reason they haven't hired you to redo the kitchen.

And so tens or hundreds of millions of perfectly responsible business owners and employees are also suffering from this slump. That's the reason we have a shortage of demand. That's the reason no one is hiring.

Even worse: People who are underwater on their mortgage, but who do not want to default, cannot move to where the jobs are either. They are stuck with their home.

You want to break this logjam? Try Chapter 11 for the nation. Massive defaults. Clear the decks, clean the books.

http://www.marketwatch.com/story/massive-default-is-best-way-to-fix-the-economy-2011-09-12

John P. Hussman calls for (partial) Jubilee

2011-09-06T15:27:00.001-07:00

Hussman points out the fundamental choice now facing government policy makers: defend the money-ed powers, or defend the common good. So far, of course, our gov't has been in the pocket of the financial parasites, and I don't see much prospect of change until a people's populist party rises up to challenge the current system. But here is Hussman's analysis:

The global economy is at a crossroad that demands a decision - whom will our leaders defend? One choice is to defend bondholders - existing owners of mismanaged banks, unserviceable peripheral European debt, and lenders who misallocated capital by reaching for yield and fees by making mortgage loans to anyone with a pulse. Defending bondholders will require forced austerity in government spending of already depressed economies, continued monetary distortions, and the use of public funds to recapitalize poor stewards of capital. It will do nothing for job creation, foreclosure reduction, or economic recovery.

The alternative is to defend the public by focusing on the reduction of unserviceable debt burdens by restructuring mortgages and peripheral sovereign debt, recognizing that most financial institutions have more than enough shareholder capital and debt to their own bondholders to absorb losses without hurting customers or counterparties - but also recognizing that properly restructuring debt will wipe out many existing holders of mismanaged financials and will require a transfer of ownership and recapitalization by better stewards. That alternative also requires fiscal policy that couples the willingness to accept larger deficits in the near term with significant changes in the trajectory of long-term spending.

We cannot simply shift to a high-level equilibrium (consumers spend because employers hire, employers hire because consumers spend) until the balance sheet problem is addressed. This requires debt restructuring and mortgage restructuring. ... To believe that bondholders simply cannot be allowed to sustain losses is an absurdity. Debt restructuring is the best remaining option to treat a spreading cancer. Other choices are fatal.

quotes from here: http://www.hussmanfunds.com/wmc/wmc110905.htm

Charles Hugh Smith calls for Jubilee

2011-09-02T12:29:00.001-07:00

Smith reprints an excellent article on his website, by Zeus Yiamouyiannis, Ph.D., read it here: http://www.oftwominds.com/blogsept11/Zeus-debt-forgiveness-9-11.html

exerpt:

Debt forgiveness simply calls out either the inherent systemic inability to make good on debts or the recognition that debt was produced through fraudulent means. In the present situation, both conditions obtain. There has likely been no point in world history where debt forgiveness has been so comprehensively merited. The only speculation from my point (barring world-wide global feudalism and eternal debt slavery) is whether we will initiate such forgiveness or be forced into it.

A sane jobs policy - end foreigner work visas

2011-08-31T12:27:00.001-07:00

Good article in the Epoch Times about the details of visa programs that bring in foreign workers to take domestic jobs. In this time of super-high unemployment, why is this still going on?

Of course, the answer to that question is obvious: it lowers costs for corporations.

Read up on the details of the programs. It is quite amazing that there are no provisions within these programs to protect American workers, or even requiring that corporations prove that domestic workers are unavailable. The programs are simply blank checks for corporations to undermine domestic wages

Will Obama's eagerly awaited new jobs policy include this basic step? We shall see, but his established preferential treatment of corporate interests leaves scant basis for optimism.

quoting from the article:

The unemployment rate in the United States still hovers around 9.1 percent, yet the U.S. federal government still allows companies to bring in foreign workers under its foreign worker programs with the excuse that local talent is not available.

The most debated programs are the H-1B, H-2B, L-1, OPT, J-1, and B-1 visas, under which a U.S. company can employ a foreign worker for up to six years. Each visa designation addresses a different need, with the H-2B visa allowing a company to bring in a foreign worker who lacks the qualification for a specific job but can be trained within a reasonable time.

During good economic times these programs helped people come to the Unites States, but over the years, and especially during the recent economic downturn, these programs stop Americans from getting jobs because they are lost to foreign workers that entered the country on the above foreign worker programs, according to a 2011 report by the Government Accountability Office (GAO).

"Loopholes in these programs have made it too easy to bring in cheaper foreign workers with ordinary skills, who directly substitute for, rather than complement, workers already in America. They are clearly displacing American workers and denying them both current and future opportunities," testified Ronil Hira, professor at Rochester Institute of Technology, before a U.S. Senate subcommittee hearing in July.

The 2011 GAO report suggested that lax oversight and statutory changes are undermining the original intent and value of the foreign guest worker program. Besides, it has become easy to perpetrate fraud.

"A recent Department of Homeland Security study reported that 21 percent of the H-1B petitions they examined involved fraud or technical violations," said the GAO report.

Over the past years, the programs have been watered down significantly and it gives an unintended competitive advantage to companies that outsource well-paying and high-tech jobs to foreign shores.

"For at least the past five years the employers receiving the most H-1B and L-1 visas are using them to offshore tens of thousands of high-wage, high-skilled American jobs," testified Hira.

read more:

http://www.theepochtimes.com/n2/business/the-curious-case-of-vanishing-us-jobs-60964.html

Harvard economist Kenneth Rogoff calls for (almost) Jubilee to defeat the Debt-caused Depression

2011-08-29T09:15:00.001-07:00

All analysis is in agreement about the basic macroeconomic problem: too much debt. The need to write off massive amounts of debt is macro-economically obvious. Interestingly, Rogoff is facing the exact same stale arguments that I faced years ago when I formulated the Jubilee plan:

Rogoff understands this objection, and doesn't dispute that what he's proposing is on some level unfair. But ultimately, he argues, this contraction is dragging us all down together, and even those lenders and savers will be better off if America's debt overhang is taken care of swiftly. Once that happens, and the economy starts to recover properly, we'll be able to focus on designing better policies that will make us less vulnerable to financial crisis in the future. "One way or another," said Rogoff, "we're going to be doing things we would not dream we would ever do before this is over."

Now the irony of Rogoff's statement is that he really isn't proposing anything "we would not dream we would ever do". After all, cranking up a little bit of inflation is hardly world-shaking. The Jubilee solution is a true example of something that most people have never dreamed.

The Jubilee Solution

The Jubilee solution is radical in the sense of "creative" and "out-of-the-box", but it actually avoids most of the objections he is facing.

--For example, the Jubilee solution does not defraud any creditors or violate any contracts. In fact, it is based on the idea of honoring all of them and paying them off.

--Nor would the Jubilee solution cause any inflation, as raising reserve ratios would soak up the potential extra liquidity, trapping it within the banking system.

Again quoting from the Boston.com article, we see that Rogoff shares the same analysis as myself (and other fringe economists like Steve Keen) of our current economic problem:

It's an argument that Rogoff himself admits is "radical," and one he says he'd rather not be making. But as he sees it, what's holding the country back from recovery is not just a lack of consumer confidence or suppressed demand, as in a normal recession, but an immense overhang of debt: thanks to the collapse of the real-estate bubble, millions of American families owe so much to banks that they're focusing all their energy on paying down their debts instead of spending their money on new investments. There will be no recovery until the painful process of working through that debt is behind us, Rogoff argues.

The full article here http://articles.boston.com/2011-08-28/news/29938939_1_inflation-rate-financial-crisis-economy

Jubilee Solution Summarized

Federal government issues electronic checks to pay off all debt. Simulaneously raising banking reserve requirements by a proportionate amount to soak up the money.

Viola. All debts paid, economy reset and primed to soar again.

It is really that simple.

The only thing lacking is general knowledge of the plan and the political will.

[The people in charge of the gov't now, who are the rentier/creditor class, don't care at all about anything but personal enrichment, which the current debt deflation is accomplishing marvelously by liquidating the assets of the masses into the hands of the creditors and cash-holders, i.e. themselves.]

Loss of Manufacturing Equates to Loss of Innovation

2011-08-29T06:18:00.000-07:00

Excellent article over at Forbes on why high-tech manufacturing is so important to keep "in-house", yet the standard rules of business lead to the economically-destructive practice of out-sourcing.

http://www.forbes.com/sites/stevedenning/2011/08/17/why-amazon-cant-make-a-kindle-in-the-usa/

excerpt:

Dell accepted the proposal (to outsource circuit boards) because from a perspective of making money, it made sense: Dell’s revenues were unaffected and its profits improved significantly. On successive occasions, ASUSTeK came back and took over the motherboard, the assembly of the computer, the management of the supply chain and the design of the computer. In each case Dell accepted the proposal because from a perspective of making money, it made sense: Dell’s revenues were unaffected and its profits improved significantly. However, the next time ASUSTeK came back, it wasn’t to talk to Dell. It was to talk to Best Buy and other retailers to tell them that they could offer them their own brand or any brand PC for 20% lower cost. As The Innovator’s Prescription concludes:

Bingo. One company gone, another has taken its place. There’s no stupidity in the story. The managers in both companies did exactly what business school professors and the best management consultants would tell them to do—improve profitability by focus on on those activities that are profitable and by getting out of activities that are less profitable.

The Truth about the $1.2 Trillion Bank Bailout - government of, by, and for the Rich

2011-08-22T09:18:00.001-07:00

First, the amount: 1.2 Trillion dollars. Quite a sum of money. To put it in perspective, that is just a bit over $10,000 per household in the U.S. In other words, instead of bailing out the banks (many of them foreign banks, btw), the Fed could have given over 10K to each and every household in the country to stimulate the economy.

This money wasn't a gift though, it was a loan, so, in fairness, we can't compare it to a "stimulus check" program. To put it in a personally meaningful analogy, here is what happened:

A Real-world Analogy of the Lending Program

Imagine that you hit a financial "rough patch" and can no longer generate the cash to pay your bills. The bill collectors are calling every day, but you don't have the money to pay them, and the bank, seeing what poor condition you are in, refuses to give you a short term loan to cover your expenses.

In short, your income has fallen and your credit has dried up, and you cannot pay your bills. You are about to face bankruptcy, forced liquidation, and financial ruin.

But.... imagine then the Fed steps in, and tells you about a new program they have: you can borrow money directly from them, at around 1% interest. The only catch is, you need to put up some collateral.

Your house and your car are already mortgaged, though, so you don't really have much good collateral to lend against. The Fed says, no problem, we'll let you use "non-standard" collateral. So you start listing whatever you've got: a couple TVs, your furniture, your DVD collection, your old fridge, whatever. Amazingly, lo and behold, violating all the standard rules for acceptable collateral, the Fed accepts it!

So: the Fed lets you write the value of all your junk as collateral on their 1% loans. You then take their money at 1%, use the money for living expenses, and pay off your bills.

It's pretty cool, because you pay off your high-interest mortgage, car loan, and credit cards with the low-interest Fed loan. You are even able to live on the loans during your extended period of unemployment. It takes awhile, but within a year, you land another job and your finances improve. You start paying off the Fed loan, and two years later, the Fed loan is paid off.

That is precisely what the Fed lending program amounted to, although, of course, it was done for the benefit of the wealthy bankers, not for any urban peasant such as yourself.

Good Thing? or Bad Thing?

As noted by other analysts, this is a classic case of "Welfare for the Rich, Harsh Capitalism for the Rest." But, nonetheless, we may ask, was it the right thing to do? Did it save society from some sort of economic apocalypse?

The short answer is NO. Banking and lending are parasitic economic activities, meaning, they do not create wealth. Keeping them alive is like providing life-support to the colony of fleas on the dog. Even if you don't understand the economic theories, you can see the results since 2008: years of economic decline and stagnation, incomes falling, inflation and unemployment rising.

Meanwhile, wealth concentration at the top is at an all-time high. Hardly surprising, is it, when the official policy is so friendly to the financial elite?

The Alternative - a People's Bailout

Bloomberg notes, the 1.2 trillion dollars is "about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages." In other words, the Fed could have chosen to bailout homeowners, but chose not to.

The hardworking people of our country were left in the cold, at the mercy of their creditors in a deflationary depression. Meanwhile, the creditors themselves, who created the deflationary depression with their reckless and unregulated money and debt creation practices, were fully shielded from the consequences of their destructive actions.

If this doesn't exactly describe "the failure of democracy", I'm not sure what else it would take.... "Government by the rich, of the rich, and for the rich", exactly describes the dystopia in which we live.

see additional info here http://www.bloomberg.com/news/2011-08-21/wall-street-aristocracy-got-1-2-trillion-in-fed-s-secret-loans.html

Venezuela transfers gold, for "international reserves" - End of dollar dominance near

2011-08-19T14:45:00.001-07:00

The monetization of gold as international reserve currency under Chinese/Russian control is proceeding according to (their) plan. The latest signpost: Venezuela's decision to bring their gold out of Western banks, bringing some of it home and putting some of it into banks in Russia and China (Pravda's coverage here http://english.pravda.ru/world/americas/19-08-2011/118801-chavez_venezuela-0/)

Chavez said specifically that his gold will be used to create international reserves: "We're going to nationalize gold and we're going to convert it, among other things, into international reserves," he said.

Converting gold to international reserves??? That should raise eyebrows among anyone who is using their critical thinking skills. Chavez is speaking of the future here, because prior to now, international reserves were in dollars, and there was no way to "convert" gold into dollars, except by selling the gold.

Upcoming Gold-backed International Reserve Currency

What Chavez is referring to is the ongoing effort of China and Russia to create a new international currency backed by gold. The gold reserves will be monetized, meaning, they will be used as collateral for the issue of the new currency.

By the way, this is not a conspiracy theory, as this is not a secret plan. It is, in fact, spoken of openly by Russian and Chinese authorities. See, for example, this summary of Putin 2009 speech at Davos http://news.goldseek.com/GoldenJackass/1235063702.php) and Russian President Medvedev unveiled the prototype gold international currency coin in 2009 (http://www.breitbart.com/article.php?id=CNG.4eb2c06b46ea42dece225df0a3ec3799.641). Heck, Putin has been talking of gold as an alternative to dollars as early as 2005 (see: http://groups.yahoo.com/group/vladimir_putin/message/899).

For some reason, the Russian-Chinese dollar replacement plan just hasn't made much publicity in Western news sources. I attribute this partly to a cover up by the Western financial elite that controls the media, and partly to the simple fact that most people are completely ignorant and apathetic about monetary news or issues.

This ignorance and apathy is unfortunate, because the end of "dollar dominance" will have profound negative consequences on the average American citizen. As I have said repeatedly in the past, it will entail a massive inflation and economic collapse involving extreme unemployment.

Of course, Russian and Chinese leaders know perfectly well that the end of dollar dominance will have catastrophic consequences on the power of the United States, as the weakened economy is reflected in a weakened military and reduced foreign influence. That is, after all, precisely why they are doing it!

Interestingly, we can add Venezuelan President Hugo Chavez as one of the prophets of our current economic doom. As the Fox story puts it:

"At a summit in 2008, he urged his Latin American allies to begin pulling their reserves out of U.S. banks, warning of a looming economic crisis in the United States."

quotes: http://www.foxnews.com/politics/2011/08/18/chavez-recalls-gold-held-in-us-europe-amid-plan-to-nationalize-industry/#ixzz1VVciXLLD

AU at all-time high: Thought for the Day

2011-08-18T10:04:00.001-07:00

Apropos of an oz. of AU reaching 1830 USD/FRN today:

"Gold is the money of kings, Silver is the money of gentlemen, Barter is the money of peasants, DEBT is the money of slaves."

Is American a parasite on the global economy?

2011-08-02T09:34:00.001-07:00

Vladamir Putin tells it like it is: http://news.yahoo.com/putin-says-u-parasite-global-economy-191447751.html

Many economically educated citizens are familiar with the idea that inflation is an attack on savers. Of course, that is true, but in today's economic world, that means American inflation is an attack on the rest of the world, primarily. Most Americans don't realize that the rest of the world holds their savings in dollars, far more so than Americans save themselves.

It is difficult to calculate the total benefits that accrue to Americans because the dollar is the international currency. The primary benefit is that our stores are flooded with cheap goods. It also means we can run huge budget deficits, and thus rely on government to keep us employed.

Basically, it means Putin is correct: we are living high on the hog, consuming far more than we produce, essentially like a parasite on the productive work of others.

The primary downside to our situation is that our industrial/productive base gets wiped out by cheap foreign goods. The high value of the dollar also spurs foreign immigration, because they can make so much more working here than at home.

In all, you can easily see, it is not a good system for Americans. Bigger government, less jobs, more immigrants, all in exchange for cheap foreign goods... Jeez, hardly seems like any upside when you look at it like that.

Oh yeah, and lets not forget the Islamic angle: the whole system is predicated on our military support for Saudi Arabia and other oil-rich authoritarian states. Thus we get flooded with waves of "Religion of Peace" propaganda funded by Arabian wealth, while betraying our democratic and Christian ideals.

When the Dollar Breaks

Russia, along with China, are working steadily to get off the dollar. If and when they manage to break the dollar, the American economy will undergo a severe shock.

When it happens we will see:

-a huge inflationary spike (with possible hyperinflation)

-a massive downsizing of government

-a huge wave of unemployment

We will have to start from scratch, rebuilding our productive economy to earn import trade, rather than just receive it as the beneficiary of being the world's ultimate privileged consumer (trading our paper money and debt for their real goods). We will all be poverty-stricken compared to today.

It will happen eventually. The longer we degrade our industrial capacity, and the more we depend on government employment, the worse off we will be when it finally happens.

Ron Paul on defaults and Debt Ceiling Drama

2011-07-21T12:00:00.001-07:00

July 19, 2011
The debt ceiling debate is providing plenty of opportunity for political theater in Washington. Proponents of raising the debt ceiling are throwing around the usual scare tactics and misinformation in order to intimidate opponents into accepting more debt and taxes. It is important to distinguish the truth from the propaganda.

First of all, politicians need to understand that without real change default is inevitable. In fact, default happens every day through monetary policy tricks. Every time the Federal Reserve engages in more quantitative easing and devalues the dollar, it is defaulting on the American people by eroding their purchasing power and inflating their savings away. The dollar has lost nearly 50% of its value against gold since 2008. The Fed claims inflation is 2% or less over the past few years; however economists who compile alternate data show a 9% inflation rate if calculated more traditionally. Alarmingly, the administration is talking about changing the methodology of the CPI calculation yet again to hide the damage of the government's policies. Changing the CPI will also enable the government to avoid giving seniors a COLA (cost of living adjustment) on their social security checks, and raise taxes via the hidden means of "bracket creep." This is a default. Just because it is a default on the people and not the banks and foreign holders of our debt does not mean it doesn't count.

Politicians also need to acknowledge that our debt is unsustainable. For decades our government has been spending and promising far more than it collects in taxes. But the problem is not that the people are not taxed enough. The government has managed to run up $61.6 trillion in unfunded liabilities, which works out to $528,000 per household. A tax policy that would aim to extract even half that amount of money from American families would be unimaginably draconian, and not unlike attempting to squeeze blood from a turnip. This is, unequivocally, a spending problem brought about by a dramatically inflated view of the proper role of government in a free society.

Perhaps the most abhorrent bit of chicanery has been the threat that if a deal is not reached to increase the debt by August 2nd, social security checks may not go out. In reality, the Chief Actuary of Social Security confirmed last week that current Social Security tax receipts are more than enough to cover current outlays. The only reason those checks would not go out would be if the administration decided to spend those designated funds elsewhere. It is very telling that the administration would rather frighten seniors dependent on social security checks than alarm their big banking friends, who have already received $5.3 trillion in bailouts, stimulus and quantitative easing. This instance of trying to blackmail Congress into tax increases by threatening social security demonstrates how scary it is to be completely dependent on government promises and why many young people today would jump at the chance to opt out of Social Security altogether.

We are headed for rough economic times either way, but the longer we put it off, the greater the pain will be when the system implodes. We need to stop adding more programs and entitlements to the problem. We need to stop expensive bombing campaigns against people on the other side of the globe and bring our troops home. We need to stop allowing secretive banking cartels to endlessly enslave us through monetary policy trickery. And we need to drastically rethink government's role in our lives so we can get it out of the way and get back to work.

source article http://www.thedailybell.com/2699/Ron-Paul-Debt-Ceiling-Drama

Dollar Replacement Soon - Russia and China non-dollar trade agreement

2011-06-27T11:18:00.000-07:00

The entire edifice of the US economy is supported right now by the status of the USD/FRN as the international trade currency.

When the Federal Reserve Note (US Dollar) loses its privileged trade status, we can expect a massive one-time hyperinflation, I estimate on the order of 300%-500%, as well as a vicious crash in the U.S. economy.

The recent Russia-China trade agreement moves us another big step towards that day.

Notice that the elevation of the Chinese currency to international reserve status is the EXPLICIT policy of the Chinese government. Judging by the policies of the Fed Reserve and US Congress, losing reserve status for the dollar appears to be the policy of the American government as well....

As reported last Friday:

Russia and China will switch to trade in rubles and yuan to boost bilateral trade and economic cooperation, following an agreement signed between the central banks of both countries, Russian Central Bank Deputy Chairman Viktor Melnikov said on Thursday.

People's Bank of China Deputy Chairman Ma Delun said the agreement would give the two nations the opportunity to increase the value of deals in their national currencies and "help bring them closer to international reserve currencies."

Source article:

http://en.rian.ru/business/20110623/164798920.html

Debt Jubilee demonstrated in China

2011-06-20T09:17:00.001-07:00

China again demonstrating the principles of jubilee in action. Previously, they had been raising the reserve ratio to suck money out of the banking system to cut off inflation. Now they are practicing large-scale debt relief of local governments.

China has a number of advantages that allow them to accomplish these feats of economic sanity. For one, they are not ruled by an internationalist banking class. They are Communist, and they are Nationalist. Their sole concern regarding economic policy is what is good for their people. They are living exemplars of the "People First" concept. Our guiding mantra of "profits first" is anathema to them.

Therefore they do not have a parasitical rentier class sucking their blood. If an economic decision is good for the economy, such as debt write-offs, they do it. Simple, easy. The only thing preventing us from doing something similar is the domination by the parasites of our economic and political system.

Jubilee Theory in Action

The economic theory is simplicity itself: rather than let bad debt slow down economic development, the government simply cancels the debt or pays it off. In the Chinese case, it is done in partial steps, with some being written off and some restructured and sold.

When the government issues the national money, it has total and complete Jubilee power. The sovereign control of the money supply is, in fact, the greatest power that government has, probably greater than its military/police power. Certainly greater than its legislative power. The fact is, he who has the money controls the laws and the military.

Medieval Concept of Commodity Money

Many people have a hard time "getting" the Jubilee concept, because they still harbor the medieval belief that money is a thing. In fact, money is not a thing, it is just a trick to get us to work together. Debt is also a "social illusion" of the same variety.

The Chinese elite realize this, and they use their monetary power accordingly, for the benefit of the people. Our elite realize it too, but they use their monetary power for personal enrichment and political control, keeping the people in the dark.

quotes from the article below (http://www.reuters.com/article/2011/05/31/us-china-economy-debt-idUSTRE74U3CO20110531):

China's regulators plan to shift 2-3 trillion yuan ($308-463 billion) of debt off local governments, sources said, reducing the risk of a wave of defaults that would threaten the stability of the world's second-biggest economy. ...

Many analysts see China's pile of local government bad debt as a major risk to the economy, especially as growth slows.

But few see a widespread banking fallout as they believe cash-rich Beijing can step in to soak up losses. Still, the scale of the plan is much bigger than a government move in 1999 to clear debt from the books of large state-owned banks.

Refutation of Classic Free Trade Arguments - Vox Day on Hazlitt

2011-06-14T12:28:00.001-07:00

Writer Vox Day has begun a formal refutation of the classical arguments for international free trade. It is a worthwhile public service, as many people are still unaware of the advances in economics which allow us to criticize the classical theories.

His choice of target is one many of us are familiar with: Henry Hazlitt's Economics in One Easy Lesson. Like Vox Day, I also have fond memories of that book. I read it as a self-education project when I was 17 years old, while I was a freshman in college. It is no exaggeration to say that Hazlitt's book provided the foundation of my economics knowledge, and a fine foundation it is. Unfortunately, the explanation of free trade is out of date, written as it was in 1946 when economic and monetary conditions were vastly different than today, and thus, justly requires amendment.

Below are my concise summarizations of V.D.'s criticisms. (You can find the full text here: http://voxday.blogspot.com/2011/06/mailvox-hazlitt-international-trade.html)

1 - Hazlitt's theory deals with tariffs as protection from foreign competition, not protection from domestic companies that offshore their production. Thus, the assumption that the primary beneficiary of the tariff is the manufacturer is wrong. The primary beneficiary is the worker.

2 - Hazlitt mistakenly assumes that the reduced price for the imported good (if the tariff is eliminated) will go somewhere else in the domestic economy. If fact, is more likely than ever to get spent on another import.

3 - Foreign business do not have to recycle their trade-gained dollars back into the American economy; they may just hold on to them, or spend them elsewhere, as the dollar is the international currency of trade.

4 - It is a mistaken assumption to assume those foreign-held dollars will ever get re-spent into the U.S. economy. Quoting here, regarding the extended period of time over which the U.S. has run a dollar-shedding import surplus: "35 years and counting is a long time to wait for this postulated inevitable return, and is unlikely to do any good for the worker who lost his job more than three decades ago."

5/6 - It is a mistaken assumption that overall employment will not go down as a result of lost jobs. "There is no reason to assume that the loss of a job in one sector will create any additional demand in another sector, indeed, to the extent there is worker mobility between industries, all the loss of the job in the one sector will do is create downward pressure on wages in the other sector."

7 - Assuming that cheaper consumer goods pay for lost jobs is a fallacy. An unemployed worker cannot also be a consumer, meaning, production comes before consumption;

Populism in the NYTimes: Krugman denounces Creditor Class, (almost) calls for Jubilee

2011-06-10T13:56:00.001-07:00

Surprising article (http://www.nytimes.com/2011/06/10/opinion/10krugman.html) by Paul Krugman nailing the cause of our economic malaise squarely on its head: the Rentier Class. Rentiers is an archaic word for the asset-owners and creditors, the people who don't do any work but profit wholly from money and their ability to drive up prices for things people need.

A sane society would make their economic activities illegal. They are economic parasites, living off of the production of others, contributing nothing.

Krugman calls them out as having hijacked the political process. Public policy now favors creditors, and the rentier class in general, continuing to squeeze the average worker and small business owner. As he puts it:

"Consciously or not, policy makers are catering almost exclusively to the interests of rentiers — those who derive lots of income from assets, who lent large sums of money in the past, often unwisely, but are now being protected from loss at everyone else's expense."

Krugman Calls for Jubilee?

Krugman even admits that debt relief could do a lot to promote overall economic recovery. Dare we say he is on board with the Jubilee solution? Reading this quote, it appears he is almost there:

"But the reality is just the opposite: creditor-friendly policies are crippling the economy. This is a negative-sum game, in which the attempt to protect the rentiers from any losses is inflicting much larger losses on everyone else. And the only way to get a real recovery is to stop playing that game."

Other choice quotes:

"While the ostensible reasons for inflicting pain keep changing, however, the policy prescriptions of the Pain Caucus all have one thing in common: They protect the interests of creditors, no matter the cost. ... No, the only real beneficiaries of Pain Caucus policies (aside from the Chinese government) are the rentiers: bankers and wealthy individuals with lots of bonds in their portfolios."

How They Maintain Their Power

Krugman offers only the most superficial analysis of how this Rentier Class maintains their hegemony on political power, but he is correct insofar as his analysis goes:

"And that explains why creditor interests bulk so large in policy; not only is this the class that makes big campaign contributions, it's the class that has personal access to policy makers — many of whom go to work for these people when they exit government through the revolving door. The process of influence doesn't have to involve raw corruption (although that happens, too). All it requires is the tendency to assume that what's good for the people you hang out with, the people who seem so impressive in meetings — hey, they're rich, they're smart, and they have great tailors — must be good for the economy as a whole."

Fight of the Century: Keynes vs Hayek

2011-05-06T08:15:00.000-07:00

Oil Futures Speculation and the Spiking Price of Gas

2011-04-20T17:10:00.001-07:00

The business pages agree and now even the President is chiming in, although it seems the establishment mainstream press tends to avoid publicizing these discussions. How can the price continue to rise even when surpluses continue to stockpile? [***see below for relevant news***] According to the theory of supply and demand, when there is an over-supply, prices are supposed to fall...

Ed Wallace in Business week says "It's no secret that speculators are driving up fuel prices. ... It's no great mystery who is responsible for higher gas prices. As I and others have written in the past, the biggest culprits are the speculators gaming the futures markets to line their own pockets. We know all that."

Huh, maybe no secret to him, but definitely a secret from most of the American public, who blame oil company greed for expensive gas.

Even Goldman Sachs is alarmed over the inflating bubble in oil speculation: "Goldman Sachs advised its clients on Apr. 11 to get rid of their commodities holdings, including oil. The Guardian quoted Goldman's advice as warning: 'The record levels of speculative trading in crude have pushed their prices up so much in recent months that in the near term, risk reward no longer favors holding those commodities.' "

Wallace ultimate pins the blame on the easy money policy at the Fed, which is flooding the world with cheap dollars, enabling and encouraging financial speculators to pump up bubbles in commodities:

"The problem starts with Ben Bernanke, no matter how many of his Fed presidents claim they are not to blame for the high price of oil. The fact is that when you flood the market with far too much liquidity at virtually no interest, funny things happen in commodities and equities. It was true in the 1920s, it was true in the last decade, and it's still true today."

In the end, it comes down to creating big profits for banks at the expense of the American citizens, because banks need the profits to pay off the bailout loans that the fedgov gave them:

"Ben Bernanke doesn't seem to understand that while he is allowing huge profits for banks and investment firms so they can recover massive losses from the financial meltdown, he is intentionally damaging what could be a much stronger recovery with the misery he's causing the average American consumer. Maybe he does understand and just doesn't care. There's always China to blame."

[read the whole of Wallace's article here: http://www.businessweek.com/investor/content/apr2011/pi20110419_786652.htm]

The Law of Supply and Demand Drives Futures Markets Too

The President characterizes the futures contracts as "bets", which is the standard interpretation and justification for these things. The problem is, the financial elite don't "bet on the market", in the same way that a small dealer is betting when he takes out a futures contract.

Rather, the financial elite are driving the market, because of the tremendous amount of money they can bring to bear. When they issue a buy order, the money flows in. The greater money inflow drives up prices.

When you have the billions in free money, you can move the market like that. It is like a money-making machine. When they issue the sell order, the prices will automatically fall, because they represent such a huge market stake.

An organized movement to rein in the madness can be found here:

Stop Oil Speculation Now http://www.stopoilspeculationnow.com/home.aspx

Obviously, financiers should not be allowed to speculate in markets like this. It should be made illegal, no exceptions, with harsh penalties for those who attempt to profit like parasites on people's need for basic commodities like food and energy. Only people with legitimate economic interests in a market, i.e. the producers, retailers, and consumers, should be allowed to purchase futures contracts to hedge their financial positions.

***The oil minster of Saudi Arabia, for example, points to the large surplus in oil production and stockpiles:

"Saudi Arabia's oil minister says the current high oil price is unjustifiable and that speculation over the future oil markets is mainly behind the hike. Ali Naimi told reporters the lower demand for Saudi oil in March compared to February was a sign of an existing surplus on the global market. He says large quantities of oil were available as commercial stockpile or surplus production in some oil-producing countries. Naimi spoke after a meeting on Tuesday with Dutch Economic Affairs Minister Maxime Verhagen. [http://www.businessweek.com/ap/financialnews/D9MMP3LO0.htm]

Banks Should be treated as Public Utilities - Thomas Hoenig, KC Fed President

2011-04-13T14:51:00.001-07:00

The analysis that banks are public utilities is a very basic and honest one. Of course they should be regulated as one, as suggested by Kansas City Fed President Thomas Hoenig (http://ca.news.yahoo.com/big-banks-government-backed-feds-hoenig-20110412-112137-434.html).

The situation with banks is actually worse than with utilities. Utilities at least provide something of value for the economy. Banks provide none, they are totally 100% parasitic. Profit to a bank is a direct loss to someone else. The more profits a bank makes, the more in debt the rest of productive society is. Growing profits in the banking sector should be looked with alarm, like a growing colony of parasites on a healthy body. If it is not controlled, the body could die, as we are seeing in our current debt deflationary episode. Because the economic interests of banks are diametrically opposed to the economic interests of the productive economy, the whole banking sector should be regulated very carefully, with strict caps on usury and profits.

The Outdated Theory of Banking Utility

The economic utility of banks supposedly resides in their ability to bring together the supply of unproductive capital with the demand of creative business ventures. Indeed, that logic had value back when money consisted of gold, and the economy suffered from the pressure of constant money shortages.

However, such a situation no longer applies. Banks don't make profit because they are agreeing to take on the risks of making loans. Today, banks make profit from CREATING MONEY through loans. It is money they never had in the first place, so they certainly aren't risking anything by giving it away. The money is literally created in the process of issuing the loan.

Thus, the banks are in a NO RISK position. If the loan goes bad, they lose nothing, since they ventured nothing in the first place. If fact, they may gain something, if the loan was secured by some real collateral (such as real estate) and they get to seize and resell the collateral if the loan fails. The only so-called "risk" they face is if their books get so far upside down that they can no longer meet their deposits, and in that case, the bank is simply nationalized.

The Fractional Reserve Scam

This is the fundamental lie and scam at the heart of fractional reserve lending. Under the "10% reserve requirement", supposing you have $100, you can lend out $500 to your mom, $300 to your dad, and $200 to your sister, while getting to hold on to the original $100! This is a far cry from the old days, when banks faced actual risk with a limited and real supply of money.

Under the old system of real money, if a bank lent out that $100, if the loans went bad, they could be wiped out, along with their depositors. Note that the gold piece money still existed somewhere. In other words, society still had as much money, but the particular bank would be wiped out. This created an iron discipline in the banking system, creating competition in an environment of real risk. This risk was very real and personal to the bank owners, because it was their personal capital that was at risk if the bank was wiped out.

Perversion of Capitalism

Today, the risk profile has been inverted. Under the Fractional Reserve System, banks can never actually be wiped out. At the last resort, the Federal Reserve jumps into the picture, takes ownership of the bank, and creates the money to honor the deposits. The owners of the bank do not face bankruptcy in this scenario, either, since their personal wealth is shielded away from the performance of the corporation.

Society as whole might be wiped out by inflation or deflation, but banking deposit accounts will always be made whole, and bank owners face no personal risk. In other words, in good times, banks make all the profit while taking no real risk. While in bad times, they are bailed out by the government. Profit is privatized, loss is socialized. This is not your grand-daddy's "capitalism".

That is why banks are essentially agents of the government. They are not truly private enterprises, facing free and open competition, under the threat of being put out of business and personally impoverished by bad decisions. Their ability to make a profit is based on a government-protected monopoly in money creation. If they mess up, the government has to bear all their losses. Heads they win, tails you lose. Nice time to be a banker, no?

Don Baker calls for National Debt Repudiation - the Jubilee plan revisited

2011-04-12T17:19:00.001-07:00

The irony here is that I was pointing out the necessity of Jubilee two years ago on Seeking Alpha, and I got lots of thumbs down. Now major articles are being published there agreeing with me (http://seekingalpha.com/article/262724-defaulting-on-debt-is-not-the-end-of-the-world)

Jubilee is totally logical and practical. Debt is killing the economy currently, and it is only going to get worse. The sooner we declare the Jubilee, the better off our real economy will be. The longer we wait, the more severe will be the recovery.

To be precise, the Jubilee plan is different than default. The Jubilee plan means that all debts are PAID OFF. The government simply writes electronic checks to pay off all debt.

Simultaneously, the government raises the banking reserve ratio, to soak up all the extra liquidity.

The result: the cancellation of all debts, without the violation of any contracts, without any inflation.

The debt deflation would be over instantly, and the economy could reset. Jubilee!

Should government be prohibited from borrowing - from the Adam Smith Institute

2011-04-12T09:25:00.001-07:00

An article over at the Adam Smith Institute (http://www.adamsmith.org/blog/tax-and-economy/government-should-be-banned-from-borrowing/) questions the utility of government borrowing. Clearly, a prohibition on government borrowing should be written into the Constitution as a hard limit on government.

Government borrowing is a moral wrong: no men have the right to set debts upon their children and grandchildren. It is functionally equivalent to hereditary slavery. It is wrong.

The very idea of sovereign powers needing to borrow is absurd. If you can create new money at will, why would you ever need to borrow?

The practice of government borrowing from banks is simply a scam that the banking elite has perpetrated: it amounts to a permanent transfer of wealth from the nation to the banking elite. It is functionally equivalent to a tax or tribute payment. Old habits die hard: the parasitic elite still acts as if it has the right to leech off the nation's wealth.

If government needs extra money, it can just print it out, plain and simple. The idea of government borrowing from banks is archaic and retrograde, a relic of a previous barbaric age when people believed a nation's wealth was defined by its gold supply.

Walmart CEO sees big inflation coming in June

2011-03-31T14:48:00.001-07:00

U.S. consumers face "serious" inflation in the months ahead for clothing, food and other products, the head of Wal-Mart's U.S. operations warned Wednesday.

The world's largest retailer is working with suppliers to minimize the effect of cost increases and believes its low-cost business model will position it better than its competitors.

Still, inflation is "going to be serious," Wal-Mart U.S. CEO Bill Simon said during a meeting with USA TODAY's editorial board. "We're seeing cost increases starting to come through at a pretty rapid rate."

Along with steep increases in raw material costs, John Long, a retail strategist at Kurt Salmon, says labor costs in China and fuel costs for transportation are weighing heavily on retailers. He predicts prices will start increasing at all retailers in June.

"Every single retailer has and is paying more for the items they sell, and retailers will be passing some of these costs along," Long says. "Except for fuel costs, U.S. consumers haven't seen much in the way of inflation for almost a decade, so a broad-based increase in prices will be unprecedented in recent memory."

Consumer prices — or the consumer price index — rose 0.5% in February, the most since mid-2009, largely because of surging food and gasoline prices. Core inflation, which excludes volatile food and energy costs, rose a more modest 0.2%, though that still exceeded estimates.

The scenario hits Wal-Mart as it is trying to return to the low across-the-board prices it became famous for. Some prices rose as the company paid for costly store renovations.

"We're in a position to use scale to hold prices lower longer ... even in an inflationary environment," Simon says. "We will have the lowest prices in the market."

Major retailers such as Wal-Mart are the best positioned to mitigate some cost increases, Long says. Wal-Mart, for example, could have "access to any factory in any country around the globe" to mitigate the effect of inflation in the U.S., Long says.

Still, "it's certainly going to have an impact," Long says. "No retailer is going to be able to wish this new cost reality away. They're not going to be able to insulate the consumer 100%."

http://www.usatoday.com/money/industries/retail/2011-03-30-wal-mart-ceo-expects-inflation_N.htm

German Economists Recommend National Jubilees

2011-03-01T14:42:00.001-08:00

The idea of Jubilee is common sense beyond doubt. By cancelling debt loads, economies can recover. The overwhelming approval of the German economics professors confirms it.

On the larger issue: the idea that sovereign nations need to take out debt is odious. It is just a trick, a hidden income transfer from the workers of the nation to the banking parasites.

Nationalization of credit is a sovereign power. Unfortunately, it has been abdicated in our modern world to the international banking class. In effect, national governments exist to fund the banking class. The "floating debt" is a permanent tax paid by the people to the banking elites, who do NOTHING whatsoever of economic value for the country in turn.

Here is the article:

http://news.ph.msn.com/business/article.aspx?cp-documentid=4670516

Almost 200 German economics professors have signed a declaration rejecting current proposals to resolve the eurozone debt crisis, instead calling for a way for distressed countries to declare bankruptcy.

Instead of the collective support mechanism set up last year that could be made permanent in a modified form from 2013, the economists argued it would be better to let countries restructure their debts.

"Restructuring allows the countries concerned to reduce their debt and start over," said the economists.

Food Price Inflation at Record Highs

2011-02-28T10:43:00.001-08:00

Notice, this record-setting food inflation is not being driven by supply-demand. It is a product of our tottering economic/financial system. As the article puts it: "agricultural commodities are attracting excess liquidity in international markets."

That means all the extra money printed out by the Fed is being exported as inflation in commodities. It is exacerbated due to the fact that most foreign nations are "net food importers", not producing anywhere close to the amount of food they need to feed themselves.

The fact that America is a "net food exporter" means that we have an extra layer of insulation from the food prices rises. The way we feel about oil prices is the way foreigners feel about food prices: an out-of-control skyrocketing import item.

There is also talk about placing capital controls on food commodities, to help prevent international investors from driving up prices on captive populations. Of course, only America could do that, as the producer of most of the world's food, and it would involve a major repudiation of free-market principles. Free-market principles meaning the elite investors can freely drive up food costs as a profit source, well.... maybe that repudiation would be a good thing.

Certainly it should be the economic policy of any food-importing nation to achieve food sovereignty and gain control over its own food supply. One major step in that direction would be to place import restrictions or tariffs on food imports, which of course, the international globalist community is fighting against.

When you get down to brass tacks like this, it is hard not to look at the international economic system as a big enterprise in exploitation and parasitism:

--The advanced economies, with their mechanized agriculture, drive local food producers out of business...

--Which then forces them to import most of their food...

--Leaving them at the mercy of their international speculators...

--International laws are written to prevent any defense against this process...

Without factories to build things, what exactly are they supposed to do for economic development??? Hell if I know...

I guess if they are lucky (and they keep their wages low enough), some international company will set up a factory there... Meaning that profits will be "internationalized", i.e. extracted into foreign "ownership" hands. What a clusterfuck!

http://ipsnews.net/news.asp?idnews=54412

The world is living through another major upswing in food prices.

World food prices surged to a new historic peak in January, for the seventh consecutive month, as the FAO Food Price Index reached 231 points, up 3.4 percent from December 2010.

The accumulated increase in food prices during 2010 amounted to 25% relative to the 2009 level.

Price movements are no longer determined only by the basic driving forces of supply and demand: agricultural commodities are attracting excess liquidity in international markets and other factors, far less transparent and constantly changing, such as expectations and appetite for risk, start to play an important role in determining the direction of the prices.

Furthermore, food markets are more and more intertwined with financial and energy markets, both of which are characterized by greater volatility. Facing these multiple sources of uncertainty, agricultural commodity markets tend to overreact to any changes in the demand or supply projections, as it happened in mid-2010 in the case of wheat.

Although the world produces enough food, global production needs to be gradually increased to keep pace with the growing population. Chronic underinvestment in agriculture throughout the years, in developing countries in particular, made them more vulnerable to risks associated with the new dynamics that rule the world market. Investment in agriculture, which would allow to increase productivity and improve resilience to climatic risks, together with strengthening of rural institutions and better governance of commodity markets, are needed to reduce the incidence of price spikes.

Russia Demonstrates Economic Common-Sense

2011-02-28T09:32:00.001-08:00

Russia is providing an example for how sane societies conduct economic policy. The funny part is, they are doing what America did in the 1980s, in response to the Japanese car invasion. They are saying, if you want access to our market, you have to open up factories on our soil.

Of course, China has been doing that for the last 20 years as well, so their economy is booming while ours continues to shrink.

The iron rule of economics remains the same: production comes before consumption. If you don't make something, you have nothing to trade. It is common sense: productive jobs have to come first. The basis of any sane economic policy has to be providing people with productive jobs.

Here is the article about Russia:

http://news.yahoo.com/s/nm/20110228/bs_nm/us_russia_autos

MOSCOW (Reuters) – The world's biggest carmakers have until the end of Monday to sign up for Russia's latest scheme to entice major players and strengthen its local industry ahead of any future crisis.

Russia was on the verge of overtaking Germany to become Europe's biggest car market before the country's 2009 recession caused annual sales to collapse by half.

A sharp recovery in 2010 -- aided by a government sponsored scrappage scheme -- has revived industry optimism about future Russian growth and prompted state attempts to pin down foreign players to invest and support the domestic industry.

Mortgage Reform set to benefit the Banks - a Jubilee Counter Proposal

2011-02-11T14:10:00.001-08:00

The federal government is currently in the position to implement large scale mortgage jubilee, since it has nationalized the organizations that own all the mortgages. Instead, they are going to modify the rules so that banks will be set for greater profits! I guess we should not be surprised. The bankers own the government, so of course they make rules to benefit themselves. See the story here http://www.cnbc.com/id/41533702

The one thing this article doesn't account for is the fact that, absent government guarantees, the demand for housing goes down, and therefore, the price goes down along with it. Thus, while interest rates go up, real estate costs actually go down, if government stops subsidizing its purchase.

Cheaper real estate benefits everyone! Well, except the parasitic bankers who reap more interest payments on higher-value purchases. If you have less or no rent/mortgage payment, you have more money to spend in the real economy for goods and services. Our entire concept of mortgaging residential property needs to change. The whole system is set up to keep people on a perpetual treadmill of debt enslavement.

That is the secret reason why real estate is not being allowed to reach its natural equilibrium level, much lower than today. Expensive real estate overwhelmingly benefits the parasitic banking class. The last thing they want is for people to be able to buy land without mortgages. How can the parasites suck their blood if people don't always have to finance everything?

A good example of a deceptive program that is supposed to benefit the people but really benefits the parasites is the mortgage interest deduction. It benefits banks to have people take out bigger mortgages! The government subsidy in effect goes straight to the bank, in the form of higher purchase costs. The tax payer is just a pass-through vehicle.

Of course, the interest deduction doesn't even kick in until you buy a high value house. For someone with an affordable mortgage, the standard personal deduction is greater than the mortgage interest deduction. In other words, the mortgage interest deduction disproportionately benefits the wealthy, with a sliding scale of more benefit the wealthier you are!

A mortgage itself is one of the biggest scams in history! A typical mortgage pays the bank twice as much in interest as the amount of the original purchase price. What a scam, huh? And god forbid you have a downturn in your ability to pay... in the next 30 YEARS of your life.... because then they get the whole property back totally free and can "sell" it again, without having to pay you back a cent that you'd been putting in all those years! 95% of your payments in those first few years goes to interest payments... 95% interest sounds like illegal usury to me! At least it was before the bankers got the anti-usury laws thrown out...

Non-Exploitative Housing Policy Makes Us All Richer: Interest-Free Mortgages

The government, as representative of the people, should make their housing policy benefit the people, not the parasite classes. The right to exist on this earth without paying for the privilege is what separates free men from serfs. Unfortunately, our government works continually for our enslavement, having been taken over by the parasite classes.

Imagine you didn't have to pay interest payments on your house... 100K house, paying 1k a month... You would pay the thing off in 8.3 years! If you wanted to pay off that same 100k house in the same 8.3 year period, under a mortgage of 10%, you would have to pay over $1,480 a month! Even under a 5% mortgage, you would have to pay over $1,225 a month to pay it off in that period. If you only had $1,000 a month to spend, you would end up paying it over 18 years under a 10% mortgage! In other word, the bank would skim tens of thousands of dollars off of you.

Here's the big mind-blowing question of the day: why doesn't government simply provide interest-free mortgages? Would the country come crashing down if people weren't spending huge amounts of their earned cash on interest payments??? The same free market in housing would still apply, you could still only buy the house you could afford, you could still lose it if you didn't make payments... What would change??? Nothing! Except the parasites would be shut out of the equation! People who sit around, doing nothing to improve the world or make anyone's life better, just pushing papers around, skimming off the hard work of others... in other words, economic parasites!

Please tell me one reason why the government doesn't simply issue interest free mortgages??? Along with leaving you more money to spend on the real economy, the best thing about interest-free mortgages is that THEY WOULD KILL THE PARASITES!!! Not being able to sit around and skim money off other people's accounts, they would actually have to go out and produce something! Rather than being parasites, being forced to provide some good or service, they would be contributing to the common good, increasing our wealth, making our lives better! Banking parasitism is not only a drain in and of itself, it is a huge lost opportunity cost. Supporting parasites make us all poorer!

Other reforms are possible as well, such as a policy of keeping land costs low. Land ownership statutes could include preventing land ownership concentration, or perhaps providing for homestead ownership as a right of citizenship, maybe actual land giveaways. If the government represented the people, these are the types of reforms we'd be talking about, not more policies that serve the parasitic banks.

Corporate Loyalty to the Global Market, not the U.S.

2011-02-09T15:48:00.000-08:00

Charles Hugh Smith presents an excellent analysis of why the U.S. middle class is being destroyed, at his website here: http://www.oftwominds.com/blogfeb11/corp-jobs-02-11.html

In a nutshell, corporate profits are now increasingly from overseas consumers, almost half of all revenues. Due to the logic of corporations, being abstract entities whose sole purpose is to deliver profits to shareholders, they have no loyalty to America.

Yet, amazingly, they are allowed to make contributions to political candidates. In fact, they have come to dominate the political process, hijacking the national parties so that the government essentially becomes captive to their globalizing agenda.

As Smith puts it:

The erosion of the American middle class is of little concern for one simple reason: it no longer matters much on the global stage. All that Global Corporate America needs from America is a stable foundation that won't offer up any surprises or spots of bother.

Policy Reforms Needed

Obviously, corporations should not be allowed to make campaign contributions. This is a basic no-brainer. Only U.S. citizens should be allowed to make campaign contributions. Corporations, which by definition, have no loyalty to the U.S. should not be influencing its economic policy.

Corporations should also be taxed differently. A sliding scale of taxation should apply based on the percentage of U.S. domestic workers. Perhaps the percentage of revenues from foreign sources should also be taxed at a higher rate.

Our tax policy should reward domestic businesses, and handicap corporations that offshore jobs.

There seems to be little hope of reform at this point, as economic elites have utterly hijacked the political process. As Smith points out, the irony is that increasingly, it is international profits which allow global corporations to exert greater influence on domestic policy:

The concern for domestic jobs is mere political expediency. U.S. corporations are pulling $500 billion in profits from non-U.S. sales, and they hold $1 trillion in stashed overseas profits in various tax havens. All the growth in their revenues and profits are coming from non-U.S. sources. Spending $3-$5 billion on lobbying and campaign contributions is an "investment" with extremely high returns: for that small sum, U.S.-based global corporations make sure the U.S. government and citizenry don't become overly burdensome or obstructive.

Something needs to be done, and it needs to be done now. We are in desperate needs of a people's political uprising to challenge the unholy alliance that has hijacked our political process. Unless people start to organize in their own self interest, we will continue to get more of what we are getting: the cancerous growth of poverty.

Fed Changes Rules to Prevent its own Losses

2011-01-28T08:31:00.001-08:00

It is quite amazing how the financial elite rigs the game. "Heads I win, Tails you lose" kind-of-thing. Facing mounting catastrophic losses on its capital balance, the Fed simply changes the rules to book the losses elsewhere.

"Elsewhere" is, of course, on the public, meaning, me and you. Yup, the Fed Reserve, a private entity, representing mainly foreign banks, with complete immunity to public inspection or control, gets to transfer its losses to the American government's balance sheet.

The circle is complete. Profits are kept private, while losses are made public. The government is now officially a financial subsidiary to the banks, the final absolute guarantor of assured profits. Remarkable, really.

http://www.cnbc.com/id/41198789

Accounting Tweak Could Save Fed From Losses

"Could the Fed go broke? The answer to this question was 'Yes,' but is now 'No,'" said Raymond Stone, managing director at Stone & McCarthy in Princeton, New Jersey. "An accounting methodology change at the central bank will allow the Fed to incur losses, even substantial losses, without eroding its capital."

The change essentially allows the Fed to denote losses by the various regional reserve banks that make up the Fed system as a liability to the Treasury rather than a hit to its capital. It would then simply direct future profits from Fed operations toward that liability.

"Any future losses the Fed may incur will now show up as a negative liability as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible," said Brian Smedley, a rates strategist at Bank of America-Merrill Lynch and a former New York Fed staffer.

"The timing of the change is not coincidental, as politicians and market participants alike have expressed concerns since the announcement (of a second round of asset buys) about the possibility of Fed 'insolvency' in a scenario where interest rates rise significantly," Smedley and his colleague Priya Misra wrote in a research note.

End the Fed - Save the Economy - Support Kucinich HR6550

2011-01-21T15:29:00.001-08:00

Kucinich's End the Fed bill is causing the parasitic banking class and its media apologists to erupt in fits, because, plainly stated, the bill would drive a stake through their blood-sucking hearts. The bill is based on a cogent diagnosis of our current economic problems, and offers a brilliant solution that would positively revolutionize our national finances and government, reviving our national economy and improving our lives. As an opponent of elite financial power and an advocate for citizen rights and quality of life, I strongly support this bill.

The bill's two most important effects, that strike most directly at the heart of the financial elite's unjust powers:

a) The end of fractional reserve banking
b) The end of the national debt

The bill's two most important effects, that would result in a positive return for the average citizen:

c) The funding of full employment
d) The funding of infrastructure modernization

A) End of Fractional Reserve Banking - the source of financial elite power

Imagine your family is in financial trouble, and you have $100 cash in your wallet. So, you write a check for $500 to your mom, a check for $300 to your brother, and a check for $200 to your sister, and on top of that, you get to keep the $100 untouched in your wallet.

Of course, this would be an illegal fraud, UNLESS you are a bank, in which case it is called "fractional reserve lending with a 10% reserve ratio". In other words, under the 10% reserve ratio, you get to create $1000 in loans based on your $100 of cash. With a lower "reserve ratio", you could create more loans on top of your cash reserve.

That would be a pretty cool power, wouldn't it? The ability to create money at will, and charge interest on it, without actually loaning out your own cash. That's right! You even get to charge interest on the money you lend out, even though you never had the money to begin with! This is how banks create money, and thereby, create financial bubbles/bust and inflation/deflation cycles.

Kucinch's bill would end this ridiculous, illegal, and unjust abuse, which is the heart and soul of the power and influence of the financial establishment.

B) The end of the national debt - a yoke of perpetual slavery laid on the neck of the taxpaying public

Think about it: the ability to create a money supply is a sovereign power, meaning, the government does it. Since the government creates the supply of money, why would it need to borrow it? If you could literally create money, you would never need to borrow it, right? Why would you borrow money from someone else, and pay them back with interest, when you could create the money for yourself? It doesn't even make sense! The idea of a national debt is a repudiation of governmental sovereignty.

It is like a tribute payment, a tithe to the banking establishment. It's a line item in every budget that goes directly towards banking profits. It is nothing less than a government subsidy for the banking establishment.

Kucinich's bill would end this outrageous, immoral, and illogical exploitation of the tax-paying public.

C) The funding of full employment - bailing out the worker instead of the banks

The whole reason behind TARP and the other bank bailouts of the last 2 years was to avoid an economic collapse. But the collapse happened anyway, because the banks never "loaned" the money back to the public. Despite receiving interest free money from the government, credit cards continue to charge over 20%, small business loans have dried up, capital financing is limited, loans for the housing market have been heavily restricted, and thus, the economy has contracted leading to perpetually high unemployment.

Instead of bailing out banks, and hoping they loan the money back to the public to get the economy going, why not skip the middle man, and directly pay the public? This is called the funding of full employment. Lots of people need jobs, and there is lots of work to be done, so why not just pay those people directly to do the work?

Some libertarians object to the idea of expanding governmental scope like that, but let's think about the alternatives: government-administered overhead, or banking-administered overhead. It is one or the other, there is no escaping the "inefficiencies" or the "external controls" or "restrictions on freedoms". The way I see it, we either bow to the power of the financial elite-controlled banking establishment, or we use government to reign in their power and be a vehicle to advance the general good.

The idea that there is a "free market" is a total joke, a complete fiction, really. The parasite banking class has completely perverted our rules and laws to their own benefit. Kucinich's bill would seek to fight back and regain our real freedom from the financial oligarchy that currently rules.

D) The funding of infrastructure improvement - modernizing America

Why is China setting records for next-gen bullet trains and laying thousands of miles of new highways, while we are slashing budgets and can't even afford to repair our broken down streets, bridges, water lines, electrical grid, and so on? The answer is keyed to the money supply: we are suffocating from lack of money. We have millions of people able and willing to work, and millions of things which need to be done. A government jobs program is just the trick to meet those needs.

The alternative is what, borrow money to meet spending needs, under increasingly high interest rates? Think about it: either the government creates the money, or private banks create the money through fractional reserve banking!

The fear of hyperinflation is misguided. Either the money gets created to get the work done, or people continue to stay unemployed, and our infrastructure continues to crumble. The only question is: who creates the money. No one is going to print out worthless paper money under Kucinich's bill.

Money would be created only to finance work, which would "spend money into existence". This would lead to a stable money supply, with slight growth as a built-in feature. This is exactly what the Fed Reserve claims to attempt, and completely failed to deliver!

Which is better for a stable and healthy economy: debt-based money created by private banks to their personal enrichment, or a permanent no-interest no-debt money supply maintained by government according to popular will?

Creating the money through government program at least offers the possibility of pubic input, while avoiding the exploitation and injustice of usury. Allowing the parasitic banking elite to continue their control of our money supply simply guarantees more misery and exploitation, as the rich would continue to get richer.

Study the full text of Kucinch's proposal here, and please, help spread the word: http://kucinich.house.gov/UploadedFiles/NEED_ACT.pdf

China demonstrating use of key method in modern Jubilee - raising reserve requirements

2010-11-19T15:17:00.000-08:00

The modern Jubilee method is for the government to pay off all debts using electronic checks. Inflation due to oversupply of money would be prevented by raising banking reserve requirements. Thus, all debts would be cancelled, without violating any contracts or causing inflation.

This week, China is demonstrating the technique of raising the reserve requirements to stem inflation. Most Americans are not familiar with this technique, because the Fed uses open market operations and interest rate adjustments to attempt to manipuate the money supply. These Fed methods are indirect methods, and used mainly because they involve huge financial transactions which enrich the Federal Reserve member banks who conduct those operations.

The Chinese method is direct, and doesn't enrich anyone. The Chinese government is not controlled by the bankers, but rather, the government controls the bankers, so they use the superior method for controlling inflation, not the superior method for enriching the bankers.

http://news.yahoo.com/s/ap/us_wall_street

Quantitative Easing Explained

2010-11-15T11:10:00.001-08:00

Off-shoring Jobs is Official Federal Policy

2010-10-06T17:19:00.001-07:00

It is really almost beyond belief. But, nonetheless true. Even in the midsts of a horrible economic depression, it is still the official U.S. governmental policy to reward companies for off-shoring jobs.

Not just be neutral about it. But to REWARD them.

"...a bill that would have ended certain tax credits and deferrals to companies expanding or moving overseas was voted down in the Senate last week." (from the LA Times, here, the very last sentence in the article)

This is the danger of handing government over to the money powers. The money powers then use government to advance their own interests, over those of the people.

It also speaks to the dangers of the handing the voice of the media over to the money powers. They will not bring these issues up to the public consciousness, and will, in fact, suppress any discussion of them.

Read the whole Times article. The pace of off-shoring, even in the midst of this depression, continues to increase. It is an economic truism that without a job, you have nothing to trade; i.e., productive jobs are the foundation of economic activity.

Thus, on the immediate horizon: long stagflation, meaning rising inflation along with shrinking wages and fewer jobs. In other words, we continue to get poorer and poorer.

And this is the official governmental policy.

That is all.

David Knox Barker Recommends Jubilee Cycle

2010-08-30T14:33:00.000-07:00

Boxer has a nice consideration of the macro-economic effects of Jubilee (here). He correctly points out that a regular Jubilee cycle would eliminate the long wave Depression cycle, by preventing a toxic build up of debt. As he puts it:

"The Jubilee law was actually crafted astutely to prevent the buildup of excessive debt levels in the economy, and not primarily to justify its cancellation. Debts were only forgiven if banks violated the Jubilee law that prevented the buildup of excessive debt. The Jubilee was not a bank bailout or stick taxpayers with others bad debts. Consider the passage from Leviticus 25: 8-19. This ancient text provides remarkable insight into the current global financial crisis, which is at its heart a global debt crisis."

Barker rightly condemns any attempt to transfer the debts of some, such as mortgage owners, onto the public purse, as some form of dishonest debt forgiveness program.

A Jubilee Year, correctly done today by the federal government, would not violate any contracts, because it would pay all debts in full. The federal government would simply write checks on behalf of private citizens to pay off their debts.

The creditors would be paid, the contracts would be honored, and the end result would be the cancellation of all debt, the resetting of the financial system, and the freeing of the productive economy. As Barker describes the renewal process: "The only way to address a debt problem is to reduce the amount of outstanding debt and create conditions for a booming economy and new long wave spring season..."

How Hyperinflation Happens

2010-08-27T15:44:00.000-07:00

Excellent article written by Gonzalo Lira, here, about how hyperinflation happens. His key point: hyperinflation is not to be confused with inflation, although most people think hyperinflation is just a case of normal inflation on steroids.

--Normal inflation happens because of growing demand, and growing credit, driving prices up.
--Hyperinflation happens because the currency is collapsing.

People commonly confuse the cause with the effect in economic events.

Like a) the common idea of blaming the Great Depression on protectionism. In fact, protectionism was a response to the Great Depression.

Or like b) blaming the German printing press for causing their hyperinflation of the early 1920s. In fact, the German money was collapsing in value, which led the government to print more money to help people cope with having less wealth. The political impetus to follow this line of action is almost irresistable, and we shouldn't be surprised to see our own government do the same thing.

In short, hyperinflation happens because money-holders start selling dollars to buy other commodities. The result is that the dollar collapses in value, while the cost of all goods shoots up quickly.

Although he doesn't talk about it in his article, I would point out that America is especially vulnerable to this type of inflation because we don't make any of our own goods anymore. Because all of our consumer goods are made in foreign countries, a sell-off on the dollar means that not just commodities, but also all consumer goods, will shoot up in price.

Note that this event would not necessarily be drawn out with dramatic scenes of barrels of paper money being exchanged for bread. That would only happen if the federal government attempts to alleviate our suffering by printing and distributing paper cash. If the government starts doing that, then the hyperinflation can be dragged on, and money can gradually shoot towards infinity.

Most likely, our government will not resort to printing out piles of cash. In that case, our hyperinflation would be short and sharp. Everything would rise 300-1000% in price, and we would also be tremendously poorer, but then things would stabilize. The new normal would us simply being much poorer with a greatly devalued dollar. The world would have to find a different country to be buyer of last resort, and the dollar would lose its status as reserve currency.

Does the Fed Create Money? A Clarification

2010-08-10T08:59:00.000-07:00

Excellent comment by Ralph Sampson, over on Ellen Brown's blog, explaining exactly what is meant by the Fed creating money.

"From my perspective Ellen explains the monetary system well but she periodically injects points of confusion. Here is an example: she says the Fed prints federal resereve notes and lends them to the banks at interest and the banks in turn lend them to us. This is sort of true but not really.

The Fed creates some paper currencey (Federal Resereve Notes) but that is a small part of the money created by the banking system. (Even that is not true. The Fed orders the notes from the mint, more specifically the Burea of Printing and Ingraving, who creates them and charges the Fed for the service.)

The main concept is that the Fed authorizes, and sometimes creates, reserves that the member banks then use as an insurance pool to back the bookentry loans (making money out of thin air) they in turn make to legal entities which are made up of individuals and non flesh-and blood-legal entities.

To just casually say the Fed prints federal reserve notes which it lends is the principal paradigm of the monetary system is, again, just not true and confuses the readers trying to understand that system.

Most of the circulating money is credit, not currency and coin, where credit is the term for purchasing power in the form of entries in a financial journal that, these days, takes the form of computer bits in a digital memory somewhere."

Steve Keen Calls for Debt Cancellation, or Does He???

2010-07-08T11:38:00.000-07:00

Steve recognizes the solution to our debt-deflation-depression is to cancel debt. However, he seems to dispair that the politicians lack the will to do it.

Darn it, Steve, grow a backbone! Instead of fatalistically resigning yourself to defeat, ADVOCATE FOR CHANGE. Use your prestige and popularity to initiate the process of systematic debt cancellation.

This apathy is soul-death, it disgusts me. If even the man who has identified and quantified the problem, who has built up a world-wide following pointing out that DEBT IS THE PROBLEM, simply lowers his head and licks his own balls rather than speaking out for the positive solution, good lord, what hope is there.

It is clearly not a failure of intelligence on Keen's part. It is nothing short than a failure of COURAGE. The choice is plain: Be a ball-licking dog dragging your head in the dirt, whipped and whining... or stand up to our banking overlords and DEMAND FREEDOM from their debt enslavement trap. Which is it, Steve???

From the latest article over at Steve's blog, http://www.debtdeflation.com/blogs/2010/07/07/naked-capitalism-and-my-scary-minsky-model/:

The motive force driving the crash is the ratio of debt to GDP–a key feature of the real world that the mainstream economists who dominate the world’s academic university departments, Central Banks and Treasuries ignore. In the model, as in the real world, this ratio rises in a boom as businesses take on debt to finance investment and speculation, and then falls in a slump when things don’t work out in line with the euphoric expectations that developed during the boom. Cash flows during the slump don’t allow borrowers to reduce the debt to GDP ratio to the pre-boom level, but the period of relative stability after the crisis leads to expectations–and debt–taking off once more.

Ultimately, such an extreme level of debt is accumulated that debt servicing exceeds available cash flows, and a permanent slump ensues–a Depression.

Its final stage emphasises a message that Michael Hudson, one of the very few others to see this crisis coming, puts very simply: “Debts that can’t be repaid, won’t be repaid”. As Americans now seem to be realising, the financial crisis has not gone away, because the debt that caused it is still there.

Having got ourselves into a debt-induced economic crisis, the only permanent way out is to reduce the debt–either directly by abolishing large slabs of it, or indirectly by inflating it away. I have very little confidence in the ability of the Federal Reserve to do the latter, while the former will take a level of political fortitude that is far beyond our current politicians.

Preserving our Way of Life with a New Economic Policy

2010-06-01T12:10:00.000-07:00

Jim brings up a great question over at his Great Depression blog. In the international race to the bottom in wages, can we do anything, or are we doomed to economic collapse as cheap-labor countries wipe us out? Here my thoughts on a rational economic policy in our globalized world.

Part of our high pay rate is definitely our social net. From environmental protections to health care costs to retirement benefits, our entire government-based social services safety net, in fact our entire quality of life, is build on the bedrock of our wages.

Because our entire quality of life, and the government itself is build on it, clearly, gov't policy should be to preserve our high wage jobs. But how to do so in a world of global capital flows and international communication as the basis of the information economy? We are no longer in the 1930's, so tarriff walls against imported products, while an important step, will not be sufficient

We need a new concept: call it a "foreign labor tarriff". Meaning, a company's percentage of foreign workers would determine its tax treatment. It is no longer enough to worry about imported goods. We also have to combat outsourincing in "knowledge work" service field, such as medicine, information technology, accounting, and education.

Companies whose path to larger profit lines is along the road of wage arbitrage need to be stimied. Wage arbitrage by global companies has one end result: greater concentration of profits for the parasitic global investment class, at the expense of the deteriorating American quality of life and impoverished American working class.

It is a basic economic law: you have to be a producer before you can enter the market as a consumer. If you aren't producing something, you have no basis of wealth to enter into an economic transaction. In short, JOBS HAVE TO COME FIRST.

This is common sense. Who exactly is distributing the crazy pills? Until our gov't forumates an economic policy that is based on preserving our quality of life, we will continue to get poorer and poorer.

Damon Vrabel on Nationalizing the Federal Reserve

2010-05-28T14:12:00.000-07:00

Some excellent analysis from Mr. Vrabel, who perfectly understands what is going on, and what needs to be done. It was refreshing to read his erudite perspective on the need for Constitutional control of the Banking Branch just a day after I published my own views on the subject. From his latest article (here http://canadafreepress.com/index.php/article/23683):

"The fact is we are in the mist of a global chess game being played above the heads of national governments in which debt and leverage are used to restructure the world under a new global money and banking system. I suggest Bernanke’s sole purpose is to hide the real role the Federal Reserve has played in this game while also helping to keep Congress from asserting its power.

The media likes to claim that voicing opposition to the Fed is lower class populism. But of course the media doesn’t think. It just promotes left or right groupthink for the few corporate powers that own the media. They don’t want you thinking about the question of a central bank. If they did, we might better understand the pros and cons.

The first con of the Fed’s form of central banking—it puts currency control in private hands. Rather than the Fed having power over the banks, its structure actually gives the primary dealer banks (mega firms like JP Morgan Chase, Goldman Sachs, and many foreign banks) significant power to tell it what to do. Entrenched powers behind these firms working together in cartel groups like the New York Fed and CFR have far more leverage than the president, i.e. an individual with no financial experience who rotates into office for a short period of time completely surrounded by bankers and their allies. The entire purpose of the Constitution and having a republic, despite its flaws, was to put power in the hands of the public vs. a concentrated private oligarchy. But the Fed system creates such an oligarchy, as many Americans now see since the crash of 2008.

Oligarchic monetary systems tend toward a 2-tiered society, money pushing rulers vs. money using servants who scramble to pay the rulers back plus interest. The ruling financial class eventually takes over the productive economy and then parasitically destroys the host upon which it lives as gambling and speculation replace savings and production as the engine of growth. Such is the power of a monetary system based on nothing but debt.

A debt-based monetary system enshrines usury, i.e. living off the backs of others by doing nothing but subjugating a population to systemic interest-bearing debt. So the foundation of our monetary system under the Federal Reserve is built upon immorality.

An oligarchic monetary system forces the great mass of the population into servitude. It effectively creates a predator/prey structure in society. In a system based purely on debt, the banking powers are able to super-inflate the system to drive up asset prices, and then deflate the system sucking value and assets up the pyramid to consolidate power. We saw this over the last 10 years. This is the biggest and brightest example of why Jefferson said “banking institutions are more dangerous than standing armies.” It’s also the best example of why the Constitution demands that government regulate the currency.

So how can we get the one pro of a central monetary authority regulating the value of the currency without any of the cons above? Do precisely what Ben says we shouldn’t do—reestablish the republic by putting currency regulation in the hands of public officials as the Constitutions says. If a country doesn’t have a sovereign currency, it doesn’t have a sovereign government. We are learning that painful lesson now as we see Greece being attacked and taken over by financial institutions. The same thing has happened to many countries in the past and it will happen in the future if governments don’t take charge. At that point everyone will know the truth—governments are held hostage by private financial interests. But more and more Americans are realizing the truth now and pushing for change.

However, the change is not as simple as ending the Fed. Without a transition plan, that would cause a disaster since it is the basis for the money supply. The key is to nationalize the Fed, and possibly its primary dealers during the transition phase, to keep them from holding us hostage with the threat of collapse. Then with honest public officials in Treasury and other agencies that don’t represent Goldman Sachs and the rest of the financial cartel—people like William Black, Brooksley Born, Janet Tavakoli, Michael Hudson, Eliot Spitzer, Harry Markopolos—it will be possible to restructure the monetary system. Other components of the solution involve the US Treasury printing sovereign US notes, state banking systems like North Dakota to restore state power, etc. (see details at Freedom’s Vision)

Central Banks as a Branch of Government

2010-05-26T17:54:00.001-07:00

As we learn from an early age, our Founding Fathers designed a system of checks and balances designed to safeguard liberty. From our contemporary vantage point, we can pinpoint a number of weaknesses and outright failures of their system.

One major failure was their failure to anticipate the rise of the supremacy of the judicial branch. The Founders were heir to a centuries-long political and military struggle that firmly established the Supremacy of the Commons, meaning the ultimate authority of the representative body of the common people. Today, the unelected, unaccountable, and permanently seated judges routinely throw out laws, as well as directly supervising legislatures and executives with various judicial orders. Were a new Constitution written today, the friends of liberty would need to reign in judicial power to prevent our current situation of Judicial Supremacy.

A good analogy for the power of the contemporary Judicial Branch is the medieval power of the House of Lords. The Lords were unelected and immune from popular censure, yet all laws had to be approved by them before they could be implemented. The commoners were simply petitioners to the Lords, they could do nothing without their approval. Such is our status vis a vis the judges today.

The other major failure of the Founders was their failure to anticipate the rise of the power of the banking class. Although the Founders failed to adequately limit the power of the judiciary, at least it was conceived as a branch of government that needed to be balanced. As we can see today, the Banking Branch is a real wing of power, exemplified in the Federal Reserve Banking system.

Unfortunately, their failure to limit its power has allowed the Banking Branch to grow into a "shadow government" that essentially controls the outlines of the entire political process, but without any checks or balances on its power. Central Banking policies are set and implimented with almost complete autonomy from oversight, even indirect oversight. They operate in almost total secrecy, with total immunity to any policy input or control.

Perhaps a good analogy for the power of the contemporary Banking Branch is the medieval power of the Church. The Church stood as a nominally separate power, yet was a repository of tremendous wealth and power. The siphoned a regular percentage of the people's money to themselves, enabling them to live in luxury as parasites on the working class. They had their own parallel power structure and hierarchy, which was internationalist in perspective, though they often interfered in the affairs of state. They invariably sided with the nobility and kings to preserve the status quo against commoner attempts at reform and empowerment.

Just as medieval commoners were forced to contribute their tithe to the church through forced taxation, we are forced to contribute our wealth to the Branking Branch through interest payments on perpetually floating debts. Popular government is an expression of the people's will, how could it possibly require "extra" financing? The concept is abhorrent, as well as abberant to a free-thinking mind that hasn't been brainwashed by the Banking Powers.

Creation of money and credit is a sovereign power, as has been recognized since the founding of the first central banks. As that renown scholar of banking history George Selgin demonstrates (http://www.independent.org/pdf/tir/tir_14_04_01_selgin.pdf), central banks have one purpose: the nationalization of credit and money creation for the advantage of the central government. Long gone, destoyed by the inauguration of central banks, is that superstitious era when men believed national wealth was measured by its stock of precious metal.

When used for the public welfare, such monetary power is a great blessing. When used to enrich the private interests of the Banching Class, such power is a curse, nothing short of a yoke of perpetual servitude chained around the common neck. The power to create and extinguish money is perhaps the greatest of all governmental powers, providing government almost unlimited power and influence.

If we were to design a Constitution again today, we would certainly need to specify and limit in greater detail the powers of the Banking Branch. Reformers now and in the future will find this a more daunting task, as their powers have been allowed to grow some pervasive and entrenched.

Would Government Banks Be a Good Thing?

2010-05-25T09:40:00.000-07:00

Ellen Brown makes a persuasive case for state government banks, in an article published over at Seeking Alpha.

http://seekingalpha.com/article/206606-the-mysterious-cafrs-how-stagnant-pools-of-government-money-could-help-save-the-economy

Her essential point: the state has billions of dollars in savings, which are deposited in private banks. Why not charter a state government bank and deposit state funds there instead?

In our current system, public money is deposited with private banks, and private bank owners pocket the profits. If that same money is deposited with a government bank, the profit would be used to balance the budget or lower taxes.

The main question she is answering is "Who shall benefit?" Right now, private banks get all the profit. We have no say in their policy, nor do we receive any advantage from it.

Why should the parasitic banking class receive all the benefit from the fractional reserve money power?

If a governmental body ran a bank, the people would have some influence on policy and receive some advantage from the interest income. The state, meaning the people, would gain the power and advantages of fractional reserve credit.

Private bankers do it, and profits go in their parasitic pockets. If states do it, profits go to reduce government spending and budgets. What is wrong with that?

The hyperinflation argument is a distraction, a red herring, not a real objection. The macro economic effect of a state bank would be no different than a private bank. The money is already being leveraged somewhere, the only question is "Who benefits?"

Food Prices Spiking

2010-05-24T17:08:00.000-07:00

Hmm, the beginnings of the inflation tsunami everyone has been expecting? Delivered in the usual high style of the inesteemable Mogambo Guru:

http://dailyreckoning.com/food-price-inflation-to-spur-zombie-takeover/

“US food prices jumped by 2.4 percent in March 2010 in the largest monthly leap in more than 26 years, and the sixth consecutive monthly increase.” Yikes! A 2.4% monthly leap! That’s a 28% annualized increase in the price of food! In One Freaking Year (OFY)! Yikes!

So I say to her, as I am sweeping by her on my way to the MBOPS and trying to keep a tone of incredulousness out of my voice, “Do you realize that the National Inflation Association says that fresh and dry vegetables are up 56.1% in price in the last year? How about that fresh fruits and melons are up 28.8% in price in that selfsame last year? How about eggs ‘for fresh use’ being up 33.6%, or beef and veal up 10.7%, or dairy products being up 9.7%? Does any of this inflationary horror mean anything to you?”

Necessary Regulations, Now and Forever

2010-05-24T11:14:00.000-07:00

Here is a great summary of financial regular we need, What we are getting, of course, is just about the opposite. Great article overall, read it all by following the link.

If Congress really wanted reform, they would
--reinstate Glass-Steagall,
--regulate the OTC derivatives market,
--thoroughly audit and terminate the Fed while transferring its powers to the Treasury Department,
--terminate and disband the PPT,
--implement the "Volcker rule" against proprietary trading by banks,
--require that the FASB (Financial Accounting Standards Board) enforce mark to market rules for financial reporting,
--stop all black box front-running trading activities,
--fire and investigate for fraud and obstruction of justice virtually all of the regulatory heads who fiddled and watched porn while Rome burned,
--expand the funding and manpower available to all regulatory authorities,
--encourage the state regulatory agencies to intervene wherever and whenever they desire,
--insist on thorough policing of the system with full accountability for regulatory failure,
--thoroughly investigate and punish all past financial crimes, with plenty of jail time and humongous fines to be doled out to provide a deterrent against future criminality.
--And most of all, require full accountability for losses without so much as another dime going to bail out financial criminal fraudsters.

http://www.theinternationalforecaster.com/International_Forecaster_Weekly/The_Morality_Of_The_Financial_Monetary_System_Is_Really_What_is_Broken

The New Command Economy: a Challenge to Libertarian Economists

2010-05-20T15:07:00.000-07:00

Great progress in economics and monetary theory has been made in the last half century. However, precious few economic theorists today have accurately grasped the implications of our new monetary system.

Unfortunately, most of the few theorists who are popularizing the new monetarism are leftists, and are no friends of liberty or decentralization. Most of the right-wing monetary theorists who are concerned with liberty are stuck in the past, dreaming of a return to the gold standard. If the friends of liberty want to be effect positive changes for freedom in the 21st century, they need to update their theories.

Is it possible for paleo-libertarians to move beyond their hallowed canon? Probably not. Perhaps this is just The Way Thing Are, that progressives continually out-innovate conservatives. Encountering libertarian economists today is like being transported back to the year 1600AD, listening to traditional horse-mounted, heavily-armored, lance-carrying noblemen denounce the use of mass armies, polearms, and muskets. Sure, the noblemen had Honor, Right, and Good on their side, but the more they clung to those traditional standards of warfare, the more antiquated and irrelevant they made themselves, and the more they guaranteed their own defeat.

Such is the condition of libertarian economic theory today. Unless their update their arsenal to cope with today's economic weapons and tactics, they are simply irrelevant. Facts: Money is paper, money is credit, the money power looms as larger than ever, unleashing monetary weapons of mass destruction upon the body politic.

In the 20th century, the Soviet command economy simply told everyone what to do, and required their acquiescense. Today, the American command economy relies on the money power to get everyone to do what they want. The American command economy is, however, far more insidious than the Soviet version, because it is cloaked in the illustion of freedom and capitalism.

In fact, the power to print money gives the American economic elites almost unlimited power over the American and world economy. They don't have to force people to do their bidding, like the Soviets; they can just pay them to do it. There is no limit to their power to do so.

Worse off, there is no Second World to show such fraud for what it is. The Soviet system collapsed not because of its own failure, in fact, it was spectacularly successful. It failed because of its relative status versus the Free World. This power to co-opt free markets through monetary creation is leading to our own impoverishment, no less so than the Soviet command system. However, unlike them, we don't have an external comparison that will demonstrate our own failure.

Here is the theoretical problem: money is not a thing, and there is no constraint on its supply. By issuing its own money, government can co-opt whatever resources and labor it desires. Yet, we are compelled by the force of law to use nothing but this federal money. In short, we are kept unwilling slaves to the federal leviathan.

Here is the practical problem: because it is under no budgetary contraints, and can freely print it own money, the government can outbid any other market participant, for anything. As with traditional command economies, huge inefficiencies enter the system, and overall wealth levels constantly decline, a long slow death spiral.

The tax collection and budgetting routine is just a sham, a puppet show for the ignorant masses. The government could tommorrow cancel all tax collection and simply pay its budget by creating new credit money.

The more money it creates, the more it can outbid the free economy for labor and resources. There is no natural limit to the number of people who can work directly for the government or be dependent on government funding, since there is no limit to the government created money supply.

The money creation power is the ultimate power in existence. With it, there is no limit to the power or scope of government influence.

With every government job, we as a society get poorer, but who can realize it? Government can offer higher paying jobs, and jobs where no others exist, so all market participants are forced to take the poison bait. Government makes them wealthier than they were otherwise, but meanwhile decreases the wealth in the whole system.

We are trapped. Who shall point the way out?

Analysis of potential Idaho Silver Currency

2010-05-19T13:09:00.000-07:00

Fascinating happenings in Idaho related to currency reform and local currency. A bill was killed in Senate committee that would have created a silver coin for Idaho that could trade as money. The currency was potentially the real deal in alternative currencies, and met all the requirements that trade tokens require to be considered legitimate and widely used as money.

As I have detailed before, the most important thing about a local currency is that its use should be tied to the health of the local economy, a fact explicitly recognized by the crafters of this money, as the silver mining to create the coins would help the Idaho economy.

The coins have been christened Idaho Gems. Interestingly, the bill will also allow the state treasurer to hedge its silver position in the financial markets. It also defines all state and local taxes as payable in this coin.

According to the bill, the state will sell the one ounce coins at the daily spot price for the one ounce American Eagle. The treasurer will also accept the coins for payment at the daily spot price. The bill guards against too much state loss by allowing the treasurer to suspend acquisition if the daily market price falls below the cost of minting. According to the bill, the state will issue silver as payment to any vendor who requests it.

Unfortunately, the bill appears to have died in a Senate committee:
http://www.examiner.com/x-16226-Boise-Economic-Policy-Examiner~y2010m3d24-Harts-Silver-Gem-Act-fails-in-Senate-committee

Alternative money needs to have a buyer of last resort, to guarantee its acceptance as general currency. The problem facing alternative currencies in general is, nobody wants to hold a currency if it is a burden to find someone who accepts it. However, if the state of Idaho accepts the medalions as payment for taxes, that would exactly fit the requirement as a surefire buyer of last resort.

The monetary value of the issue of the coins, at least at first, would be limited by the size of the Idaho budget. Anything beyond that would run the risk of non-redeemability. Especially in the early stages of an alternative currency, it is important to create the expectation of full redeemability, so that people become confident using the new coins. If redeemability became an issue, people would be hesitant to accept the coinage, and it would become little more than a gimmick or collector's item.

After a general confidence in the redeemability of the coins has been established, under the condition of wide circulation and usage in general commerce, the state could produce a excess of coins beyond the limit of the state's financial budget.

The state also faces the potential problem of seasonal deflation, as coins are removed from circulation to pay taxes. Encouraging general circulation and usage in non-tax-related commerce, would allow the state to mint enough coins so that the seasonal redemption would be less noticable.

The ultimate way for the state to overcome the issue of seasonality and limited usage would be for the state to not only take the coins as payment, but also distribute the coins as income, starting with its own state workers and welfare recipients. Afterall, the state's tax receipts exactly match the states outgoing payments. If the state agrees to receive the coins in payment, it has to have a method for redistributing them. Without a regular channel of distribution, the coins again fall into the gimmick/collector item category.

From the wording of the bill, the focus seems to be on silver money as a store of wealth.

And, as always with a commodity-based money, the state would have to be concerned with the value of the underlying commodity. If silver, as a metal, rises in price relative to the US dollar, the silver coins would be hoarded if they are fixed against the dollar.

So, the legislature is in a bit of a bind. In order to issue the money to its own workers, the coins would have to be exchangable for US dollars. If that exchange rate is fixed, hoarding could quickly become a problem. Especially given the problem of the rapidly inflating US dollar, the value of silver can be reasonably expected to rise, dragging the value of the coins up with it.

Lets say the coins are issued on par with dollars. The following year, the dollar inflates by 10%, but the silver coins remain stable. 100 coins originally bought the same as 100 dollars, but now 100 dollars only buys 90 coins. Which would you rather be paid in?

The coins! Think of the converse side: 100 coins now buy 110 dollars. Holding or being paid in coins means you are getting richer in dollars. This would actually increase the value of the coins, exactly as the Idaho legislature hoped, spurring their demand and thereby stimulating the Idaho silver economy. In order to meet the demad, and discourage hoarding, the state could prudently issue more coins.

In short, against the background of an inflating dollar, doing business in Idaho silver gems would naturally increase your own wealth. But this would only work if the silver coin was not fixed versus the dollar. If the Idaho legislature had the discipline to not inflate their supply, the demand would remain strong for their silver coins.

Notice that under these conditions, people would stop paying their taxes in silver coins, preferring to pay them in depreciating dollars.

Of course, if the price of silver fell, the conditions would reverse, and the state would see its monetary position wiped out. Under conditions of falling silver, people would flee the silver coins, as they'd be worth less and less relative to dollars. Citizens would pay their taxes only in the increasingly worthless silver.

The state, as a governmental agency, is thus put in a double bind. No matter which way the currency is going, by giving the citizens a choice in payment, the state will always be paid in the worse currency.

This is the whole point of legal tender laws and capital control laws. Without those expedients, the citizens will always work to make the state the loser in currency arbitrage. With legal tender and capital controls, the state can foist the currency costs off on its beholden citizens.

http://www.silverbearcafe.com/private/03.10/medallion.html

With only one state representative dissenting, the Idaho House State Affairs committee voted on Monday to endorse HB 633, a bill that would allow Idaho citizens to pay their state taxes with an official state silver medallion.

The news comes just a month after a South Carolina legislator introduced a bill seeking to ban Federal currency altogether, and replace the upstart greenback with gold or silver coins. A half-dozen other states have considered similar legislation, reports the Tenth Amendment Center. But there's a key difference between the Idaho plan and the bills proposed in other states, most of which fall somewhere on a spectrum ranging from Tea Party rage to Ron Paul goldbug-ism. (The South Carolina bill, for example, claims that "the State is experiencing an economic crisis of severe magnitude caused in large part by the unconstitutional substitution of Federal Reserve Notes for silver and gold coin as legal tender in this State.")

In contrast, the sponsor of the Idaho bill, Republican Phil Hart, seems to be marshalling wide support by crafting legislation that is straight out industrial policy aimed at boosting Idaho's silver industry. The text of the bill is quite clear.

The intent of this act is to use the abundant silver resources of the state of Idaho to create a means whereby the people of Idaho can pay their taxes to the state using silver mined from the ground of Idaho, processed in Idaho and finally minted into a medallion in Idaho. It is the intent of the Legislature to create mining jobs in Idaho while giving the people of Idaho a means to store their wealth in a precious metal that is immune from the effects of inflation while complying with the mandates of our federal Constitution.

The Idaho bill therefore incorporates tax incentives for silver processors located in Idaho.

From The Idaho Reporter:

That, Hart believes, could bring hundreds, if not thousands of jobs to the state. In conjunction with the creation of the medallion, Hart's bill would also try to lure silver processing companies to Idaho, and in particular, north Idaho, which, according to Hart, was once called "the silver capital of the world." The bill would give companies that come to Idaho to process silver for the medallion a 10-year exemption from income taxes, as well as property taxes. The exemption would be open for 20 years and would sunset after that period of time.

Hart believes one of the advantages of silver is that it would resist inflationary pressure better than paper money. But since states aren't allowed to mint their own money, the value of the silver medallion will have to fluctuate according to market forces. In just the last ten years, the value of an ounce of silver has zig-zagged between four and twenty dollars.

Gold, the Dollar, and the Hidden Inflation Right Before Your Eyes

2010-05-07T23:54:00.000-07:00

So, gold popped above USD1200 today, the first time in quite awhile. The last time it did so, it was seesawing with a falling dollar, sliding to 77 at that time.

Today, amazingly, dollar is holding strong, rising in the 84 range, and gold is rising anyway.

Basically, we are witnessing the drop of all currencies together, relative to gold, in other words, worldwide inflation.

The USD/FRN is rising relative to the crashing Euro, but it is still falling in an absolute sense.

Inflation is all around us. On the radio just two days ago I heard how airfare is over 30% higher than a year ago. Some for the price of gold, and the price of gas. If obvious measures like gold, gas, and airfare are up over 30-40% in one year, how do they expect us to believe inflation is flat. And the price of food such as bread lately? Good lord.

As I have endeavored to show in articles on this blog, economics is really common sense, and you should never be afraid to believe your own eyes.

The History of Free Banking and Alternative Currencies

2010-04-27T00:00:00.000-07:00

The academic study of the history of free banking and the contemporary practice of alternative currencies are strongly related. It seems clear to me that the contemporary monetary reform movement should be based upon lessons of monetary history, but such a connection rarely seems to take place. Perhaps because monetary history is so obscure, and monetary theory so confusing?

A wonderful interview was recently published by the Daily Bell (http://www.thedailybell.com/975/George-Selgin-Austrian-Finance-Central-Banks-Free-Banking.html), with an academic expert on the history of free banking, George Selgin.

One important takeaway: Dr. Selgin drives another nail in the coffin of the "100% non-fractional gold reserve" argument. He appears to conclusively demonstrate through the historical record that free market conditions will not result in a 100% gold standard. As I have argued before, we have moved onward, never to return to a gold standard, because our monetary theory has simply advanced to far. The idea of non-fractional gold as the only legitimate form of money is excessively retrograde, IMHO.

Another important takeaway is the limitations of viewing pre-Civil War America as a true example of free banking. In that era, bank charters often contained onerous provisions related to capital requirements. As I have detailed elsewhere, any asset can be monetized, which is to say, used as collateral to create a money supply. In the Wildcat Banking Era (as in most eras), land and government debt were the primary collateral monetized by regional banks.

In Dr. Selgin's view, as I interpret it, it was the instability of land speculation in that boom-bust pioneer era which caused the instability of those banks, not anything inherent in the institution of free banking itself. In effect, our most popular idea of why Free Banks were a failure, is simply wrong.

A third important takeaway is the history of free banking in early modern Scotland. Monetary reform advocates have over a century of history to plumb in their search for workable alternative monetary solutions. I look forward to researching more into this era myself, particularly with an eye towards how the Scottish Free Banking system was related to the real bills system and the gold standard system of the same era.

Social Security, Debt, Federal IOUs, Inflation

2010-03-16T00:31:00.001-07:00

I wrote about this issue a couple months ago, and now it has been confirmed: Social Security is now bankrupt. Right now, not some 20 or 30 years from now, as you will sometimes hear repeated.

http://news.yahoo.com/s/ap/us_social_security_ious

We, as the unwashed sheeple of America, are supposed to buy into the idea that the federal government is issuing IOUs for previous Social Security payments.

Here is the facts when boiled down to monetary reality: the Social Security tax no longer covers Social Security expenditures, so the government is going to print new money to make up the difference. These are the so-called IOUs, but the reality is the same: new money is being printed to cover the deficit.

For decades, the Social Security tax brought in more revenue than was needed for Social Security programs. The extra money went into the general fund all those years and was spent. An IOU was created (an accounting ledger entry, really, nothing more), meaning they general budget was saying to the Social Security fund: "Hey, thanks for the money, I'll pay you back later".

The money came in, it was spent, it is gone. In this time of exploding budget deficits, where is the government going to get the money to pay off these IOUs?

Obviously, printing up all this money to cover the deficit is highly inflationary. It is an axiom of economics that needs to be more highly publicized and well-known: a federal budget deficit is inherently inflationary. I haven't seen the mathematical studies, but I am willing to bet that the percentage rate of inflation is highly correlated to the percentage size of the deficit. Given that we are experiencing double digit percentage deficits since last year, I would expect inflation to rise into the double digits this year as well.

Using Reserve Requirements to Decrease Liquidity

2010-01-12T10:46:00.000-08:00

Raising reserve requirements is a key component of the modern Jubilee plan. The idea of directly using reserve requirements does not occur to most Americans, simply because the Federal Reserve uses only open market operations to change liquidity levels.

But this week, China demonstrates the utility of reserve requirements as a tool to fight inflation (read more here).

In fact, China is demonstrating the real-world success of the Jubilee plan. After flooding the country with stimulus in the past year, the government is now counter-acting potential inflation by requiring banks to stockpile more money.

The Jubilee plan is slightly different, in that it would not randomly disburse stimulus. Rather, would unleash stimulus across the board by direct payoff of debt, simultaneously requiring banks to soak up the extra money by raising reserve requirements.

The total amount of money (currency and credit) in circulation would remain the same, but all debt payments would be eliminated, allowing the economy to restart itself without central government control.

Why are We Facing a Jobless Recovery?

2009-12-31T09:58:00.000-08:00

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.

Unavoidable Debt Trap Looms, According to Forbes

2009-12-22T10:03:00.000-08:00

Clearly, the general awareness of the problem of debt is growing. Even Forbes is now proclaiming the inevitability of default. Forbes is only 1 or 2 layers away from the mainstream, so the idea has almost reached critical mass. More and more people are slowly realizing, the debt simply cannot be paid off, even if we wanted to.

Of course, to our banking class parasites, the point of the debt is not to pay it off, but to keep it floating, a perpetual yoke of slavery on the neck of the people. However, they have overplayed their hand, like all parasites, they cannot self-govern their own growth and now endanger the health of their host.

We are trapped between crushing debt payments that will literally devour the whole budget, crippling budget cuts that will destroy our governments, or onerous tax hikes that could destroy the economy.

Or..... Cancel the debt, destroy the parasites, and let the economy recover! It really is that simple. Repudiate the debt load, which will save our economy and way of life. In a word, JUBILEE!!!!

http://www.forbes.com/2009/12/18/government-budget-deficit-personal-finance-financial-advisor-network-treasury-debt.html

At all levels, federal, state, local and GSEs, the total public debt is now at 141% of GDP. That puts the United States in some elite company--only Japan, Lebanon and Zimbabwe are higher. That's only the start. Add household debt (highest in the world at 99% of GDP) and corporate debt (highest in the world at 317% of GDP, not even counting off-balance-sheet swaps and derivatives) and our total debt is 557% of GDP. Less than three years ago our total indebtedness crossed 500% of GDP for the first time."

Add the unfunded portion of entitlement programs and we're at 840% of GDP.

The world has not seen such debt levels in modern history. This debt is not serviceable. Imagine that total debt is 557% of GDP, without considering entitlements. The interest on the debt will consume all the tax revenues of the country in the not-too-distant future. Then there will be no way out but to create more debt in order to finance the old debt.
It assures a period of economic devastation. In a last, desperate attempt, politicians at the federal and local levels will raise taxes to astronomical heights to raise revenues. And that only assures destruction of the economy. Forget the fable of economic recovery. Unless there is a change in Washington by next year's election, there will be no way to turn back.

Worker Co-Ops Gaining Traction in Cleveland

2009-12-22T07:51:00.000-08:00

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."

Ellen Brown Calls for National Debt Cancellation

2009-12-17T14:44:00.000-08:00

Excellent article published yesterday by Ellen Brown, detailing the positive side of national debt cancellation. The banking class everywhere at all times attempts to load the commoners with heavy debt burdens. The commoners are starting to wake up.

Jubilee means freedom from exploitation!

http://www.truthout.org/1216097

Europe's small, debt-strapped countries could follow the lead of Argentina and simply walk away from their debts. That would shift the burden to the creditor countries, which could solve the problem merely by a change in accounting rules.

Local Currency for Local Development

Issuing and lending currency is the sovereign right of governments, and it is a right that Iceland and Latvia will lose if they join the EU, which forbids member nations to borrow from their own central banks. Latvia and Iceland both have natural resources that could be developed if they had the credit to do it; and with sovereign control over their local currencies, they could get that credit simply by creating it on the books of their own publicly-owned banks.

In fact, there is nothing extraordinary in that proposal. All private banks get the credit they lend simply by creating it on their books. Contrary to popular belief, banks do not lend their own money or their depositors' money. As the US Federal Reserve attests, banks lend new money, created by double-entry bookkeeping as a deposit of the borrower on one side of the bank's books and as an asset of the bank on the other.

Besides thawing frozen credit pipes, credit created by governments has the advantage that it can be issued interest-free. Eliminating the cost of interest can cut production costs dramatically.

According to a German study, interest composes 30 percent to 50 percent of everything we buy. Slashing interest costs can make projects such as low-cost housing, alternative energy development, and infrastructure construction not only sustainable but profitable for the government, while at the same time creating much-needed jobs.

Government-issued money to fund public projects has a long and successful history, going back at least to the early 18th century, when the American colony of Pennsylvania issued money that was both lent and spent by the local government into the economy. The result was an unprecedented period of prosperity, achieved without producing price inflation and without taxing the people.

The key is to use the newly-created money or credit for productive projects that increase goods and services, rather than for speculation or to pay off national debt in foreign currencies (the trap that Zimbabwe fell into). The national currency can be protected from speculators by imposing exchange controls, as Malaysia did in 1998; imposing capital controls, as Brazil and Taiwan are doing now; banning derivatives; and imposing a "Tobin tax," a small tax on trade in financial products.

Would U.S. Debt Default bring Armageddon?

2009-12-14T11:54:00.001-08:00

Frankly, overblown rhetoric about the economy is perhaps the greatest obstacle facing economic and currency reformers. When a U.S. debt default is publicly declared by an Australian lawmaker to lead to Armageddon and the collapse of the world, it is hard to imagine a steeper wall to climb for Jubilee advocates.

To speak plainly, after a debt default, the main victims of economic collapse would be the banking classes, who profit obscenely from the current system of mass usury and financial manipulation, keeping massive debt loads piled on the backs of the common workers.

http://www.brisbanetimes.com.au/national/joyce-warns-of-us-armageddon-20091211-kmlu.html

THE OPPOSITION finance spokesman, Barnaby Joyce, believes the United States government could default on its debt, triggering an ''economic Armageddon'' which will make the recent global financial crisis pale into insignificance. Senator Joyce said yesterday he did not mean to alarm the public but there needed to be a debate about Australia's ''contingency plan'' for a sovereign debt default by the US or even by a local state government. ''A default by the US means complete economic collapse around the world and the question we have got to ask ourselves is where are we in that,'' Senator Joyce said.

Senator Joyce said that if the US recovered, global funds would flow back into North America. ''There will be only one way Australia will be able to keep funds here and that is by putting up interest rates, which will therefore bring real costs back to households,'' he said. ''That is the first scenario, which is extremely bad for Australia. The worse scenario is where the US doesn't repay its debt - the $2 trillion in debt it owes to the Chinese, the $1 trillion in debt it has to the Japanese and the $US1 trillion in debt to others - and then we are really nailed.

''The outcome is a shift away from the US dollar as the international trading currency and a shift to the Chinese yuan, and China becomes an immensely powerful player overnight. It's the real financial crisis, and the real financial crisis will mean this preamble we have just had pales into insignificance.''

Asked what sort of contingency plan he would advocate, Senator Joyce said it was like trying to prepare for a tidal wave but the local economy should have more self-reliance.

Can the Whole World be Export-Driven?

2009-11-13T14:56:00.000-08:00

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.

Tokens as Alternative Money and Problems with Metallic Coins

2009-11-10T09:48:00.000-08:00

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.

Gold a Rising Force as Money

2009-11-04T08:32:00.000-08:00

Gold is making a strong comeback as the international unit of account, as the world moves away from fiat paper dollars. It is actually quite amazing to watch monetary theory unfold before one's very eyes.

The fact is, fiat currencies are just fine for national/enclosed economies. It is only when trading between economies that a stable unit of account is a necessity. Gold, because of its relatively stable and constant supply, is the perfect solution to the need for this international unit of account.

Gold is undergoing a rapid international monetization to fullfill this role now, as the international community has decided to abandon the US dollar as reserve currency. As usual, the general public is generally clueless, because an Authority as not made an Official Announcement. But the game is on, albeit a secret game, played under the table, so as not to spook the markets in dollars and gold. Even played without Offical Announcement, the game is becoming obvious to the casual observer, with more open ackowledgements of central banks buying up gold and the price climbing a steep hill upward.

Obviously, central banks would prefer to purchase on dips, but there are no dips. The price is jump step climbing upward, relentlessly responding to demand, the demand which is trying to maintain itself as secretly and quietly as possible. There is an almost literal mad rush internationally right now to take physical possession of all gold reserves.

The abandonment of the dollar as the reserve currency is already starting to cause inflation in the US. That, along with continued record deficit spending, is going to ramp up inflation depite continued economic collapse and high unemployment. In other words, the worst of both worlds.

from http://news.goldseek.com/BullionVault/1257258074.php

Paul Mercier, a senior central banker [from the European Central Bank (ECB)] said official holders overall will no longer be net sellers of gold," said UBS analyst John Reade today, summing up the London Bullion Market Association's 2009 conference here in Edinburgh. "Given the Indian announcement overnight, that forecast's already true for this year. Central banks are now net buyers."

ECB markets manager, Mercier yesterday told the LBMA conference that although diminished from its early 20th-century role in the world's monetary system, gold continues to be an important asset in global reserves.

In private investor and institutional portfolios, "We've seen a move away from unallocated gold to allocated gold," said Neil Clift of J.P.Morgan Chase at a debate held at the LBMA's conference this morning. Commenting on the shift from unsecured credit accounts to physical positions held in secure custody, "[It means] the client owns their gold, there's no first lien over it, and they can come and take it away when they want."

"There will be a threat to the London market from overseas storage if we see the ETFs continue to grow, as we expect they will," Clift said, noting that Asian and Middle Eastern investors increasingly want exchange-traded products that vault in or near their home state – and are also priced in their domestic currency, rather than US Dollars.

Commenting on the much-discussed issue of bringing the different bodies representing London's bullion market together into some more formal organization – and which is likely to see "cleared forwards" for London gold offered by a formal exchange very shortly – "I think it's fantastic for the bullion market that the [Chicago Mercantile Exchange] is now accepting gold as collateral on other positions," said Key."We can expect to see other exchanges accepting gold as collateral over the next year, alongside dollars, currency, T-bonds."

Jubilee as Protection against Fractional Reserve Banking

2009-10-13T09:23:00.001-07:00

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.

The Necessity of the Jubilee Cycle in the Modern Economy

2009-10-08T14:29:00.001-07:00

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.

The Dangers and Advantages of Credit Creation

2009-10-07T10:52:00.000-07:00

Excellent article by Peter Warburton over at Gold Eagle, http://www.gold-eagle.com/gold_digest_01/warburton041801.html, that, although written in 2001, deals with many issues we are facing today. The central problem he addresses, especially as he came from a monetarist perspective, is the lack of connection between money expansion and inflation, the very issue at the center of the inflation/deflation debate today.

Warburton accounts for this puzzling phenomenon as due to the role of credit. The rise of the credit-based economy has radically changed the economic landscale since the 1980s. As he puts it, "On the one hand, it has enabled the monetary aggregates to grow much more slowly than the credit aggregates, helping to keep inflation lower. On the other hand, the non-bank credit avalanche has enabled a furious pace of fixed investment in physical assets that has promoted structural global excess capacity in virtually all manufactured products and exerted downward pressure on product prices."

In other words, credit is inherently non-inflationary, and it allows economic activity to the point of overproduction and oversupply, which is actually disinflationary.

Even though he was writting in 2001, Wharburton exactly describes the conditions of 2009, noting that monetary expansions are mainly caused by banking stress, as the troubled banks hoard the cash: "The more obvious are the system’s weaknesses, the greater is the fear of collapse and the larger the demand for liquidity within the financial markets. In these stressful episodes, it is the financial markets themselves that are the principal driving force behind the monetary expansion. Hence, there is relatively little monetary impact on the product and labour markets, that is, on prices and wages."

Thus, we have massive expansion of the monetary base without inflation, because the banks are just sitting on the money.

Wharburton posits that inflation due to monetary expansion is not to be found on the consumer price level, because it affects other sectors, especially in the value of the currency itself. The real price paid for over-expansion of credit is overproduction and malinvestment. The final outcome is debt deflation: "In the limit, the construction of excess capacity gives rise to debt default, as the idle portion of capacity does not earn an income and cannot service the debt that financed its construction." The result: "central banks preside over the creation of additional liquidity for the financial system in order to hold back the tide of debt defaults that would otherwise occur." Again, we witnessed this precisely as described.

The real cost of this credit destruction is paid by the currency: "The latent losses in the credit system, emanating from non-performing loans and defaulting bonds, represent a charge against the value of the currency, as surely as if the edges of the notes and coins had been trimmed away. " The main obstacle to realizing it, is that the debasement of any one currency is kept hidden by the fact that all national paper currencies are being debased in the same fashion.

Jubilee Analysis:

Credit creation is a form of resource allocation, functionally equivalent to money. In other words, a credit line allows you to purchase real labor and resources, in direct competition with cash purchasers. Thus, credit creation can drive up prices just like cash creation can. The advantage of credit creation over cash creation is the avoidance of hyper-inflationary effects, as credit is created and extinguished. The downside is the tendency towards malinvestment and debt-deflation when credit levels become too high.

This is THE fundamental issue flying right over the heads of the Hard Money types. The majority of money is not centrally issued. Sure, our currency is issued by the feds, but most money is functionally created by banks in the form of credit. The only way to eliminate the issuance of credit money by banks is to eliminate the system of fractional reserve banking.

Dollar Replacement Rumbles Begin

2009-10-06T08:45:00.000-07:00

Wow, what a night. The dollar falls sharply, with gold up up up, all due to the DENIED rumor of Gulf state movement to leave the dollar. The Independent yesterday released a bombshell of a report detailing a secret plot to abandon the dollar in the oil trade (http://www.independent.co.uk/news/business/news/the-demise-of-the-dollar-1798175.html). The process is supposed to take 9 years, but markets reacted sharply in the following 24 hours!

The most amazing part of the story is the American press's complete lack of coverage of it. With today's movement in the dollar and gold, it seems they will have to cover it. We shall see.

Reuters India reports:
"...analysts said that while individual countries would find it relatively easy to stop using the dollar in settling oil trades, as Iran has already done, replacing the currency in which oil is priced would require a massive effort. The newspaper story did not make clear how the change would work, and many analysts doubted it would occur any time soon."

Frankly, this is assurance without substance. Why would it require massive effort? It could be done tomorrow! We are approaching the borderline between orderly and disorderly collapse of the dollar, meaning, how long will it take?

Every major non-NATO country has already come out and said they desire dollar replacement, and the Gulf states have already publicly stated their desire for a regional currency, so the latest denials ring hollow:

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."

Chartilist Monetary Theory Insanity

2009-10-02T14:24:00.000-07:00

There is no doubt that operating under fiat currency introduces a new monetary theory that most people have not grasped, but the Chartilists have apparently jumped off the deep edge, as they have come up with a new theory of money that recommend larger government, zero interest rates, and expanding deficits.

Their basic argument appears to be that after the passing of the gold standard era in 1971, governments are no longer revenue-constrained, and thus, government money is free and goverment debt is just fine, better than fine, really, since government debt drives down interest rates and provides savings. To them, opposition to more government involvement and expanded deficits just boils down to "an ideological obsession that government is bad and private markets are good."

It seems we have run into another species of the modern Greenbackers, who believe that government money is now free, with the main difference being the Chartilists are based out of Australia. Frankly, these people are positively dangerous. I am tempted to attribute their lack of realistic thinking to the fact that they are leftists, and liberalism is defined as the substitution of fantasy for reality.

See, for example, this: "Imagine if the government saw through all the smokescreens and announced they were no longer issuing debt and would just continue to credit bank accounts as necessary to support full employment? The neo-liberals would scream inflation … but would soon run out of steam with that line of attack."

Also, this gem: "Why will inflation rise? With capacity utilisation rates so low around the world and spare labour capacity what will generate a widespread inflation? Perhaps oil prices? But that will be due to an olipolistic cartel (OPEC) and nothing to do with the deficits." (source quotes here: http://bilbo.economicoutlook.net/blog/?p=5219#more-5219)

The fundamental issue can be boiled down to the question: since fiat-currency issuing governments can print their own money, why collect taxes at all, why not just issue new money to pay for government expenditures? The proposition sounds simple and self-evident, but glosses over some very deep problems.

The most fundamental problem is this: a) money that is created without an accompanying creation of real wealth is inflationary and b) government action does not create wealth. Thus, governments that issue new money to cover current expenses quickly spiral off into an inflationary tailspin. Money created to fund a service is inflationary because once the service is performed, the money still remains and so we have an ever-expanding money supply.

Compare that with a pure credit clearing system, a la Thomas Greco, wherein mutual credit is spontaneously created and extinguished in a balanced fashion with every economic transaction. Such credit clearing is non-inflationary, since credit is created then extinguished. If money had to be created for each transaction instead of credit, the volume of money would quickly rise exponentially. This process accounts for such historical inflations as occured in colonial Canada when, in response to a coin shortage, playing cards became money (described here: http://www.micheloud.com/FXM/MH/canada.htm).

Thus, to balance government expenditures, taxes must be extracted in an equal amount. Any excess of government expenditure above the amount removed through taxation is, by definition, inflationary. That is the problem with government deficits. Deficit spending is inherently inflationary, as they introduce money into the system without the creation of wealth.

Now, some might object, government could theoretically introduce money to pay for wealth creation activities. That point is true, it could. But it doesn't. That is not that nature or function of modern government. We don't have a wing of government devoted to creating economic wealth, although the Chinese do, and it is working fantastically for them.

Our governments, like China's, could indeed create entire industries from scratch with fiat money, and produce no inflation. Such industries would be an economic positive if they competed with foreign industries, or created industries that otherwise did not exist at all. But the fact is, most of our government programs today fund only welfare programs, which are transfers of wealth, not wealth creating.

It is a standard Keynesian idea that in times of economic downturn, government ramp up spending to replace shrinking private spending. The idea makes perfect sense, and works wonderfully, when targetted on wealth-creating industry and not connected to the fact of high and increasing debt.

When stimulus money merely goes to filling budget gaps, while increasing the debt load, the treatment is worse than the disease, because the economic condition post-stimulus will be worse than it was pre-stimulus.

Steve Keen Proves the People's Bailout Works Best

2009-10-02T13:24:00.000-07:00

As I have been arguing all along, the only effective solution to debt deflation is cancellation of debt, and stimulus needs to go directly to the people, not to the banks. Perhaps Steve Keen cogitated over the comments I left on his blog, as he created a computer model to test the theory. Low and behold, his model proved the People's Bailout is correct: money given to banks is far less effective, even in theory, than money given directly to citizens.

As he puts it at his post http://www.debtdeflation.com/blogs/2009/09/19/itâs-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

2009-10-02T10:02:00.000-07:00

Add another log to the "inevitable inflation" fire: Social Security going negative now, not later. Because of our current debt deflation depression, revenues have fallen far, far faster than anticipated. Not only are revenues falling, many people are transferring their unemployment problem onto the Social Security system, as unemployment gets translated into early retirement and disability payments. The SS tax is not going to bring in enough to cover current SS payments, as soon as next year officially, probably right now in reality.

Remember, the SS Trust Fund is not a fund, and you certainly can't trust it. It is just an accounting trick. The SS tax money has been going into the general fund, helping mask the deficit, for years. The SS Trust Fund is simply a Treasury promise to pay.

Ok, so how will they pay, now that the SS tax is no longer sufficient to meet the SS payments? Raise the tax? Lower benefits? Those would take political will. Most likely: just print the money, driving up the debt and adding to the deficit, which is INHERENTLY INFLATIONARY!

It boggles my mind how the press stories continue to obfuscate and misinform. The AP article says, "The deficits — $10 billion in 2010 and $9 billion in 2011 — won't affect payments to retirees because Social Security has accumulated surpluses from previous years totaling $2.5 trillion."

They continue to push the mistaken idea that there is a surplus of money somewhere, a build up of cash that is waiting to be drawn down. The whole thing is a complete scam, abetted by people's economic and accounting ignorance. The article says, " Without a new fix, the $2.5 trillion in Social Security's trust funds will be exhausted in 2037. Those funds have actually been spent over the years on other government programs. They are now represented by government bonds, or IOUs, that will have to be repaid as Social Security draws down its trust fund."

So, how much sense does it make that the government can give a bond to another wing of government? It only seems to make sense as a linguistic sentence, it has no economic reality behind it whatsoever. Real translation: the money was taken in, it was spent, it is gone, there is no such thing as a trust fund. There is only a promise to pay, that is all, with no actual money to do the paying.

That is the psychology of hyperinflation. The refusal to cut budgets, the refusal to face reality. The money will be printed, there is no doubt.

http://www.google.com/hostednews/ap/article/ALeqM5h6BfoloJOnV0TeI7eIHC1ZWuBxygD9AVS0202

The Art of Not Seeing the Inflation Right in Front of Your Eyes

2009-09-23T15:43:00.000-07:00

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.

Worker Owned Businesses - the Wave of the Future

2009-09-17T16:09:00.000-07:00

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.

Why is Treasury Demand Still Strong

2009-09-11T16:26:00.001-07:00

Many of us have been waiting for the market for US debt to collapse, but the demand seems to be increasing? What is going on?

In short, the banks need somewhere to park all the excess reserve money they have on hand. The last thing they want to do is invest it in the real economy during a deflation. They are just riding it out, holding cash, as the real economy crashes. At some point, they will swoop back in, picking up dollars for dimes.

Why do they have so much reserve money now? Government bailouts! Lovely pattern isn't it? A pattern sometimes known as the clusterfuck...

Government bails out banks, banks use the money to buy government debt. Economy continues to grind down and future prospects continue to darken.

Welcome to Screw-ville, baby, population: YOU!

http://www.bloomberg.com/apps/news?pid=20601087&sid=aEZxetP0Q2Zw

Treasury Bond Auctions Show Insatiable Debt Demand

Sept. 11 (Bloomberg) -- The U.S. Treasury Department’s auctions this week of $70 billion in notes and bonds shows the unprecedented amount of debt being sold to finance the record budget deficit is failing to curb investor demand.

Fixed-income investors can’t see a recovery strong enough to spur central banks to raise interest rates anytime soon, especially with the Obama administration forecasting that unemployment in the U.S. -- the world’s largest economy -- will rise above 10 percent in the first quarter.

“The auction shows investors are not afraid of inflation going forward,” said Ira Jersey, an interest-rate strategist in New York at primary dealer RBC Capital Markets. “There was a lot of cash on the sidelines that needed to go to work.”

Global Trade, Debt, and Stimulus: a short Explanation

2009-09-11T16:06:00.000-07:00

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.

Economics of the Higher Education System: Ponzi Exploitation

2009-09-09T00:42:00.001-07:00

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.

Father of Legal Tender - Elbridge Gerry Spaulding

2009-09-04T14:30:00.000-07:00

Article in today's NY Times (http://www.nytimes.com/2009/09/04/business/economy/04norris.htm) attempts to equate Bernanke to E.G. Spaulding, the man who financed the US government during the Civil War by firing up the printing presses. In funny part is, Spaulding didn't even support his own actions, except for the necessity of specifically WAR TIME funding, and to say he was a proponent of fiat paper money is completely false.

The Times article is basically a propaganda piece suggesting that money printing by government is not bad. Well, I guess it’s all relative, right? The article presents some of the doom and gloom statements of that debate that did not pan out, even flatly dismissing the inflation problem, which as predicted, did occur. By suggesting by extension that today’s naysayers are equally wrong, that Bernanke has a chance at historical vindication when this is all said and done, the Times produces a lame pro-Bernanke publicity piece. [As for Bernanke, it has been proven conclusively that he is an intellectual idiot who completely fails in every prediction he makes, demonstrating his lack of mastery of what is really going on with the economy. His only successful function is enriching the banking class at the public’s expense, so it is no surprise that the Times, the voice of that banking class, lauds him.]

The article pays homage to Spaulding, an important factor in the victory of the Union in the War for Southern Independence (what he called the Great Rebellion and we call the Civil War), while totally misleading us about what Spaulding really did and what he stood for. The article calls him the father of fiat currency, a man who was willing to throw out the economic orthodoxy of his day. He article falsely states: “Contrary to the expectations, paper money did not set off sharp inflation over time, and when the paper money eventually was made convertible into gold, there were no lines of people wanting to trade in paper for bullion.”

The facts of history debunk this. In fact, the greenbacks were indirectly backed by gold for the first half of the war. When its gold backing wavered in the first half of 1864, inflation spiked over 100%, and in the end, the dollar went back on gold, which was used to pay off all wartime debts including the redemption of the war time greenbacks! Such blatant and easily verified factual errors calls into question both the competence and honesty of the Times.

After it was all said and done, Spaulding wrote a book documenting it all for posterity, and God bless him for it. Spaulding’s book, History of the Legal Tender Paper Money Issued During the Great Rebellion, published in 1869, is an absolute treasure trove of speeches and letters, the very substance of the money argument at the time. It is full of weighty economic theorizing on matters of money, economics, and government finance. Some of the language is a bit archaic, as we no longer use some of their financial terms, but it is always elegant, and merely sampling the book pays off intellectual gold.

One thing that may surprise the average reader today is that the central terms of the debate were not whether the government should issue lots of paper money to pay for the war effort. That was generally granted by all, save the northern banking class of the day, which wanted the government to pay for the war through bonds sold on the open market (a scheme roundly denounced as most assuredly designed for the enrichment of the bankers, not for the good of the Union).

Rather, the most tendentious issue of the day was the establishment of the newly issued federal script as legal tender. At the time, there was no legal tender, no money that you had to accept in payment by force of law. Regional notes competed in an open market, and inferior notes would suffer discounting. Greenback advocates like Spaulding did not want their federal notes to suffer competition, while holders of solid regional notes did not want to have honor these obviously inflationary greenbacks at face value, which legal tender laws would require.

Another fascinating aspect of the war-time greenback effort was an ingenious bond conversion program they developed. For the first year of their issue, each newly issued federal note had the following statement engraved on it: “This note is a legal tender for all debts, public and private, except duties on imports and interest on public debt, and is exchangeable for US six percent bonds, redeemable at the pleasure of the United States after a period of five years.”

On the one hand, this bond conversion option was seen as a compensation for people forced to accept the notes. It was openly acknowledged that the legal tender issuance of federal notes was a loan to the federal government forced on the public. The bond conversion option was like a bonus to offset the rightful discounting that could have been taken in the absence of legal tender law.

The bond conversion option was also intended, in modern terms, to soak up liquidity. This convertibility would prevent any great inflation, as Spaulding wrote, “for the reason that as soon as this currency became redundant in the hands of the people, and not bearing interest, they would invest it in the six percent bonds” (pg 188).

The interest on those government bonds was to be paid in coin, meaning gold, every six months, while the bond’s principle would be paid in gold within 20 years. In other words, these greenabacks were not really debt-free fiat money, as Ellen Brown would have them. They were still on the gold standard!

Spaulding stated explicitly on this matter: “There was no very great danger that the currency would become excessively inflated so long as every person holding greenbacks, not bearing interest, could exchange them at his own will into gold-bearing bonds at six per cent interest per annum” (pg 192).

The bond conversion aspect of federal notes was, however, suspended after the first year of their issuance, in March 1863. Spaulding does not explain why, although presumably, the government simply no longer wanted to pay interest on their forced loan. After that time, it was up to the discretion of the Treasury Secretary how much interest he would pay, if any at all. After that change in the greenback, after it had been removed from the gold anchor, inflation kicked in. Spaulding was against giving that power to the Secretary, calling it a mistake, and blamed it for “the inflations, fluctuations, and changes now so apparent” (pg 194). An inflation spike of 100% took hold in the first six months of 1864. By mid July, these US notes were worth only 35 cents on the dollar.

After the war was over, Spaulding was an enthusiastic proponent of paying back the national debt in gold and silver. The way he saw it, abandonment of the gold standard during war was necessary because those war loans paid for destruction, meaning an unproductive purpose. As he put it, “Every dollar expended took out of existence a dollar of value for which the Government gave its promise to pay. Every dollar of property thus destroyed led us farther and farther away from the specie standard, and has to be produced again by labor before the value is restored” (211-2). Eventually, the debt was paid back in gold, as Spaulding called for.

To cite this man as anything but a gold-standard enthusiast is completely dishonest.

Currency Reform: a Modest Proposal

2009-09-03T15:30:00.000-07:00

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

2009-09-03T15:02:00.000-07:00

Clearly, gold is returning to its role as money, the ultimate store of value and settlement medium. The Chinese are deftly, and quietly, preparing to exit the dollar-denominated international system by establishing their own regional gold market. There is even overt mention of monetizing the gold, which, in plain language, means a return to the gold standard as an objective unit of international settlement.

All the talk of the slow, almost impossible process of displacing the US dollar as international reserve currency would be rendered moot instantaneously if China backed a currency with gold. The dollar would be obliterated overnight if the Chinese introduced a trade currency pegged to gold.

Is it a coincidence that gold has spiked in the last 36 hours (hovering just below $1000/oz.)???

HONG KONG (MarketWatch) -- Hong Kong is pulling all its physical gold holdings from depositories in London, transferring them to a high-security depository newly built at the city's airport, in a move that won praise from local traders Thursday. The facility, industry professionals said, would support Hong Kong's emergence as a Swiss-style trading hub for bullion and would lessen London's status as a key settlement-and-storage center.

"Having a central government-sponsored vault would create a situation where you could conceivably look at Hong Kong as being a hub, where metal could be traded for the region," said Sunil Kashyap, managing director at Scotia Capital in Hong Kong, adding that the facility was the first with official government backing in the region.

The Hong Kong Monetary Authority, which functions as the territory's unofficial central bank, will transfer its gold reserves stored in other vaults to the depository later this year, the Hong Kong government said in an earlier statement. The 3,660-square-foot depository, located at the city's main Chek Lap Kok Airport, will serve as a "storage facility for local and overseas government institutions," according to the government statement.

Traders said the new depository facility could also foster new financial products, such as exchange-traded funds based on precious metals.

Martin Hennecke, a financial advisor with the Hong Kong-based Tyche Group Ltd., said that could be appealing to regional central banks unnerved after watching the global financial system teeter on verge of implosion last year.

"Central banks are increasingly aware of the importance of having gold reserves at time of financial crisis and having it easily available at their own disposal," he said.

Meanwhile, local newspaper reports said the Hong Kong Mercantile Exchange had signed an agreement to use the depository for its physical settlement and storage needs.

Marketing efforts will be launched to convince Asian central banks to transfer their gold reserves to the Hong Kong facility, according to reports citing Raymond Lai, finance director with the Hong Kong Airport Authority. Efforts will also be made to reach out to commodity exchanges, banks, precious-metals refiners and ETF providers, the reports said. Management firm Value Partners planned to launch an ETF gold fund that will use Hong Kong instead of London as a repository for the gold backing the fund, local reports said Thursday.

http://www.marketwatch.com/story/hong-kong-recalls-gold-reserves-from-london-2009-09-03

China's Boom or Bust: the Paradox of Easy Money

2009-08-20T12:25:00.000-07:00

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.

GDP as Mass Mind Control

2009-08-10T11:28:00.000-07:00

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.

Storm Clouds Gather as Fed Secretly Monetizes Debt

2009-08-07T09:21:00.000-07:00

Scary stuff follows. Keep in mind, the only thing propping up national GDP, and the financial system as we know it, is the Fed monetizing the debt.

http://market-ticker.org/archives/1304-BLATANT-Monetization-Uncovered.html

"...
Well now we know what happened: The Fed pretty clearly pre-arranged, either explicitly or by "suggestion", that the Primary Dealers take up the auction with the promise that The Fed would immediately monetize half what the Primary Dealer's took!
Folks, this is beyond bad - it is pernicious and outrageous conduct by The Federal Reserve in conspiracy with the Primary Dealers, both of which are now desperately trying to prop up the US Government Bond Market through subterfuge rather than just buying up the bond issue from Treasury when originally put to the market!
If you think the economy and credit markets are "on the mend" why would The Fed do something like this? It would not be necessary unless The Fed was told (by those very same Primary Dealers) that they were going to be unable or unwilling to take down any more Treasury Debt.
Folks, let me be clear: The United States HAS OFFICIALLY HIT THE TREASURY DEBT WALL and The Fed and Treasury are engaged in subterfuge and conspiracy in an attempt to hide this from the market.
There is no other explanation for what just happened.
...
When it sinks in to the market's consciousness - we had two failed Treasury Auctions last week, both 5 and 7 year, yet we intend to try to borrow ANOTHER $400 billion next quarter and nearly $100 billion this coming week - the consequences could be extremely severe."

Excess Reserves, the Federal Deficit and Fed Manipulation

2009-08-04T10:16:00.000-07:00

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.

Chinese Industrial Policy of Piracy

2009-07-31T13:44:00.000-07:00

Capitalism divorced from any ethics or morality, this is the Chinese way.

Sun Danyong, the 25-year-old suicide victim who worked at contract cellphone maker Foxconn International's massive gray and white factory complex in Dongguan, had 16 prototypes of Apple's new fourth-generation iPhone in his possession, according to the Taiwanese company. When one went missing, Foxconn's security guards raided his apartment, according to a report in the People's Daily. The phone didn't turn up. A likely answer, according to security experts, is that the device ended up in the hands of Shenzhen's notoriously entrepreneurial counterfeiters.

"The copying of prototypes certainly happens a lot in the electronics and IT industries," said Dane Chamorro, a regional general manager with Control Risks, a corporate investigations consulting firm. "You don't have to steal them, you just have to borrow one for a day." In an earlier interview with the New York Times, Foxconn's general manager for China said that Mr. Sun had previously lost products "several times" before getting them back again.

Apple computer, whose popular iPhone is widely copied in China, isn't the only foreign handset maker to suffer at the hands of counterfeiters. Knock-offs of Samsung, Nokia and Motorola products are all sold openly throughout China.
According to U.S. Customs and Border Protection, 81 percent of all counterfeit goods seized at the U.S. border were from China. The value of those goods rose 40 percent in 2008, to $221.7 million.

"Mainland China is the riskiest place for foreign firms to introduce their leading-edge technologies," said Steve Vickers, president of Hong Kong-based FTI-International Risk. "It remains a major problem."

A recent visit to the Golconda Cyber Plaza, a sprawling electronics mall in Shenzhen, suggests the scale of the challenge. Hundreds of vendors were showing off their knock-off mobile phones, including counterfeit Nokia and Samsung handsets, and the latest Apple iPhone, which was selling for about US$63, far cheaper than the US$579 charged on Apple's Hong Kong online store. "The iPhone quality is good and quite steady," said Li Jinhui, a salesperson with Shenzhen Guanghui Communication, one of the phone sellers, pointing at one of the counterfeit phones on display. "The real phone price is too expensive, so many people buy this instead."

The copying takes several forms. In some cases, companies copy phones already on the market. In others, local suppliers of foreign companies run extra shifts and sell the surplus goods on the side. Then there are the designs that get stolen even before production. This last form may be the most damaging, since it undermines costly efforts to build anticipation about upcoming products.

Theives have become adept at exploiting weak points in companies' security arrangements. According to Nicholas Blank, an associate managing director with security firm Kroll, the typical Chinese factory is protected only by guards who check the IDs of employees entering the facility.

"Unfortunately, in most of these schemes where intellectual property is stolen from a factory, it's not someone breaking in," said Blank. "It's usually an employee or a contractor who already has access to the facility." Even where internal security is more elaborate, counterfeiters may be able to identify which employees have access to product samples and bribe them. "If you wanted to know what a company's next design would be, you can pretty well target those in the OEM organizations who are holding the prototypes," said Chamorro. "It's not rocket science to throw money at them."

China's legal system hasn't helped matters. Intellectual property cases are hard to bring and even harder to enforce, according to attorneys. One problem is that China's criminal code specifies a minimum value for seized goods in order to trigger criminal action -- seizures worth less than 50,000 yuan ($7,330) aren't prosecuted by the police. Counterfeiters have responded by limiting the size and value of their shipments.

Another worry is that anti-piracy enforcement may have weakened during China's economic slowdown. According to a report by the International Anticounterfeiting Coalition, coalition members have been told by local police that they were under instructions not to pursue criminal cases against counterfeiters. "Overall, we've seen a deterioration," said one Hong Kong-based lawyer who declined to be named. "There's a lot of concern that the government has openly told local forces not to pursue as many cases because of the impact it might have on jobs and social stability."

http://www.reuters.com/article/newsOne/idUSTRE56T0BL20090730

Arizona Government Selling Capitol Buildings

2009-07-31T08:28:00.001-07:00

Nothing is more emblematic of the real effects of the financial contraction cycle than the latest proposal by the Arizona government to sell their own government buildings.

In a monetary contraction, real wealth, starting with real estate, is vacuumed up by the financial elite. As I have detailed elsewhere, that is exactly the purpose and function of monetary contractions: a well-executed plan by the wealthy to gather more wealth. Normal people lose their possessions by going into debt during the credit run-up. Arizona is proving it can happen to governments too.

Living beyond your means, relying on the bankers to bridge your budget with their loans, this is the mechanism of slavery. A sale/lease-back such as Arizona is proposing is just a loan by another name, as they try to sneak around legal limits on their ability to get loans.

Thank you, Arizona, for making the process of wealth contract by bankers at teh expense of the people so obvious and notorious.

Dream with Bernanke!!!!

2009-07-31T08:14:00.000-07:00

This morning I had a dream with Bernanke. Yeah, weird, I know.

We were in a room in some big city apartment building with some other people for a publicity thing, a big-wig mingling with the commoners kind of photo-op. So I asked him real respectful like, why he gave all the bailout money to the banks rather than directly to the people.

He just laughed and went into the next room.

The Paradox of International Trade Deficits

2009-07-24T10:05:00.000-07:00

Many people still have the idea that a trade deficit is an unqualified negative, but since we went off the gold standard, that unqualified judgment no longer really applies.

Back in the days of the gold standard, an imbalance of trade would be settled in gold. So, a country operating a trade deficit would be chronically bleeding gold. In fact, that exact thing was happening to America in the early 1970s, leading Nixon to take the dollar off of its international gold standard .

The situation today is much different. The deficit country gives slips of paper to the surpluss country, in return for real goods. Who is really getting rich in that scenario? Obviously, its better to get stuff and give paper. The surplus trade partner is just plain dumb in the first place for accepting a non-objective currency as a settlement of account.

They are even dumber for then reinvesting those dollars in dollar-denominated debt. Seriously, would you give a loan to someone expecting repayment in a paper currency they can print out at will? It is asking to be taken advantage of, quite frankly.

The only rational thing to do with a paper currency from a foreign issuer is to immediately plow it back into real goods and services.

This analysis merely highlights how irrational Chinese economic policy has been. Actually, to be clear, it is only irrational from the perspective of maximizing value. It is not irrational, it makes perfect sense actually, in light of their true policy objective: full employment. The Chinese are willing to sacrifice a great deal to maintain full employment.

The problem for us is that by hitching our economies together, our economy is distorted by their irrational economic objectives. We get tons of cheap Chinese junk and a bloated financial sector, but lose real productive jobs.

Worst of all, we are subsidizing the unsustainable, inefficient, and destructive production goals of the Chinese government. In classical economic terms, this is called malinvestment.

It makes no economic sense to keep people employed by making half of them construct houses and the other half tear them down. But under a command economy, such economically destructive processes go on all the time. In fact, the Chinese already have a large overcapacity of housing supply, but that doesn't stop them from building more under the direction of central planners.

In the Soviet days, their planned economy was isolated, firewalled off from the free world. Today, ours is linked to theirs. On the one hand, we benefit from all the cheap goods they give to us for paper dollars, on the other hand, we suffer from inflated commodity prices and the loss of jobs, and we encourage an unsustainable and destructive economic system.

Credit Contractions and the Consolidation of Wealth

2009-07-23T12:48:00.000-07:00

The wealthy love credit contractions and they use their banks to facilitate them. Here why and how:

It is an axiom of human psychology that people will fall victim to easy credit. I chalk it up mainly to the inevitable fact that young people with the keenest need for status displays have the least available savings. For that and no doubt other reasons, people are happy to go into debt to get something today rather than wait until they have saved to afford it.

Easy credit serves to consolidate wealth in the bankers’ hands in two ways. For one, there is a systemic shortage of dollars to pay off loans. Because we operate under a debt-based money system, collectively, there is not enough money. In short, money is created is based on the value of loan collateral, but there is no extra money created for the interest payments.

Thus, there is a mathematical shortage of money relative to outstanding debt owed, which guarantees a constant percentage of loan failures. A loan failure means a permanent transfer of wealth into banking hands.

This constant transfer of wealth into banking hands is a low-level phenomenon under the normal conditions of an expanding credit supply, but undergoes a massive spike upward when credit conditions tighten, which is the second reason why the wealthy love credit contractions.

The conditions of easy credit create a greater demand for credit, because the easy credit drives up prices. For example, if housing has to be paid for in cash, there will be less ability to afford houses, i.e., lower demand. On the other hand, if housing can be 100% financed with loans, more people will be in the market for housing, the greater demand driving up prices. The higher prices then mean that fewer can afford the prices, driving up the need for credit. Rising prices then drag in speculators hoping to ride the upward tide of prices. Thus, as you can see, easy credit and higher prices form a feedback loop, producing what are commonly known as price bubbles.

The wealthy love price bubbles because they know exactly when they are going to pop. They know this not because they have psychic powers or are economic geniuses, but because they themselves cause the bubble to pop. The wealthy pop the bubble themselves by removing their own investments, known as profit taking.

Profit taking is happy enough for them, but it gets even better, because after taking their profits, they also tighten credit availability. Tighter credit, combined with their initial burst of selling, produces a bubble collapse. Masses of common people are left sitting on devalued collateral but overvalued loans, resulting in mass defaults and panic sales at low prices.

Now, of course the wealthy love getting to repossess and resell the collateral, but even more than that, they love swooping in and buying up the goods at ultra-cheap prices from distressed sellers.

It is really the simplest game in the world for the banking class: pump up prices with easy credit, take profits, pop bubble, acquire cheap assets, repeat.

But you object, banks get hurt in the process too, don’t they? Well, the big ones don’t, not at all, they are “too big to fail”, remember? But even more importantly, you are confusing banks with the banking class. Sure, some banks fail, but that is part of the process of tightening credit and lowering asset values. A bank may “fail” but the bankers are still getting rich. A bank is just a legal fiction, so the bankers are not actually going broke when a bank fails. Their personal assets are squirreled away and safe, sitting in cash and other valuable goods. Remember, they are the ones who know exactly when to cash out, because they caused the bubble collapse themselves.

When you are rich enough, you are not riding the market, you are moving the market. The common investors are just along for the ride, hoping for the scraps that fly down from the feast. Additionally, this banking class is in contact with one another, so they have the ultimate insider information. Because they themselves move the market, and are in close contact with others who do the same, their trades will always occur before the masses. Its like the built-in house advantage at the casino. Just enough commoners make money to keep the whole operation going, but it is the house that is always getting rich.

Unfortunately, our debt-money system is structured so that you are forced to play at their game. They create the money, so they get the goods, it’s really that simple.

For the common people, the main solution is to get the base of our money supply off the debt system. People will always be going into debt to banks, but the government should be putting debt-free money into the economy to counteract the money shortage.

Government can also prevent asset bubbles by regulating interest rates and bank charges, as well as guaranteeing consumer rights (rather than bank rights). These government actions would not regulate bank credit creation directly (which would be almost impossible), but would effectively control bank credit creation by squeezing its profitability.

Government can also go into the banking business itself. Much government revenue would be created through interest charges, and even loan failures would go to the public good. Competition with government would also drive down the costs associated of the private bankers and decrease their overall power. Government directly banking could also be used to finance crucial government infrastructure functions, debt free, saving us all money.

The Black Magic of Debt Money Creation

2009-07-21T16:50:00.000-07:00

Anything with market value can be monetized to create money. The most common example we can all relate to is housing. Here is how it works:

You give the bank your house, they give you money. You are then allowed to buy your house back from them, on a slow repayment plan. In short, they give you dollars up front, then you slowly give back the dollars to get your house back (except you give back about three times the number of original dollars, because of the interest charged).

This house for dollars scheme is one example of debt dollars. The dollars are based on a debt, the amount owed on a house. You supply the house, they supply the money. Where did they get the money? They created it.

Now, by creating it, I don’t mean they printed the dollars. In our modern system, that is not necessary. They simply created an account balance for you. On their accounting, they have a house as an asset, and you have money as your asset, so it balances out.

Hopefully, now you can better understand the meaning of economic statements like the following:

"Note that although the system of fractional-reserve banking creates money, it does not create wealth. When a bank loans out some of its reserves, it gives borrowers the ability to make transactions and therefore increases the supply of money. The borrowers are also undertaking a debt obligation to the bank, however, so the loan does not make them wealthier. In other words, the creation of money by the banking system increases the economy's liquidity, not its wealth." (N. Gregory Mankiw, Ph D., Professor of Economics at Harvard University, Macroeconomics, Fifth Edition, pg 485)

This easy creation of money by banks is the real reason why the rich always get richer. They create credit dollars, and they get to buy real assets like houses. As mentioned, they don’t even have to print actual paper dollars, they simply create money as an accounting balance. They get the house, you get the account balance. Of course, if you fail to scrounge dollars from other sources, they keep your house.

Nice little scam, really, but it’s only for the rich. In order to gain this money creating power, you have to prove you are sufficiently wealthy to start with. That’s because the rules state that banks have to have a minimum capital level before they can get chartered as a bank. Gotta have money to make money, as they say!

Housing was the traditional basis for a lot of money creation, but in today’s world, banks have found something even better: government cash flow. Now we all know that governments have a regular cash flow coming in from taxes. Bankers figured out that they can create money based on the promise of future cash flow. Creating money based on future money, it sounds kind of shady, doesn’t it? Here is how it works:

Any institution that generates cash flow can take out a loan, right? Except, long ago, they discovered the best way to get a loan is not go begging for money from individual sources, but to make the money sources come to them! They do this by issuing bonds. They advertise that they are in the market for some money, and they will take a loan from whoever gives them the best deal. Various people with money bid against each other, lowering the cost of the loan, until finally someone wins. The winner then buys the loan contract, which is called a bond. Both private companies and government bodies can gather money this way, by issuing bonds.

Bankers like bonds, because, as slips of paper, they are more easily bought and sold than real estate. If they didn’t want to hold the bond, they found they could sell the bond to someone else. Remember, at the root of the bond is a company or government paying off a loan. Whoever buys the bond gets that loan repayment money, so a market developed buying and selling bonds.

At some point the bankers realized that they could monetize bonds the same way they monetized real estate. Say you own a bond, and you sell it to the bank. You give them the bond, they give you money. As long as the bond has a market value, that process is just as legit as selling your house for money, right? It seems a bit shady because it has entered the realm of abstraction: creating money to exchange for the promise of other money.

This enters us into the ethereal realm of financial products, all the way up to the credit default swaps and derivatives which became notorious during the financial panic of 2008. As long as there was a market value for something, some creative banker could monetize it, creating money to pay for it, in an ever-growing mountain of credit leverage.

The dollar is often called debt money because it is based on the monetization of US government debt bonds. The US Federal Reserve is the source font of dollar creation, because it monetizes the bonds of the US government. The Fed Reserve is also responsible for releasing actual paper cash into the economy, but that is a separate issue. Interestingly, the US Mint releases coin cash into the economy in yet a third money creating process.

But at its most basic level, the Fed Reserve creates credit money by monetizing government debt. The Fed then provides that credit money to banks to distribute into the economy at large. That creates the base source of the money supply. The market value of the federal debt is the collateral that backs the money supply.

Because the debt is the basis of the money supply, if the government paid off its debt, what would be the basis of the money supply? Hmm, there is a good question. Obviously, there would be the paper bills and coins in circulation. There would also be the credit money that commercial banks created by monetizing assets into private loans. But obviously, the money supply would shrink drastically if the government paid off its debt.

As a practical matter, the government simply keeps up the process of turning over its debt, continually refinancing and expanding its debt. Obviously, that continues to expand the money supply as well, resulting in widespread easy credit and chronic inflation.

Individual banks also have the power to increase the money supply on their own, by monetizing assets into loans, as we detailed previously. There was a time in the early mid-1800s when the debt was paid off and the money supply for the nation was solely in hands of private state banks (called the Free Bank Era). The banks based their money issue on exactly what we have been talking about: the monetization of real estate and government bonds as collateral.

This era was criticized as the Wildcat Bank era, but it did not really end out of its own failure. It was brought to an end by the National Bank Act of 1863 to meet the financing needs of the Civil War.

After the Civil War, the government returned to the discipline of the gold standard. That was then criticized for being too inelastic in its ability to create credit. Which led to the formation of the Federal Reserve system in the 1910s to loosen up credit. Which worked spectacularly throughout the 1920’s to pump up the economy. The credit bubble burst, however, resulting in the Great Depression. To loosen up credit again, the dollar was taken off the gold standard. Since then we have had runaway economic growth and malinvestment fueled by easy credit and chronic inflation, culminating in the Credit Crunch of 2008 and the ongoing Great Recession.

There is a better way of these destructive and unsustainable cycle, and it involves moving out of the system of debt-backed money.

The Real Costs of Business with China

2009-07-21T15:30:00.000-07:00

Great article detailing the practice of business with the Chinese. In sum, they are untrustworthy, highly unethical, and frankly brutal in the treatment of business partners. Read the following book review for yourself.

Poorly Made in China by Paul Midler
Reviewed by Muhammad Cohen

When you buy for US$2 in New York an umbrella that's made in China, you have to wonder how they do it. After all, the umbrella components have to cost something, there's shipping, and there's profit for numerous middlemen and the retailer. Among the economic miracles unfolding in China over the past two decades, the most mysterious may be how a country that skipped the Industrial Revolution, substituting the Cultural Revolution, became the low-cost factory floor to the world.

Poorly Made in China: An Insider's Account of the Tactics Behind China's Production Game provides fascinating and disturbing answers. Chinese manufacturers cut corners wherever they can, from product quality to factory equipment and maintenance. They unilaterally change product and packaging specifications to trim costs. They raise prices after the deal is signed, leaving the importer to absorb the added cost. They reproduce their customers' products for sale at higher margins in other markets. With support from government, bankers, and networks of fellow manufacturers, they conduct manufacturing and customer relations as a game, treating the other party as a patsy not a partner, playing for the short term of making an extra penny at the risk of product quality but also taking a long-term, multidimensional outlook that outflanks the hapless customer.

. . .
cont.
http://www.atimes.com/atimes/China/KG18Ad02.html

The Theory and Practice of Credit Exchanges and Alternative Money

2009-07-15T11:10:00.000-07:00

Money represents wealth. Money can be issued based on anything of value, be it a good or a service. Creating money to represent some object of wealth is called monetizing. Any collateral can be monetized to create new money. Even labor can be monetized to create money.

Money that is created apart from collateral wealth, apart from real goods and services, is inflationary, because it causes a surplus of money relative to wealth. Money can be printed, but unless wealth is created along with it, it does not make anyone richer.

Credit, the kind issued by a credit clearing exchange, can only be issued in the same fashion. Credit can only be created based on the monetization of some collateral or service. By definition, the creation of credit only makes sense to facilitate some mutual transaction. Credit cannot be given out freely, any more than money loans can be given out freely.

For this reason, in a credit exchange, people should not be extended unearned credit lines. Credit clearing exchanges die because of negative balances. Credit clearing must proceed on the same time-tested basis as any other banking function: on good collateral.

A credit clearing exchange cannot be run solely on idealism. It has to be based on real wealth and offer a real profit motive, both for the members and the exchange operator.

Without the availability of an interest charge on loaned money, the credit exchange operator has to rely on an alternate source of revenue: brokerage. The exchange is not offering a good, like money, it is offering a service. The service is to broker economic transactions, and to track objectively and accurately the mutual credit streams created.

A credit exchange is backed by nothing more or less than the full faith and credit of its members. The exchange only profits insofar as it facilitates economic transactions. The interests of the exchange and the members are aligned: profitable economic transactions.

This is the only economic function of a credit exchange: facilitating economic transactions that would not otherwise take place. The economic problem the exchange solves is a lack of cash. For example, a plumber and a mechanic have both lost their jobs. They are both without money, so in the regular scheme of things, neither can afford each other’s services. However, the credit exchange can step in and facilitate their mutual transaction, garnering a small brokerage fee for the service.

If the tradesmen were flush with cash, they would not need the credit exchange broker. Thus, the target audience for a credit exchange is clear: the unemployed and under-employed. People who have excess time, but not a steady cash flow, need the services of a credit exchange. Some people would also like to join the credit exchange as a form of advertising. The larger the labor pool, the more transactions would take place.

Thus, in practice, the exchange operator must seek out and recruit clients into the exchange. The operator should have an eye for specific industries and skills that would be most beneficial for the overall health the exchange network. The operator must deliberately and systematically seek to maximize in-network credit transactions. Each new member should be encouraged to invite others into the network as well.

New members should not be extended free credit, as the problem of free-riders would get too large. Rather, new members should be required to deposit their own good/service into the exchange vaults. Economically speaking, this is a deposit of wealth which the credit exchange then monetizes. The deposit would earn a balance in the network, and mark the official entry of the member into the exchange’s economic system.

Members have to monetize their own wealth-building service as a form of capitalizing their own credit account. For example, a mechanic could monetize 8 hours of his own labor, or he could monetize 80 hours of his own labor. It would be up to the exchange operator to establish an upper limit on the credit value that could be monetized by any member. This is a very intuitive form of a credit limit that even a new member would understand.

Beginning members might not be allowed to monetize any of their labor at first, but might have to operate solely on an service-rendered-first trade basis. Or beginners might be allowed to monetize a day’s worth of labor. But as their reputation score rose, the credit limit could rise with it. Soon, a member might be able to monetize a week’s worth of labor, or more, as appropriate.

Monetizing labor means that trade credit is granted a member, under the expectation that future labor will be done. The member would literally sign over a labor check, or labor bond, stating how much labor was deposited with the exchange. It is nothing more or less than a personal IOU signed over to the exchange.

The exchange operator would then be able to market that IOU. Someone who needs that service would purchase that service with their own IOU. This is how a purely credit exchange network would operate. The IOUs function as money, but they are backed solely by the full faith and credit of the issuer. A member would deposit their own personal IOU with the exchange, then complete that service when someone purchased the IOU.

If someone refused to, or was unable to, honor their IOU, functionally, that means they have defaulted on their credit. In such cases, the loss would have to be absorbed by the exchange operator. The operator must be running at a sufficient profit to enable the write-off of defaulted credit by unfaithful members. Obviously, this is exactly parallel to how a money bank must earn enough dollars in interest and fees to offset loan losses.

Members would be encouraged to be faithful guarantors of their IOUs by the benefits of being in-network. Their faithfulness and skill in fulfilling their IOUs would be revealed by their reputation score. If someone refused to honor their own IOU on day one, before they used anyone else’s services, there would be no harm done to the exchange itself. However, if someone spent two weeks using the services of the exchange, then refused to contribute in turn, that would be a huge loss for the exchange to absorb.

Everyone contributes with the expectation of getting something back, so widespread defaults could easily shake the confidence in the faithfulness of the exchange network itself. Members should be fully briefed on the high ethical standard that they are expected to maintain when they join the network. Obviously, refusal to honor even one IOU could be grounds for removal from the exchange network, and new members should be limited to very small account balances until they established their credit worthiness.

So far, I have only discussed the monetization and trading of services, but goods can be monetized into the exchange network as well. Rather than capitalizing their own labor through an IOU, someone might simply contribute a bicycle, or a car, or a bus, or whatever, into the capital fund of the exchange network. The member would receive trade credit, and the exchange operator would then market the collateral. Within network, members could offer their own goods directly for sale to other members for trade credit.

Counterfeiting is a huge problem for alternative currencies, as the printing technology is likely to be simplistic and the ability to track or prosecute counterfeiters almost non-existent. Trade credits and other alternative currencies should be electronic to the greatest extent possible. When printed, they should be printed in cheque form, to be countersigned upon transfer, so that a chain of legitimacy can be established. Using checks has the added advantage of preventing theft.

Teleb and Spitznagel Call for Debt Cancellation

2009-07-15T09:41:00.000-07:00

Taleb and Spitznagel have an excellent grasp on the problem of high debt, and getting people thinking about debt cancellation is a good thing. They also point out the folly of current economic modeling, and the failure of the economists in general. But their proposal to convert debt to equity is highly problematic.

The idea is taken straight from corporate finance: Corporate debt holders, rather than receiving cash payment, will sometimes receive ownership shares in the company. Debt holders can often be forced into this conversion against their will, as the article suggests.

However, this article is the perverse opposite of that process. Rather than debt holders being forced to accept equity, he is suggestion that owners be forced to give away shares to debt holders! The idea that we should support a system in which debt holders forcibly acquire an ownership stake is highly objectionable, in fact, it is outrageous.

The proposal would benefit one group: the debt holders who are seeing their debt-generated wealth evaporate on a large scale. Now that debt payments are defaulting like crazy, these parasites are trying to get hold of the underlying assets. It is an outrage! And an example of the priveleged elitist attitude which sees the entire world as a bunch of cattle to be milked and butchered for their profit and convenience.

Taleb and Spitznagel are speaking for the parasite class, and as far as I am concerned, they should be told to go to hell. There will be no forcible debt to equity conversions.

The solution to a high debt depression is a Jubilee renewal, freeing the people from their debts, not a bail out for the parasite class. The government can directly pay off debts, and simultaneously raise bank reserve requirements to absorb the excess money to avoid inflationary effects. This is the People's Bailout, and we could do it right now, without violating any laws or contracts.

http://www.ft.com/cms/s/0/4e02aeba-6fd8-11de-b835-00144feabdc0.html

International Trade and Protectionism, part 3

2009-07-14T10:22:00.000-07:00

Policy Implications

Americans spent 200 years of industrialization building up a high quality of life and standard of living, only to watch it petered away in the last generation through out-sourcing of industries and in-sourcing of cheap replacement labor. It shouldn’t be surprising that our average wage and quality of life have been deteriorating for the last 30 years.

The American wage supports an entire way of life, including a minimum wage, safety standards, environmental protections, health care costs, affirmative action set asides, and a retirement system.

Allowing jobs to be out-sourced to low wage countries destroys those aspects of the American dream. Obviously, foreign workers who have none of those advantages can work by the hour for cheaper, but the true cost is borne by American society as a whole.

A rational economic policy for America would safeguard the foundations of our industrial and productive strength. Trade should be open and free when based on true comparative advantage and fair competition, in other words, when it truly benefits both countries.

Imports from countries that do not support an equivalent standard of living should be penalized with a tariff, with the tariff revenue being used to support the American way of life that is undermined by the import.

Corporations that export American professional jobs should face penalties such as a higher corporate tax rate based on what proportion of their workforce has been off-shored.

Tariffs should be levied across the board on countries who engage in any currency manipulation for trade advantage or provide any export subsidies.

American economic policy should support domestic employment by focusing on a stable and profitable productive base, allowing imports and outsourcing only when it would provide a demonstrable benefit to the American standard of living.

Promoting off-shoring based solely on wage arbitrage is actually economically backwards, resulting in production that is less efficient and more costly when viewed in resource terms. Resource terms are real terms, an absolute measure, as opposed to money terms, which are relative and illusory. If off-shoring destroys a naturally evolved network of comparative advantage, it is economically backwards, even if it appears to "save money" in dollar terms. In other words, it is bad for the whole world's economy overall, not just the American economy.

Economic regions are defined by geography, common currency, free labor movement, and transportation integration. Economic regions should be encouraged to become as independent as possible, based on natural comparative advantages, which save resources and produce goods more cheaply on an absolute scale.

Trade which is based on those comparative advantages between regions should be encouraged. However, wholesale relocation of productive industry from one region to another should be discouraged. Rather, domestic industries in each region should be nourished, with the goal of uplifting standards of living in each region without lowing standards of living in another, while maximizing the efficient use of scarce resources everywhere.

Only in this way can a long-term sustainable global economy, with rising standards of living for all, be established.

International Trade: Comparative Advantage and Protectionism, part 2

2009-07-10T17:07:00.001-07:00

That money saved is the usual macro-economic justification for off-shoring in the first place. Theoretically, that money saved creates a job elsewhere in the economy. This is where so many people trip up, unable to differentiate monetary effects from real economic effects. In real economic effects, production of the same output has become less efficient and capital destroyed.
The great lie told during this generation of outsourcing has been that these laid-off workers would move up the knowledge chain, into higher value-added occupations. However, we can see that this is empirically false.

The fact is, there is a natural limit to the amount of “knowledge economy” jobs that are available. Knowledge jobs (traditionally called white collar) are subsidiary jobs: they exist to support some other industry. Remove the base industry, and the knowledge job disappears with it.

The idea that you can have an entire economy based on knowledge jobs is silly, it does not even make sense. There are only so many accountants, teachers, lawyers, salesmen, and consultants needed for a given population. They are subsidiary jobs because all of these “knowledge-work” professions depend on other industries to create the wealth. Without a primary base of wealth-creating enterprises, white collar jobs are not required. The same thing goes for so-called service jobs. You can’t base an economy on retail, restaurants, hair stylists, and spas. All those jobs are possible in a wealthy and nicely diversified economy, but without a wealth-creating base, they wither and die as overall standards of living fall, because there is less real wealth circulating.

This is a simple truth: at the base of every economy are the wealth-producers, who create and build something tangible that improves our quality of life. Mining, farming, chemicals, steel, plastics, textiles, and manufacturing of all kinds, that is the basis of the modern economy. A huge chunk of white collar economic activity then develops to support those industries, trailing off into the salesmen and retail stores that move the wealth. Teachers, doctors, police, and government workers are necessary for civil society, but they do not create wealth, and their standard of living is dependent on the wealth-producing industries.

To help clarify the economic principle, let’s look at a practical example. A car factory in Michigan is shut down, with production moved to a car factory in China instead. Physical plant in Michigan is destroyed, and skilled workers are fired. Cars intended for the American market are now shipped in from China, consuming extra resources in the transportation process.

The process is only economically justified if the displaced workers can find a new activity that produces greater wealth than what they did before. Is that even possible? What are their options? In the real world, such displaced workers have to switch careers, becoming truck drivers, plumbers, laborers, or whatever. Does that increase wealth? Unfortunately not. Unless they are shifted to another wealth creating activity, they will merely become wealth-consumers, and compete with other workers in some service job. So, they lose their own high previous wage, and drive down wages in whatever field they go into, while adding nothing of wealth to the economy as a whole.

But what about the money the car company saved? Doesn’t that return somewhere in some efficiency to create a new job? Let’s follow the money trail and see. Ok, so assume the company’s dollar profits just went up by lowering labor costs. The dollars return to the US economy through executive salaries and stock owner dividends. From a class perspective, the rich just got richer and the poor got poorer, but is it good from a macroeconomic perspective?

The question is, what happens to those dollars when they enter the domestic economy? Of course, there are less dollars in the US economy at first, because the laid-off worker is not being paid. Say the worker was paid 100 dollars, but after outsourcing, 50 dollars go to the Chinese worker, and the remaining 50 dollars goes to corporate profits. However, the 50 dollars paid to the Chinaman have to come back to the US economy eventually, as dollars can’t be used in China. But when the dollars do get back to the US, there is less stuff to buy. Less goods are being produced because our industry was lost to outsourcing. A constant amount of dollars chasing fewer goods: a formula for inflation.

The only way to short circuit this process is to make sure the laid-off worker is moved into another productive industry. If the worker transitions to any non-wealth creating job, he will merely be adding to a fixed labor pool, with the effect of driving down wages. There is no way around this. If he becomes a laborer, we now have one more laborer, if he becomes a plumber, we have one more plumber, if he becomes an accountant, we now have one more accountant. In all cases, no new wealth is being produced, so wages can only be driven down as the fields are crowded with displaced workers.

We have the same amount of real wealth available, since the car he built is now build and imported from China. We are poorer in terms of resources however, if for no other reason than the increased transportation costs. We have the same amount of money in circulation, assuming that is kept constant. We just have more workers in other fields. This is known as downward mobility.

Even if he becomes a doctor, which would make him personally richer, the country overall is poorer. His dollar wage may have gone up, and the country gets a needed doctor, but our overall wealth went down. Doctors do not create wealth. Teachers do not create wealth, lawyers do not create wealth, government workers don’t create wealth… The list could go on and on. Unless our displaced worker finds another wealth-producing position to fill, our country got poorer.

Some have objected to protectionism on the grounds of scale, asking, so why doesn’t each state become protectionist, or it must be bad to move a factory from New York to Alabama, for example. Unfortunately, these questions reveal a poor understanding of comparative advantage in regional economies, so let us examine these claims.

Let’s say a factory owner sees a potential profit relocating a factory from high cost New York to low cost Alabama. How is that different from relocating to China? The key difference is the available movement of labor. If the displaced New York factory worker cannot find better employment in New York, he is free to move to Alabama himself and take advantage of its growing economy. Thus, in a regionally integrated economy like the United States, economic progress proceeds generally and in a healthy fashion.

Also, the white collar jobs that support the wealth-building activity are all created locally. So producing cars in Alabama will not only employ laborers and skilled factory workers, but also technicians, engineers, accountants, and lawyers. None of those jobs are available to Americans if the factory is located in China. The local wealth-creation supports higher wages for those positions, and drags up wages overall. This is a "drawing-upwards" of workers into higher standards of living, the opposite of what happens when displaced workers have to get retrained and placed into a labor pool with workers in an already-existing industry.

Americans spent 200 years of industrialization building up a high quality of life and standard of living, only to watch it petered away in the last generation through out-sourcing of industries and in-sourcing of cheap replacement labor. It shouldn’t be surprising that our average wage and quality of life have been deteriorating for the last 30 years.

The American wage supports an entire way of life, including a minimum wage, safety standards, environmental protections, health care costs, affirmative action set asides, and a retirement system. Allowing jobs to be out-sourced to low wage countries destroys those aspects of the American dream. Obviously, foreign workers who have none of those advantages can work by the hour for cheaper, but the true cost is borne by American society as a whole.

A rational economic policy for America would safeguard the foundations of our industrial strength. Trade should be open and free when based on true comparative advantage and fair competition. Imports from countries that do not support an equivalent standard of living should be penalized with a tariff, with the tariff revenue being used to support the American way of life that is undermined by the import. Corporations that export American professional jobs should face penalties such as a higher corporate tax rate based on what proportion of their workforce has been off-shored. Tariffs should be levied across the board on countries who engage in any currency manipulation for trade advantage or provide any export subsidies.

American economic policy should support domestic employment by focusing on a stable and profitable productive base, allowing imports and outsourcing only when it would provide a demonstrable benefit to the American standard of living.

International Trade, Comparative Advantage and Protectionism, part 1

2009-07-10T16:59:00.000-07:00

The latest attack of economic propaganda came out of the G8 meeting in Italy today, extolling the virtues of free trade and vowing to fight protectionism. The classic formula -- "the Great Depression was made worse by protectionism" – continues to get ground into our collective mindset until it becomes an unquestioned axiom of thought. Heck, I used to believe it myself, until I actually starting analyzing it.

Here is the short-form rebuttal: in the 1920's, the US was the world’s number 1 exporter and creditor. Today, the US is the world's number 1 importer and debtor. The case against protectionism, for America, does not apply. Less developed countries have understood for centuries that domestic industries often need protection to stand a chance of getting off the ground against larger and richer foreign competition. From colonial America to post-war Japan, nurturing of domestic industry has always been practiced.

But what about today? Have we passed the point where national protectionism is not necessary, that it does more harm than good? In fact, it is the opposite. Our economic world today, more than any other time in history, calls for a certain amount of protectionism. I am not making this claim based on nationalism or some theory of social justice, either (although those arguments have their own merits). I am saying protectionism is justified solely on economic grounds.

In free-trade theory, when a domestic job is displaced due to foreign competition, a new job is supposed to open up somewhere in the economy because of the money saved, based on the efficiencies of comparative advantage in production. The idea is that a foreigner can produce something more efficiently, thus lowering overall costs, thereby freeing up more money, which will create a job somewhere else.

Comparative advantage is a powerful economic theory, and it has much truth to it. In order to understand why it doesn't it apply to certain aspects of international trade today, we have to understand why it does apply to some situations. Only by understanding its truth and correct application, can we understand when it is used falsely and incorrectly applied.

Comparative advantage is mainly rooted in geological and environmental factors. For example, people on grassland plains have a comparative advantage raising cattle, people on the coasts have a comparative advantage catching fish, and people in the mountains have a comparative advantage raising timber. In a primitive economy, people have to raise their own meat, catch their own fish, and build their own houses out of local resources. However, trading freely and widely allows them to specialize in what they have an advantage in, thereby benefitting everyone.

Another aspect of comparative advantage comes from relative location. Thus, a factory close to a source of materials has a comparative advantage over a factory far away. An oil field with easily extracted crude has a comparative advantage over a location with deeper, harder to access oil. A power plant close to its fuel source has a comparative advantage over one farther away, and so on.

All comparative advantage is rooted in the efficient use of scare resources. The rule is: less resources in, cheaper products out. We all get richer, meaning more output in less time using less resources, when everyone is operating at maximum efficiency. Healthy systems of domestic and international trade incorporate those efficiencies. For example, oil from the Middle East is more easily accessed than domestic sources, while coffee and bananas cannot be grown in America. These are exactly the kind of comparative advantages that lie at the heart of healthy trade, making us all wealthier by encouraging us to do what we have a natural efficiency doing.

The problem with comparative advantage in global trade today is that it is not based on real comparative advantage, but only on the illusion of advantage created by money. Thus, the dominant source of comparative advantage today is found in taking advantage of low wage labor in countries with cheap currencies and low standards of living. We are so accustomed to operating in the nominal terms of dollars that we are blinded to the real effects of such wage arbitrage.

Real comparative advantage takes advantage of real efficiencies to increase overall wealth. Exporting jobs to low wage countries decreases real wealth by working against natural efficiencies and increasing input and transportation costs. The problem is thinking in dollar terms, not in real terms. In real terms, what happens when an industry is off-shored? That domestic factory grew up at a natural nexus of efficiency related to labor, materials, markets, and transport. Moving that factory disrupts that natural efficiency and introduces massive inefficiencies. In dollar terms, it seems like a good idea, but in resource terms, it is not.

The comparatively cheap labor rate in dollars is papering over big losses of real wealth as resources are squandered to make factories from scratch in far distant locations. The distant location of the new factory also increases the loss of resources that results from transporting raw material and finished goods to a location that is far removed from either primary resources or consumer markets.

In short, from a purely macro-economic perspective, off-shoring decreases overall wealth. After off-shoring, production is transferred to a new location which takes greater time and uses greater resources. This is the opposite of comparative advantage, which is based on less time and less resources. After off-shoring, the real cost of production, measured in time and resources, has risen.

Meanwhile, at home, the factory is shuttered, meaning capital is destroyed, and the labor is idled, meaning skills and training (human capital) are wasted. Theoretically, these workers are going to find something else to do, but by definition, anything else they do will be less economically efficient, since they have already spent years training, mastering their specific economic role. Anything they do after layoffs will be an economic loss overall, unless they are immediately transferred into some high-value added endeavor.

Off-shoring means that local production networks based on real comparative advantages are tossed aside, throwing away those advantages for the sake of illusory dollar profits. Because no real efficiency is gain, we are actually getting poorer, because there is less overall wealth circulating in the economy.

Most people get stuck on this point, so it bears repeating until it is fully understood: When a production job is outsourced, no real wealth is created. Rather, real wealth is lost as comparative advantages, fixed capital, and labor skills are thrown away. We are actually getting poorer as wealth is thrown away and efficiencies lost. Corporations gain an advantage at the expense of domestic workers because of the illusion of dollar savings, but our collective standard of living falls.

The only hope, the leap of faith in trade theory, is that those displaced workers find a more efficient economic activity. From a macro-economic perspective, that new economic activity has to be more efficient and productive than the previous activity, or the economy has suffered a net loss.

But, should we take that leap of free trade faith? Is it possible for that laid-off worker to find a more productive activity? If they can’t find a more productive activity, their layoff is not economically justified.

Notice the macro perspective I am adopting here. From the macro economic perspective, replacing one worker with another only makes sense if it introduces a real efficiency into the process. Remember, giving a production job to a worker in China, who was previously unemployed, is economically neutral if it merely causes a worker in Detroit to be unemployed. That fact that the new Chinese factory is far away from sources, trade networks, and markets, means that the off-shoring starts out as an economically backward idea, since it consumes greater resources. Moving production to some far-away locale costs more, so it must be justified by a greater efficiency introduced elsewhere, or we have just gotten poorer (since we are using more resources to produce the same goods)!

From the individual corporation’s perspective, laying off the worker for a lower-wage worker increases profits. But that is exactly the illusion created by looking at the situation through the nominal dollar lens. The company is saving money, but by doing so, they are introducing inefficiencies into the economic system. The inefficiencies of off-shoring are only worth it if the displaced workers move into a more efficient occupation.

Notice that the off-shoring company does not care about the displaced worker. They company’s only concern is with their own higher corporate profits. This is the paradox of modern industrial economic policy planning. What saves money for individual companies is often bad for the economy as a whole.

Minimum Wage Law Has Negative Effects

2009-07-10T15:13:00.000-07:00

The following is probably the best essay I have read concerning the pernicious negative effects of the minimum wage law. Printed in full, original article here.

Minimum Wage, Maximum Stupidity
In a free market, demand is always a function of price: the higher the price, the lower the demand. What may surprise most politicians is that these rules apply equally to both prices and wages. When employers evaluate their labor and capital needs, cost is a primary factor. When the cost of hiring low-skilled workers moves higher, jobs are lost. Despite this, minimum wage hikes, like the one set to take effect later this month, are always seen as an act of governmental benevolence. Nothing could be further from the truth.

When confronted with a clogged drain, most of us will call several plumbers and hire the one who quotes us the lowest price. If all the quotes are too high, most of us will grab some Drano and a wrench, and have at it. Labor markets work the same way.

Before bringing on another worker, an employer must be convinced that the added productivity will exceed the added cost (this includes not just wages, but all payroll taxes and other benefits.) So if an unskilled worker is capable of delivering only $6 per hour of increased productivity, such an individual is legally unemployable with a minimum wage of $7.25 per hour.

Low-skilled workers must compete for employers' dollars with both skilled workers and capital. For example, if a skilled worker can do a job for $14 per hour that two unskilled workers can do for $6.50 per hour each, then it makes economic sense for the employer to go with the unskilled labor. Increase the minimum wage to $7.25 per hour and the unskilled workers are priced out of their jobs. This dynamic is precisely why labor unions are such big supporters of minimum wage laws. Even though none of their members earn the minimum wage, the law helps protect their members from having to compete with lower-skilled workers.

Employers also have the choice of whether to employ people or machines. For example, an employer can hire a receptionist or invest in an automated answering system. The next time you are screaming obscenities into the phone as you try to have a conversation with a computer, you know what to blame for your frustration.

There are numerous other examples of employers substituting capital for labor simply because the minimum wage has made low-skilled workers uncompetitive. For example, handcarts have replaced skycaps at airports. The main reason fast-food restaurants use paper plates and plastic utensils is to avoid having to hire dishwashers.

As a result, many low-skilled jobs that used to be the first rung on the employment ladder have been priced out of the market. Can you remember the last time an usher showed you to your seat in a dark movie theater? When was the last time someone other than the cashier not only bagged your groceries, but also loaded them into your car? By the way, it won't be long before the cashiers themselves are priced out of the market, replaced by automated scanners, leaving you to bag your purchases with no help whatsoever.

The disappearance of these jobs has broader economic and societal consequences. First jobs are a means to improve skills so that low skilled workers can offer greater productivity to current or future employers. As their skills grow, so does their ability to earn higher wages. However, remove the bottom rung from the employment ladder and many never have a chance to climb it.

So the next time you are pumping your own gas in the rain, do not just think about the teenager who could have been pumping it for you, think about the auto mechanic he could have become had the minimum wage not denied him a job. Many auto mechanics used to learn their trade while working as pump jockeys. Between fill-ups, checking tire pressure, and washing windows, they would spend a lot of time helping and learning from the mechanics.

Because the minimum wage prevents so many young people (including a disproportionate number of minorities) from getting entry-level jobs, they never develop the skills necessary to command higher paying jobs. As a result, many turn to crime, while others subsist on government aid. Supporters of the minimum wage argue that it is impossible to support a family on the minimum wage. While that is true, it is completely irrelevant, as minimum wage jobs are not designed to support families. In fact, many people earning the minimum wage are themselves supported by their parents.

The way it is supposed to work is that people do not choose to start families until they can earn enough to support them. Lower wage jobs enable workers to eventually acquire the skills necessary to earn wages high enough to support a family. Does anyone really think a kid with a paper route should earn a wage high enough to support a family?

The only way to increase wages is to increase worker productivity. If wages could be raised simply by government mandate, we could set the minimum wage at $100 per hour and solve all problems. It should be clear that, at that level, most of the population would lose their jobs, and the remaining labor would be so expensive that prices for goods and services would skyrocket. That's the exact burden the minimum wage places on our poor and low-skilled workers, and ultimately every American consumer.

Since our leaders cannot even grasp this simple economic concept, how can we expect them to deal with the more complicated problems that currently confront us?

It's All About the Productive Jobs

2009-07-07T13:11:00.000-07:00

The basis of any and all economic activity is simple: productive jobs. Always keep in mind this basic law of economics: production must always preceed consumption. Part of the propaganda effort against the common citizen is the idea that consumption is all-important. Much propaganda is crafted trying to paint a rosy picture of the economy because of the importance of consumer confidence leading to greater spending. Along with allied stupidities like "we have to get credit flowing again" to "stimulate the economy".

Obviously, consumer confidence and available credit have their place in ramping up economic activity, but their effect is overshadowed by the far more important power of productive employment. Nothing elevates consumer confidence and loan applications like having a high paying and stable job. In fact, without a high paying and stable job, consumer confidence and credit applications are simply impossible, as people without jobs can't buy things or get loans.

These facts are so obviously plain, simple, and true, it is a marvel that anyone could ever support economic policies that aren't based on the fundamental importance of productive jobs. And yet, it seems we have built an entire generations worth of economic policy ignoring that fact. Even more unbelievably, our current economic policy, in the midst of a collapsing economy, is still operating in complete ignorance of the fundamental importance of productive jobs.

The official (and understated) unemployment rate is 9.5% and rising, the highest in 26 years. The United States now has fewer jobs than it did nine years ago, even though the work force has grown by 12.5 million people since then. It's the first time since the Great Depression that a recession has wiped out all the jobs created during the previous business cycle.

So, why was job growth from 2000 to 2007 so ephemaral and easily lost? They were in bubble jobs, unsustainable jobs. Most were parasite jobs (paper pushing finance jobs), and even the productive jobs (like construction) were often malinvested (into overbuilding). The debt-based bubble years of 2000-2007 have left us in worse condition than when we started, as now we are over-built and heavily burdened by debt.

Dr. Housing Bubble puts it eloquently in his recent analysis [here]:
"It is amazing how little focus has been given to job creation. If we spent half the amount of time as we did in bailing out the crony banks on job growth we’d be in much better shape. But as many of you now know the U.S. Treasury and Federal Reserve when push comes to shove, answer to their banking oligarchs first and then to whatever they have time for. That is why the unemployment situation is quickly falling apart. In fact, that is why we have seen no employment plan come out from either the last or current administration. No matter what tax break you give for buying a home, without a job it really doesn’t matter. That is something that really amazes me in this current economic crisis. Where are the jobs going to come from? If anything, I can stand behind a job plan more than I can stand behind a crony banking bailout. Yet all this time is devoted to saving Wall Street and banks. Now you know who the Fed serves and it isn’t the American citizen."

also, "It is amazing that the Federal Reserve, which in its mission talks about maintaining stability, has presided over: the Great Depression, multiple recessions, the 1987 Panic, the technology stock crash, and housing bubble. By this simple definition they have failed miserably. They operate as a cartel and when things are going well, it goes better for those connected here. When things hit the fan, they take care of their banking partners and take the average taxpayer out to dry."

Meanwhile, the productive economy continues to shed jobs because of high debt in a deflationary environment, which leads to both job destruction and constrained consumer spending. The fundamental solution to a debt deflation is cancellation of debt. Why is no one talking about this?