Friday, September 30, 2011

On Violence

“vi•o•lence [vahy-uh-luh ns]
1. swift and intense force: the violence of a storm.
2. rough or injurious physical force, action, or treatment: to die by violence.
3. an unjust or unwarranted exertion of force or power, as against rights or laws: to take over a government by violence.
4. a violent act or proceeding.
5. rough or immoderate vehemence, as of feeling or language: the violence of his hatred.”

“Only those at the top of the hierarchy can afford to pay, and therefore attract and retain, the services of the state’s best story-tellers, chroniclers, historians, priests, etc. The risks that the texts these writers produce one day confine future rulers to a particular interpretation and therefore inhibit their freedom to rule as desired, are minimised by both dominating their interpretation (i.e. with a priestly class), and writing texts as open-ended and conflicted as possible (i.e. The Bible). The written word is thus both the source of state permanence and the justification thereof, as well as of diplomatic, lawyerly and political double-speak the modern world knows so well, and has become so jaded by.”

The above is a quote from my book, the dictionary definition I pasted from I’m not quoting my work here to advertise my wares, but because it introduces something Debbie has been bringing to my attention recently, both in comments and in email exchange: violence is as natural as sunshine. I’ve been pondering this for a while, and wanted to invite comment and critique, or any sort of observation on the nature of violence, because I see this topic, and its association with force and the threat of force, as a fundamentally important area for those of us seeking to define what might happen after capitalism, what direction we ought to try to follow.

Thus far my musings have generated the following rough thoughts.

Hobbes, whose thinking still dominates today even among those who believe they no longer think that way, saw a progression away from ‘uncivilized’ violence characteristic of anarchy towards a state monopoly on force, so as to minimize violence and increase harmony. Is there an animal more violent than we humans, the sole creators of the state? If not, why not, and what does that mean? A solitary predator like the tiger is not violent beyond some dynamically balanced relationship with its environment. They defend their territory and nothing more. Indeed, well fed in a domain that can keep them that way one could hardly call them violent; more ‘necessarily aggressive.’ I imagine such is true of all other solitary predators. Social predators such as wolves (no Hobbesian war of each against all there, and no state either) are also not violent beyond the immediate survival needs of the pack. Wolves are hierarchical, but also quite communistic it seems. They have ‘developed’ a crude consensus-maintaining system which is far more intricate than was once assumed in the alpha-leader-and-the-rest model. The details of this are beyond the scope of this article. Suffice it to say that violence, be it of storms, tigers or wolves, never attains the level of something like torture. Are humans different? Yes, but so is everything else. In everything we do, we are as natural as the weather. Is violence in the human realm Evil?

Should we seek to transcend violence, end war, crime, suffering? No, that’s utopian. Hobbes was a loyal servant of the state because it minimized (in his eyes) the natural urge to violence in every human breast, not because it eradicated it. He was no dewy eyed idealist. That accusation is more accurately leveled at me and those who see more cooperation, harmony and ‘justice’ emerging more or less spontaneously by transcending the state form, demoting money to as minimal a role as possible, and revolutionizing just about everything else. Such a direction can only be trod by a people willing, ready and able to do so. But how might a people, across the planet no less, agree to such a radical change? Won’t that take violence? And don’t the means become the ends?

Violence could well be embedded inextricably in our ability to assert an opinion, to come to a conclusion, to interpret. Because everything is unique there must be as many opinions and interpretations as there are people. For there to be consensus some violence must be done, some must lose, sovereignty must be yielded. If we are to have agreement, some are going to be unhappy. Society thus requires violence in an ongoing way, whether hierarchical or anarchic, whether implicit or explicit. On top of this, even non-violent rebellion must be violent, even if its members are all pacifists, because the object of the rebellion—most likely a state—can only react violently. Even ‘peaceful’ refusal to cooperate at all invites violence, since one is thereby rejecting existing consensus. One is a party-pooper of the worst possible kind; rejecting the right to party in the first place. I am unaware of any minority becoming the majority consensus without this involving violence. And to embark on that path requires almost fanatical passion, for choosing to be an outsider, one calling for fundamental change, is a lifelong commitment likely consigning one to the wilderness, to the fringe. To be able to bear that kind of isolation one must be insensitive to others, and hence, in a way, sociopathic. (By this I do not mean uttely without compassion, but that an element of this deep insensitivity must be there.)

Today society worldwide is more complex and interconnected than it has ever been. Much energy of many kinds has been invested in its construction. The amount of energy it will take to change course is enormous. This enormous amount of energy must be applied against the wishes of the majority. How can this not be violent? Or, for the majority to want something different, violent collapse, which releases coherent energy into wilder forms, must first happen. Violence again.

Because of the mess and 'uncontrollability' of life generally, violence pops up everywhere. The amount of control necessary to turn every single citizen into a ‘non-violent’ person, the amount of repression, the totality of ownership of interpretation of all existing and future data would itself be violence, and doomed to fail too. Control is an illusion generated by our sense of being separate from nature. In truth we only react, we never act. There are no uncaused causes, hence violence has to happen, in that the unwanted has to happen, and sometimes with great force. We can’t always be ‘right,’ and others will always have different perceptions, pleasures and opinions.

Leaving violence behind is as impossible as leaving opinion and perception behind. The paradox of this is wrapped up in empathy—the opposite of psychopathy—which enables us to feel what others feel, even those alien to us. Just as we are passionate passengers of our lives, so our lives become aligned and entangled with those of others and Universe generally. How could it be otherwise? We are not separate, we are of All. For me it is therefore the fact of empathy, evident too in monkeys, elephants and other animals, that suggests to me a different and, yes, ‘better’ system—one in which our potential to enjoy our lives richly, as our inter-being and co-evolution ‘create’ our entangled trajectories, and allow them the ‘freedom’ to blossom fully, including error, suffering and tragedy—is possible.

There will be violence and crime always, but perhaps our relationships to these inevitabilities will simply be maturer and less hysterical. I think that’s well worth fighting for.

Tuesday, September 27, 2011

Alessio Rastani: Our Saviour

So it turns out Alessio Rastani is not an expert in the way an organization of the high reputation of the British Broadcasting Corporation would ordinarily appoint to pontificate on a matter of such import. Isn’t that the sweetest thing!

The Beeb have embarrassed themselves by hiring some failed trader to voice his (expert!) opinion on the global financial crisis, is shocked when same then speaks what millions believe, meaning that millions hear this information for the first time on a mainstream outlet, and the expert doesn’t even own his own house! Sublime. Talk about a poster child for The New Way.

I am not an expert. And thank goodness. Our stock of experts from all corners of the globe seem incapable of arguing their ways out of wet paper bags, or at least of calling a spade a spade. That a so-called non-expert, a failed trader according to the balance sheet quoted by the Telegraph, should squeeze onto the prime time and go viral with “Goldman Sachs rules the world!” is about as tautly ironic a moment as we could possibly deserve to enjoy.

When the first rumours started circulating that this was a hoax, I have to confess I thought it would be better that way. It really doesn’t matter how expert or otherwise Alessio Rastani is, what matters is what he said, the BBC’s reaction to him, and how his interview went viral. His message is what I suspect even governments believe, and, deep down, even the mainstream media. We are fooling ourselves still that the façade is real, that Mummy and Daddy are in nicely charge, that the wheels are not off, and that ‘normal’ is coming back. Who then but a fool to point out the bleeding obvious, that the emperor has no clothes?

Sublime. Cosmic. Fated. Mythic. Wonderful.

Monday, September 26, 2011

Are Market Traders Psychopathic?

Hamburg – Why do traders like the exposed London UBS dealer Kweku Adoboli blow away billions? What’s going wrong at the banks, or with our young professionals? One thing’s for sure; they behave more recklessly and manipulatively than psychopaths – which is the conclusion a recent study conducted by the University of St. Gallen comes to, as SPIEGEL found out.

The cooperativeness and egoism of 28 professional traders were studied. The subjects had to play computer simulations and undergo intelligence tests. The results exceeded the expectations of the Team of Pascal Scherrer and Thomas Noll, forensics experts [“Forensiker und Vollzugsleiter”?] from the Swiss Prison of Pöschwies, north of Zurich.

“Of course we can’t call the traders mentally disturbed”, says Noll, “but the traders did behave, for example, in a more egoistical and reckless manner than a group of psychopaths who took the same test.”

Especially surprising for Noll: In total the bankers didn’t win any more money than the control group. Instead of competently and soberly pursuing maximum profit, “the traders sought only to get more than their competitors. And they put a lot of energy into harming them.”

Noll compared the situation to a neighbour having the same car, “and you go at it with a baseball bat, just so that yours looks better”. The scientists cannot explain this drive to destroy. The UBS dealer Adoboli, who blew two billion dollars, will remain in custody until further notice.
Der Spiegel (My translation.)

“Of course we can’t call the traders mentally disturbed”. Of course not. They’re professionals. They work in respected institutions and were once known as Masters of the Universe. The very last thing such people are is mentally disturbed. They know what they’re doing.

And don’t forget the Invisible Hand. Forget neither that economics is and should remain amoral. We are all, individually and collectively, far better off if we behave more recklessly than psychopaths. This is what the free market promises to deliver. The last thing we want is any of our precious freedom to accumulate wealth in a ‘Devil take the hindmost’ fashion be taken from us. As long as I could not give a fuck how well you’re doing, everything will be just fine, if you’re like that too.

On the BBC yesterday trader Alessio Rastani told his interviewer his version of the truth: “This economic crisis is like a cancer, if you just wait and wait hoping it is going to go away, just like a cancer it is going to grow and it will be too late!” He goes on to point out that national governments are powerless, and that Goldman Sachs rules the world. Alessio wants to help people though. He advises us protect our assets, have good hedge strategies, take advantage of the coming collapse. It doesn’t appear to occur to him that his advocacy is for us to be more like him. His message is that traders do not care. Or rather, the only thing they care about is making more money than their ‘competitors.’ The consequences of this are collapse. His cure is to take advantage of collapse just like traders do.

“Insanity is doing the same thing, over and over again, but expecting different results.” Albert Einstein.

“Of course we can’t call the traders mentally disturbed.” Thomas Noll.

I think Thomas Noll is doing good work, but I side with Einstein here. And I think it really is past high time we recognize that we are slaves to an insane system of perpetual pillage that cannot stop until it devours itself, and most of us with it.

Saturday, September 24, 2011

Obey The Market Obey The Market Obey The Market ...

This just in: Obey the Market! If we do, all will be well.

I had a brain-flash earlier this week, what with the stock markets of the world going nuts, people panicking, talk of doom every which way. I was due one, and providence delivered. After all, I write this blog and owe it to me public to guide with wisdom in troubled times. Brain-flashes don’t visit me often, so when they do, I lie down and take them very seriously indeed. Thankfully this one was brilliant in its simplicity.

Four small words a child can understand: Bail out the banks.

Hear me out. Don’t think I haven’t thought this through.

As we all know, times are troubled right now. I won’t list the details because they’re everywhere in plain sight, but when I say every one of us owes everyone an awful lot of money, I suspect you’ll know what I’m talking about. That’s right, money is the problem. And, being money factories creating, selling, storing and moving money throughout the economy, the banks are suffering bad. These poor guys are hurting like nobody’s business and if they stumble, should they fall upon their brave knees, we have to be there to help them stand tall again. We need them as they need us. We’re in this together. If we don’t step up to the plate here and sign over all the money we can’t possibly afford unless we do so, they’ll die.

It’s that simple. We have to dig deep into our collective debt and borrow more money from the banks to bail them out so that we can pay them back the money we lent them ... sorry, they lent us to lend them to help them help us help them out. It’s that simple.

And I’m not even going to try and frighten you with a description of the bloody mayhem that will erupt in full fury the very second we don’t bail out the banks, because deep in our hearts, we all know this is so. The choice is stark: act to bail out the banks, or die horribly. Even you, dearest Reader!

But here’s the real stunner. At last the experts agree with me! Check this out:

“G20 must unite again to resolve crisis as it did in 2009, says Lagarde
IMF managing director invokes spirit of London summit, saying 'we need to address the current crisis together'”

“IMF chief tells Europe: you must bail out the banks again” (Guardian headlines)

“We need to recapitalise European banks.” (Edward Harrison.)

“Treasury Secretary Timothy Geithner drew a cool response from EU policymakers when he urged them to leverage their bailout fund to better tackle the debt crisis and to start speaking with one voice.” (Reuters)

In the company of kings at last. I always secretly dreamed I’d find respect from the leaders of our world, those who really know how the game works, and now it looks like I have my in. The only problem is you could argue I hastily patched this article together after reading those headlines. It’s not true. I am as clever as they are and can have ideas as brilliant as theirs.

“Politicians must listen to the markets, not ignore them” (Telegraph)

“Warning of a stock market rout unless a eurozone rescue package is found. Obama urges France and Germany to move quickly to find a solution to the eurozone crisis, while UK chancellor George Osborne claims Britain is 'ahead of the curve'” (Guardian)

There you have it. The Market is telling us to bail out the banks because if we don’t ... Well, you know what will happen. Don’t say I didn’t warn you.

P.s. This article assumes the world began in 2010.

Monday, September 19, 2011

Pirates Storm German Parliament!!

No joke. [In German, Pirate Party website.]

The party I voted for on Sunday in Berlin's local election has won 14 seats. The FDP (a business friendly liberal party, currently in coalition with the CDU) received under 2% of the vote and have thus no seats. A genuine double whammy election shocker. Tabloid-style headlines and sentence structure fully justified.

I voted for the Pirates (Die Piraten) because they are for transparency in the political process, direct democracy, guaranteed income, and other assorted sensible ideas. I thought I'd give a small taste of their platform by translating some of their manifesto so that you have it straight from the pirate's mouth, as it were.

We see transparency as a duty of Berlin. We will abolish regulations for application [I assume this is concerned with over-complicated German bureaucracy regarding political participation], minimize entry restrictions and abolish fees for [publication of political] information and reports. We demand that every step of bidding, contract negotiations and contract signing processes are made public. Every contract will only become valid after it has been made public; old contracts will be looked into anew. Documentation pertaining to committee meetings, board meetings, etc., will be immediately and clearly published, online and offline. In future the public are only to be excluded from sessions in rare cases, sessions will be broadcast live on the internet and recorded. Every delegate is to make public his/her contacts to lobby organizations, unions and other organizations. We will live transparency. All data and works brought into existence by taxpayer funds will be made public and available to every citizen. Berlin must inform her citizens about every new project as early as possible, so that her citizenry has a proper opportunity to participate. Press laws will be changed such that no whistle-blower need have any fear of the state.

We will prepare the way for free, Berlin-wide wireless internet access and abolish operator liability for public WLAN networks. Furthermore we want to show every Berliner and this city's guests how to use this network.

For learning too we insist on the freedom and self-determination of the individual. All students shall have the chance to organize and complete their schooling individually. We want to democratize schooling institutions. In the future there will be one teacher to every fifteen students. We will end the use of filter software in public education establishments and enable free and open access to all information available on the Internet. We will also make sure that all students are able to work with digital media and will school them accordingly. We will also provide free lunches. We will offer students of non-state schools the same developmental opportunities as those of state schools, and expand and improve the teaching of German as a second language. We will abolish fixed school times so as to enable an open and critical coarse of study. Longer term we want to set up a round table as a public forum for all involved in higher education. We want to realize a library statute in Berlin.

Now I did not vote for Die Piraten because I am a political animal fervently in support of one party or the other, nor because I understand the fine details, or even the totality of their whole program in general, but because this is a party called The Pirates who are gently and humorously making the right noises and prodding the mainstream in the right direction. The party has only been around since 2006, so this is an explosive start, and is making headlines here. They've knocked the FDP out of the Berlin Parliament (The Greens expanded their share of the vote too), and this represents a major shift in the politics of Berlin, a sea change.

It just so happens the the father of one of my daughter's friends is "A Pirate" so I will be grilling him soon as to what the party is going to do with its power, and other questions along those lines. If you guys want to know anything, drop me a line...

Tuesday, September 13, 2011

Capitalism is Communism – The Proof

(My posts have been getting rather long in the tooth of late, so here’s a ditty you won’t have to wade through.)

Premise: Money underpins the entire economy. The current system of central banks creating the “high powered money” that represents the private banks’ reserves is actually a hidden commons.

Watch this deft sleight-of-hand:

Reserves are central-bank-created money which must legally be present in sufficient volume in the ‘vaults’ of private banks, such that citizens’ claims on that money—via the “credit money” they have on deposit—are effective should people withdraw actual cash. The ratio of high powered money to credit money typically stated is 10:1. Let’s run with that.

Hence, you and maybe nine other citizens of your country who have, say, one dollar ‘in’ your bank account, each possess an equal and simultaneous claim on some ‘real’ dollar ‘present’ in the total reserves of the private bank system. The point, of course, is that each of us has sufficient access to the ‘real’ dollar held in reserve. Your ‘private ownership’ of your dollar is in fact no such thing. You share that dollar with roughly nine other people (if you’re lucky), hence we sort of rent money from each other via banks! Money, it turns out, is an abused commons from which private banks profit. (The degree to which society ‘benefits’ from this system I’ll not address here.)

Therefore, at the bottom of the entire modern capitalist system is a depth of sharing that would beggar the belief of those neoliberal economists who insist we humans prefer competition, that the commons is always a tragedy, and sharing is impossible. It turns out we are already experts, it’s just that we don’t know it. Weird, but true.

Proposal: All it takes is setting things up such that we have sufficient access to what we need and enjoy. Who needs ownership! Let’s go!

One more observation on this theme. Consider two supposedly diametrically opposed notions, one the essence of socialism, the other the essence of capitalism (I’ll let you assign them):

1. From each according to his ability, to each according to his needs.

2. The Law of Supply and Demand.

At root, aren’t they the same thing? We ‘supply’ what we can and ‘demand’ what we need.

When it comes to defining ‘needs’ we can of course argue all sorts of things, but I would say the prevailing paradigm tells us what we need; a nice car, a large house, fashionable clothes, etc. Different paradigms at different stages and places of history have generated different conclusions about human needs, and it would be absurd to assert that the current paradigm will hold for all time. Hence “to each according to his needs” is as valid to consumerism (one is often depressed and dejected if one is not a (credit) card-holding Consumer able to demonstrate full participation in the consumption game) as it is to any other social system. And isn’t the goal of neoliberal economics to equip as many as possible with the wealth necessary to fully participate, to leave no one behind, to raise all boats together? Isn’t the Invisible Hand supposed to deliver the best of all possible worlds?

Of course there’s greed to consider, but the admirable sharing we all engage in, merely hinted at above, the endemic absence of total property rights regarding our ‘own’ money, strongly suggests this whole greed shebang is one big delusion. As I’ve argued elsewhere, I know no greedy people. I’ve heard of Jamie Dimon, John Pierpont Morgan, and others, but they are hardly the norm. Don’t we think such people are sick in the head? The famous insatiably greedy normal person only turns up in arguments, as an assertion that ‘everyone’s greedy.’ Are you greedy beyond all hope of satiety, dear reader? Are your wants infinite? Are you an immortal locust of infinite consumptive capacity?

I believe we’ve tricked ourselves into thinking we’re insatiably greedy. Silly us, to think we’re all alike in that regard, all hungering after endless numbers of Ferarris, MacMansions, golf club memberships, caviar, lobster thermidor, Barbies, iPads, all-you-can-eat fast-food, etc., and that we cannot be happy unless we are in hot pursuit of such items. And consuming them.

Kind of an embarrassing collective self-deception, but hey, I think we can give ourselves a break. It’s not everyday a species emerges from the complex life-ground of a lush and impossibly beautiful planet of breath-taking diversity, sporting opposable thumbs, high social intelligence, upright walking and abstract language, to wander around for hundreds of thousands of years before inventing farming, homes, and then states. It hasn’t been easy, but history has not stopped. We’re not dead yet and the Challenge of Being is as juicy and full of potential now as it ever was.

Dig in!

Thursday, September 8, 2011

German Government Admits Money System Is Giant Ponzi Scheme

Earlier this year a petition to the German government received enough votes (4,254) to have to be addressed by the government. The petition called for 100% reserve banking, giving the following reasons (as the government interpreted them) for its request (from Sein magazine):

As grounds for his petition the petitioner argued, in particular, that banks need only demonstrate eight percent capital cover to be able to allocate 100 percent credit. Because banks demand interest on this credit, i.e., ask for more money back than they originally lend into the system, the total debt owed grows faster than the available credit. This leads (according to the petitioner) to ever growing debts, including on the public account, and will lead to yet worse financial crises than the current.

It’s very good, in my opinion, that this debate can take place at all, and I think highly of the German state for having mechanisms in place that enable this. Nevertheless, the request was denied, and the grounds for the denial are both entertaining and revealing. I would say far more revealing than the government intended. Here are the core arguments:

Money is a central component of economic life. […] Alongside its functions as medium of exchange and unit of account, money is also a store of value. The more stable money is, the better these functions can be fulfilled, and, therefore, the smoother the economy will run.

Standard fare. And yet money-as-commodity, from which ever-growing money-profit can directly be made (per M-->Mn-->Mn2, rather than C-->M-->C’ of typical exchange (Commodity sold for Money to buy another Commodity)) via currency exchanges and interest-based means, is implicit in the government’s position. How healthy this mechanism might be is of course not up for discussion, cannot even be mentioned as a possible topic even in a response to a petition discussing the money system. Indeed, the government’s entire response is a textbook rendition of the prevailing economic orthodoxy, which rests on assumptions debunked countless times in recent decades (and even centuries).

The business operations of the money and credit institutions fulfil a central role in an economy.

Money is important, thus banks are too. Then follows some blah blah about how important it is that banks operate sensibly, with an almost tangential reference to fractional reserves (“in Höhe eines bestimmten Prozentsatzes” = “at the level of a specific percentage”). It just emerges in the paragraph, a passing reference to the main problem denoted by the petition, popping up briefly in the refusal-text as a strength.

Next the mechanism of central banking is briefly laid out:

Because the central bank in the Euro system makes high powered money (“Zentralbankgeld”) available to the banks, it can influence the business operations of those banks. Private banks create money when they grant their customers credit by booking the amount due on their accounts. They expand the money supply via credit creation without any involvement of the central bank. The banks are, however, bound to new high powered money, because they must also make cash available to their customers, and maintain a part of their account deposits as assets at the central bank in the form of minimum reserves. The high powered money requirements of private banks is thus the central bank’s leverage (?? “Ansatzpunkt”) for influencing the credit money creation of the private banks.

Again, standard fare. One look at the fact-based evidence of Steve Keen’s “The Roving Cavaliers of Credit” should be enough to destroy this oft asserted claim, and yet “the entire body strides vigorously forward” still. When you have power, you can ignore facts and repeat lies in archaic terminology slick enough to be a ‘get out of jail free’ card (until the show stops).

There follows the conventional view about central bank control of base rates (low interest rates = high economic growth, high interest rates = slow growth), even though the last few years are demonstrating—for all to see—how ineffective this ‘control’ is. Then comes the jewel:

As a rule, interest on borrowing is earned through additional production and income. Financing with new debts, on the other hand, would indeed lead to over-indebtedness and—practiced across the board—to a collapse of the financial system.
[My emphasis.]

Without growth, the system would collapse. You can’t just keep on piling debt on top of debt unless there is sufficient economic growth paying for it. That’s a ponzi scheme. I hope this justifies my tabloid-style, eye-catching headline.

There follows more blah blah about how damaging inflation is, especially for people on low incomes, best prevented by “independent central banks” charged with ensuring price stability. Best not mention the frequency of economic shocks that have peppered modern history with astonishing frequency, though there is mention of the hyperinflation caused by over-reliance on the famous printing press. I love the argument that borrowing money is not printing money. As if, because we owe more than we print, we are not printing. As if systemic addiction to perpetual growth has a stabilizing influence. Gold has risen from the mid $200s to almost $2,000 per ounce today in about ten years! In 1971 an ounce of gold cost about $40! Price stability!? Wages, on the other hand, have been quite flat for thirty or forty years. Commodities generally tell a very inflationary or volatile tale. And look at housing. Energy. Food. Even on their own arguments the system has failed. The only stable dynamic it generates is robbing the poor to pay the rich.

The last quote I want to draw your attention to is the last two sentences of the penultimate paragraph:

The petitioner’s recommendation to install a 100% reserve system for credit institutions would yield a steep reduction in credit extension and thus call the existence of private banks into question. The consequences of this would be that the banking and finance system, as well as the money circulation of the private sector, would be jeopardized.

It is precisely this the petitioner was hoping for. The response is a tacit admission that the petitioner is correct, but that The System has to be protected because it works the way it does. No claim is backed by any evidence, and everything we see around us today in economies across the planet flatly contradicts the government’s position.

To conclude: there’s a clear admission that economic growth backs usury, and a clear admission that should growth not occur for long enough, the system collapses. That is an implicit admission that the money system is a ponzi scheme. The insistence that ‘that’s how it works,’ while inevitable, is in itself an admission that they have a serious systemic problem; infinite growth on a finite planet is simply impossible. Whether or not they recognize this is anyone’s guess.

In toto the response is an admission that the government borrows—via bonds etc.—from private banks and other financial bodies the very money with which it equips those same private banks. Private banks then use the money they ‘loaned’ the government as ‘reserves’ to extend loans (credit money) to citizens at some reserve ratio. Or put another way, private banks use the (non-existent) money loaned by them to The Government and backed by The People as backing for credit-loans lent to The People for the express purpose of growing the economy and the economy’s money supply. Or in even simpler terms, people borrow from themselves to back money they then use to borrow more money from themselves. And the interest flows to the owners of money. We are puppets, and our strings are made of the money we pay the cost of borrowing into existence.

Quite the circle jerk. If you can get your head around it.

Saturday, September 3, 2011

Money, Debt, Reserves, Money and Debt II

We are often told money does not grow on trees. So where, then? For grow it most certainly does, and dies, is somehow born, plus all sorts of other organic-like stuff; ‘money talks,’ ‘let your money work for you,’ ‘money never sleeps,’ and so on. What follows is a partial, though lengthy look under the hood of money creation, ably assisted by Warren Mosler’s booklet “Seven Deadly Innocent Frauds of Economic Policy” and the Chicago Fed’s “Modern Money Mechanics”. My own idiosyncratic reactions to those booklets’ contents does the rest. (Thanks to Sigi for putting me firmly on this path!)

For those of you who understand reserve accounting, note that the Fed can’t do what’s called a reserve drain without doing a reserve add. So what does the Fed do on settlement day when Treasury balances increase? It does repos – to add the funds to the banking system that banks then have to buy the Treasury Securities. Otherwise, the funds wouldn’t be there to buy the Treasury securities, and the banks would have overdrafts in their reserve accounts. And what are overdrafts at the Fed? Functionally, an overdraft is a loan from the government. Ergo, one way or another, the funds used to buy the Treasury securities come from the government itself. Because the funds to pay taxes or buy government securities come from government spending, the government is best thought of as spending first, and then collecting taxes or borrowing later.
[Warren Mosler. My emphases.]

A simplification* certainly, nevertheless complicated stuff. Somehow counter-intuitive. A central bank just creates money, from nowhere, because it can. Government sells debt because … more on that below. Money is injected into the system, money with which government debt can be bought so as not to incur the irritation of commercial bank overdrafts of accounts held at the Fed.

Why so complicated? My short answer: banks are profit-making businesses with enormous, centralized power. The commercial bank system is the sole conduit between people and “high powered money” and exists to make money for its owners. Banks are businesses. Banks are therefore usurers ‘corporatized,’ which in effect means institutionalized, which means state-sanctioned. They are also, at some size and in the eyes of the state, too big to fail. They are therefore, ipso facto, part of the state. They are not distinct components of a logically separate ‘private’ sector, somehow at the mercy of government high powered money creation. Indeed, my impression is that central banks exist in part to mask how powerful commercial banks are. Of course economic stability is key, but one can also argue that such stability as is achieved serves commercial banks more than any other sector; it must, after all be stable growth. Economic Growth is systemically yoked to usury and the dynamic of the pyramid scheme, and is the hidden core of our money system.

The Fed can’t drain without first adding: To me, that’s not really a drain. That’s like adding water to a pool in the hope that the pool’s manager will allow you to take it out again in exchange for magically expanding ice cubes with different melting rates.

Repos: adding funds to the banking system, funds which banks then might use to buy government debt—note there are “primary dealers” ‘obliged’ to buy government debt at debt auctions. So why bond auctions at all? Why not just hand over the bonds ‘for free’ and cut out step 1? Because then the money markets would no longer be money markets as we know them. Then the whole thing would be too much of a joke, and a less entertaining one than a game of Monopoly. The following quotes hint at what I mean:

“Efforts to rescue the UK economy were plunged into fresh uncertainty this morning after the government failed to find a buyer for some of its debt, the first such failure in seven years.”
[The Guardian]

“1.923 BTC X 61.59% Primary Dealer bid = 1.18 BTC (PD), greater than 1.0. Or to put it a different way, but for the primary dealers the bid-to-cover was less than one, meaning that some of the issue would have been left on the table.
“Thats a fail; but for the primary dealers the issue would not have subscribed.
“Primary dealers are required to bid. That's the deal in exchange for their being named as "primary dealers." For this reason short of thermonuclear war you will never see an actual (BTC < 1.0) "fail" on a US Treasury Auction - Treasury has rigged the process so as to insure that cannot be reported.”
[Market Ticker]

“China's finance ministry has failed to sell all 28bn yuan ($4.1bn; £2.55bn) of one-year government bonds it offered at an auction.
“It is the first under-subscribed government bond auction since 2003.”
[The BBC]

Quite embarrassing (or at the very least odd) when you ‘give’ the buyers the money with which to buy your product! And I do not believe all of the above is pure, clueless guff from a mainstream media unacquainted with the fine points of MMT. The larger story such stories weave is very important, very powerful, has us in its grip. Ownership of this story, being able to propagate it at will, controlling the paradigm, this is what is at stake here. Who owns the story? The ‘People’ or The ‘Elite’? Does MMT threaten this story, or merely present it from a different angle?

Bond issuance is serious stuff, no matter how ‘effortlessly’ central banks can change numbers in commercial bank accounts. Mosler’s analogy of a football stadium able to display points on a scoreboard without having to borrow them, is misleading; there are very clear rules for the assignment of points dependent on the game of football afoot. As I understand it, the sale of bonds is, from one perspective, a way of measuring the market’s opinion of that country’s growth prospects. From another it is a large, international process which boils down to control of the money system by the owners of money, that is control of the flow of funds generated by usury. Thus if governments were to side-step bond issuance entirely, directly pump the economy with high powered money as they saw fit, that would be printing, pure and simple. That would be government determination of how much money the economy needs, not market. It would be the government ignoring the market. But the market’s opinion must hold, because the Free Market Myth says, ‘Invisible Hand Knows Best!’; that government interference in, or ignoring of the market produces negative outcomes. To be wise, to be in tune with what economics and history have proven time and again, governments should yield to market forces, just as we must all yield to gravity. If we ignore this universal truth, hyperinflation will (eventually) occur (which, by uncanny coincidence, happens to hurt the owners of money more than borrowers).

High powered money is not ‘given’ with the explicit instruction to buy X amount of government debt with it (of course, not only banks buy bonds, but the money to do so does come from their ‘reserves’). Bond auctions must be (more or less) genuine auctions. There is a choice to hold onto the injected cash or exchange it for something less liquid. The stated reason for the injection of high powered money (HPM) is to keep reserves up, to prevent commercial bank overdrafts at the central bank. That annoyance would mean some commercial banks owed the government money, whereas bond ownership means the government owes banks money. Much nicer. What the commercial banks freely decide to do with those freshly injected reserves is their business (unless they happen to be “primary dealers”). As such, “high powered money” hardly has the descriptive ring of truth to it! Its existence and creation is more the legal requirement of a system designed to keep money fruitful and potent, in and of itself, I believe as a centralized tool of control. HPM serves to enable usury, even though usury does not require it (arguments of stability to one side); Canada has a zero reserve system. In the end it is usury which must survive. This system works in the interests of the owners of wealth, who get to make judgments, and profit, on the ever-shifting attractiveness of various currencies, regardless of whether it was cynically designed to do so; regardless, too, of whether the ‘elites’ really are elite and thus ‘deserve’ to protect their positions via such mechanisms.

So, why do governments sell debt? Because of usury generally, because the rich and powerful want to carry on making more money from their money, indefinitely. The system works for them first, for the rest second, and by coincidence. ‘Trickle down’ is a sop. Even the twin responsibilities of ensuring the ‘correct’ quantity of HPM and preventing too high inflation, the main duties of a central bank, at the deepest level, work to protect (stabilize) the interest-based money system. Who in the mainstream talks warmly of zero or negative growth GDP? Social dividend? Demurrage? As such this system is a ponzi scheme for the ‘elites’ and will completely collapse when it becomes apparent to the majority that growth is over. The current system cannot cope with steady state economics. Private sector credit money may not, effectively and in toto, net to zero because its absence would be the destruction of at least 90% of the effective money out there. “Reserves are unchanged by the loan transactions. But the deposit credits constitute new additions to the total deposits of the banking system.” (From “Modern Money Mechanics” (my emphasis).) Were credit-money-originated claims on HPM ineffective or irrelevant or impotent, somehow not “legal tender”, somehow ‘less’ than HPM, the system simply would not work. “Nets to zero” is neither here nor there, is a red herring. Money promised to function as money must do so. And why do we have money? To assist the economy. Why must the economy be assisted? Because the Perpetual Growth economy, in its current form, sustains elitism.

Commercial bank overdrafts at the Fed: Loans from the government. If a commercial bank is net negative in its reserves, the government is obliged to ride to its rescue. How will a commercial bank repay that money? After all, it can’t create HPM! My guess would be to ‘win’ more reserves from other banks via ‘wise’ extention of credit, but, in truth, I don’t know, and haven’t seen the answer in Mosler’s book. Interest earned on loans does not alter the amount of reserves generally, and is furthermore bank earnings; that is, bank earnings pay bank operating costs, wages, profits to shareholders, etc., so are distributed back out into other accounts in the system as already existing reserves. One bank’s owing of reserves to the Fed is the system ‘bleeding’ HPM generally speaking. Think of all banks as one, as compartments containing the total of HMP in existence. Any reduction of the amount of HPM in the system is potentially dangerous, because credit money is the economy's lifeblood.

As an aside, this is good place to remind ourselves that interest is redistribution, not creation. But as that redistribution favours the owners of money (over time), shortfalls occur among the poorer portions of society, which generates a need for more HPM. If the economy is not growing sufficiently quickly, there will be falling demand for new loans, credit-money claims on HPM won’t multiply, and defaults (credit-money destruction prior to banks earning a profit) will increase. The amount of (effective) money in the economy shrinks and there is less profit to be earned from interest. If too many people and businesses are too indebted; as, say, oil reserves become increasingly more costly to extract, in energy terms; if also consumerism is faltering, its charisma wearing thin, even new injections of HPM will make no difference. All more HPM can do is increase the ratio of HPM to credit-money, e.g., raise reserves and lower the risk of a bank run (depending on many other factors). But the point is not the amount of HPM (which is almost like dead money), but the rate of growth of the economy as it relates to potential credit-money creation and profits via usury.

Borrowing later: Government creates the money it borrows. It gives the system the money it later borrows at interest. That’s weird and telling, in my opinion.

In brief, government places money as reserves into commercial bank reserve accounts, with which government debt can be ‘purchased.’ “Otherwise, the funds wouldn’t be there to buy the Treasury securities, and the banks would have overdrafts in their reserve accounts.” What a line! Banks with overdrafts mean banks with negative reserves. Counterproductive. Must be immediately rectified by the Fed.

Government sells bonds and other forms of debt as one way of taking HPM back out of those accounts, lowering (for a while) the amount ‘in existence.’ Each debt promises to pay back that amount of HPM to the bearer plus some interest. And then one day government pays out on those bonds, whereupon more HPM enters the system.

The HPM, which must be exchanged for these transactions to occur, is created at need by the government and only by the government. Funny money? What is that money backed by? Whence does its value come? Some say tax and the solvency of the people. I say the value of this money comes from growth of economic activity, or, ongoing sale and purchase of ever increasing amounts of goods and services. Imagine an economy with only taxation. Government gives you money, then taxes it away again. The evidence that growth backs money is the maths of usury (P < P+I), the way the system invariably collapses when it is not growing (recessions and depressions are Not Good), and that inflation drains value or wealth from money.

So, why buy government debt? You ‘exchange’ some of your high powered money for debt because you want the amount you hold of that currency to grow faster (or more securely) than it otherwise could in some savings account. You want more of that currency at some later stage. Why more of that particular currency? The only reason I can think of is because you expect it to be stronger than other currencies, to retain better its purchasing power relative to others. Or some other reason to do with increasing your wealth. You would not buy government debt expecting to lose money (except as a primary dealer, who’d be bailed out at need anyway).

In general

The system is about getting money-richer, money being sticky abstractions of ‘measured’ wealth. Money working for you. Investing so as to maximize profit from money-ownership; a wise mix of risky and stable in your portfolio. Government debt is sound. They can always pay. The only question is, what is the value of this currency relative to others? What does a bond or other government debt offer relative to a commercial bank savings account, or some stock, or gold, or oil? And growth in the economy must be occuring for growth of the money supply not to be inflationary. Growth must also be happening for there to be more and more people wanting to take out loans, earnings from which pay for the interest owed by banks to the owners of money.

The system looks like, as others have said, a government backed counterfeiting cartel. Its centre is the credit money system, for which the central bank acts as a kind of hidden guarantor, a rock of stability. HPM is an enabler of the commercial bank activity. In the end, it does not really matter whether we have 100% reserves or 0%; money means, systemically, that we all need money of some accepted kind to survive. When you need money to survive and there is not enough for everyone ‘out there’ (how could there possibly be enough?), some will have to borrow. Those in a position to ‘help’ financially people in need survive are systemically constrained to abuse that power, because the underlying premise of the entire system is differential advantage, perpetual competition, and success as concentration of wealth and power to increasingly few. (The appendix in Eisenstein’s “Sacred Economics” is very helpful on this point.)

Where does money disappear to? To the Great Nowhere of the Fed via taxes and government ‘debt.’ What about interbank lending; how did it dry up in the second half of 2008? If we are to understand HPM as a pool kinda sorta equally distributed (dynamically) among accounts held by commercial banks at the Fed, and if only the Fed can create/destroy it, how did it disappear to critically low levels? How was there a ‘shortage’ of it? Derivatives and sub-prime. ‘Creative’ forms of debt. The claims on HPM were excessively above ‘required’ reserve ratios and were cratering bank balance sheets. It’s not that HPM disappeared, it’s that there quickly became too little relative to the multiple and exotic claims on it. The HPM/Debt cocktail was way too thin (though HPM is also debt-bound due to government selling debt on the money markets). The bursting of the real estate bubble had an explosive impact on bank balance sheets, such that no bank trusted the other. What to do? The system can’t be allowed to fail! The rest, as the saying goes, is history. And the times are getting interestinger!

Some graphics inspired by Modern Money Mechanics

* “Currency held in bank vaults may be counted as legal reserves as well as deposits (reserve balances) at the Federal Reserve Banks. Both are equally acceptable in satisfaction of reserve requirements.” And: “Part of an individual bank’s reserve account may represent its reserve balance used to meet its reserve requirements while another part may be its required clearing balance on which earnings credits are generated to pay for Federal Reserve Bank services.” (From “Modern Money Mechanics”.) There are fine grades of difference in the role played by high powered money as it resides in different places, as well as what reserves really are, and not all of it is customer owned, even though there are—by virtue of the nature of fractional reserve banking itself—multiple valid claims on that ‘real’ money. As to ‘real’, in the end, the validity of any money, whether high powered or otherwise, rests on faith: “What, then, makes these instruments – checks, paper money, and coins – acceptable at face value in payment of all debts and for other monetary uses? Mainly, it is the confidence people have that they will be able to exchange such money for other financial assets and for real goods and services whenever they choose to do so.” (“Modern Money Mechanics”) I can only conclude that this complexity serves to generate a powerful and unconscious sense of wow! in the observer, to foster trust in the competence of the experts who designed and remain in tight control of such an amazing system. Seriously. This is an amazing system. The smarts involved in building and maintaining it are not to be underestimated. And, perhaps most importantly of all, it is a pseudo-solid chimera that can take almost any shape yet still be exactly what it is; wealth-mining machinery of exquisite design. After centuries in existence, we are still debating how it 'really' works. That says something.