Marginal Productivity Theory

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Published on Credo Economics on September 21, 2016


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This chapter describes the “marginal revolution” of neoclassical economics. The idea of marginal productivity and payments to “factors of production” was developed for ideological reasons to counter thinkers like Marx and George. The theoretical framework learned by generations of students is contradicted by the evidence. The ideas of capital and land in neoclassical economics are incoherent.

Economists tell us how consumers on the market, “voting” with their purchasing power got what they wanted and wealthy landowners got the economic theory that they wanted. It was economists like J.B. Clark that were necessary if your economics department was to become well-funded.Clark moved to Columbia University in 1895. The university was blessed by funding from Wall Street banker J. P. Morgan.

The key idea for theorists like Clark was that “factors of production” earned what they added to production “at the margin”. If adding an extra worker to the payroll adds more to production, sales and revenues, than that worker costs to hire, then it was in the interests of the employer to hire the extra worker. The same logic continued to apply as long as each additional worker enabled more money revenue to come in from extra production and sales than they cost. The process of adjustment by hiring more workers would stop at the point where the last worker (marginal worker) was adding as much to enterprise revenues as they were costing. Now what could be fairer than that? Employers would employ more workers until a point where each worker is being paid the same amount of money as the value they have added to production can be sold for.

The same logic is applied to explain the income being earned by the other “factors of production”, namely, an amount equal to the revenue from the sale of their marginal products. This idea was an ideological construction that suited business interests nicely.

Critics have pointed out the flaws in this reasoning. A technical argument about where a business person will no longer find it worthwhile, under tightly defined conditions, to add more and more labour to his capital, has been fudged as an ethical argument justifying the income distribution between that business person and his employees and ignoring the underlying social relationship between the wage labourer and the capitalist. In the words of Joan Robinson:

The very essence of the theory is bound up with a particular institution — wage labour. The central doctrine is that “wages tend to equal marginal product of labour”. Obviously this has no meaning for a peasant household where all share the work and the income of their holding according to the rules of family life; nor does it apply in a [co-operative] where, the workers” council has to decide what part of net proceeds to allot to investment, what part to a welfare fund and what part to distribute as wage. Joan Robinson quoted in (What is Wrong With Economics, 2009)

Neoclassical economics thus, emerged, originating in an ideological imperative, namely, the justification of property incomes. This new approach concocted an elaborate fiction that was subsequently fed to each generation of students which purports to describe how companies decide how much they are going to produce.

If you ask most business people what determines how much they produce they will probably say that they are limited by how much they can sell or how much capital they can raise to expand production – which will also depend on them convincing a capital provider of how much they can sell. To the neoclassical economist, however, what limits what a firm will produce is not only that it may have to reduce its prices if it tries to sell more but that, as the firm increases, its production its costs will rise.

In the textbooks there is a picture of what happens in the production arrangements of companies which goes like this: If a company wants to expand its output “in the short run”, it will find itself unable to alter the availability of some “factors of production” like its premises and its capital equipment. However, it will be able to vary the input of other factors of production like its labour force. But adding more and more workers to the fixed quantity of capital equipment will eventually lead to “diminishing returns”. The neoclassicals want us to believe that output will increase but at a diminishing rate. The reason is that the ratio of workers to capital equipment becomes less than optimal after a certain point. Indeed at some point adding another worker would lead to no extra output at all. The last worker would simply get in the way and might even reduce total production.

The implication of “diminishing returns” from the variable factors of production (e.g. labour) is that if companies try to expand output they find that their costs will rise. Let us illustrate by imagining a company in which, in the early stages of an expansion process, there is little labour and much capital equipment. In this company, in order to expand production by 10 units a week it would require one extra worker costing an extra £100 a week to hire. An example of what “diminishing returns” would mean is that, to produce a further 10 units a week beyond this might require 2 extra workers costing £200 to hire. An extra 10 units a week again might cost 4 extra workers at £400. This being the case, if this imaginary company is to be induced to produce more and more, its owners will want to be able to sell the greater number of units at higher and higher prices so that they can cover the higher and higher costs. Since the company is unlikely to be able to get consumers to buy more at higher prices its expansion will be choked off by the diminishing returns which has led to rising costs.

Well, that is the textbook story anyway – but it is a conceptual house of cards which was dreamed up for ideological purposes in order to justify the distribution theory. The idea of diminishing returns is 164 important because, if you think about it, it implies that to employ more workers the labour force must take a wage cut. In the imaginary story an employer who employs more people is getting less and less additional product for each additional worker. To induce him to do this, he has to be able to pay them less to make it worth his while. It’s obvious then, isn’t it that, if there is unemployment in the economy, it is because wages are too high. Wouldn’t you know it – once again the poor have only themselves to blame.

Steve Keen quotes Galbraith:

Neoclassical economics can be summed up, as Galbraith once remarked, in the twin propositions that the poor don’t work hard enough because they are paid too much, and the rich don’t work hard enough because they are not paid enough. (Keen, 2011, p. 119)

What all of this has got nothing to do with, however, is the real world. This theory has been tested against empirical research over a hundred times and shown not to be true. If the theory were true it would be demonstrated by rising costs as companies try to expand, but these are not the findings. A few companies have cost structures like this but the vast majority don’t. The evidence is in cited in Keen’s book Debunking Economics.

For example, a study by Alan Blinder surveyed 200 medium to large US firms which collectively accounted for 7.6% of America’s GDP admitted that:

The overwhelmingly bad news here (for economic theory) is that, apparently, only 11% of GDP is produced under conditions of rising marginal cost… Firms report having very high fixed costs – roughly 40% of total costs on average. And many more companies state that they have falling, rather than rising marginal cost curves. While there are reasons to wonder whether respondents interpreted these questions about costs correctly, their answers paint an image of the cost structure of the typical firm that is very different from the one immortalised in the textbooks. Blinder 1998 quoted in (Keen, 2011, p. 126)

Blinder’s research is not alone. Steve Keen mentions 150 empirical studies. Every study found the majority of firms acting in a way that contradicts the textbook theory. (Keen, 2011, p. 125)

The reason is that the idea of “diminishing returns” is wrong. It is far more accurate to describe short term expansion (or contraction) in an industrial economy as involving “constant returns” as production is scaled up or scaled down. The “constant returns” occur at the same time as an increase or decrease in capital utilisation.

Here is another imaginary example that is a little more realistic. You wish to set up a business in the clothing trade employing (mainly) women who each work with a single sewing machine. You do it by acquiring premises and putting a number of sewing machines in the factory. The price of the premises, the sewing machines and other equipment are your fixed costs. As you start up you may use only half of the sewing machines and half of the production space of the factory, depending on the size of the market but if your product becomes more popular you hire extra women to sew using the otherwise unused sewing machines and the previously unused factory space. The sewing machines and space brought into use do not cost any more. These are fixed costs that were already being paid for and are now being spread across a larger volume of production. Nor are there any “diminishing returns” to the increased labour input, because, just as before, each worker works with one sewing machine and in the same amount of space, specifically for their work.

Fact is that production in an industrial economy requires an often tightly defined specialisation of labour functions and/or a specific relationship of workers to production equipment. There is no point in varying the worker to sewing machine ratio. Two or more workers per sewing machine at any one time makes no sense at all. Likewise, at any one time, just one lathe will be used by just one worker. A blast furnace has just so many workers with specific functions. The technical ratios between specialist workers in teams and between the workers and machines cannot be varied. To have flexibility one must have spare capacity – and then employ that capacity in the appropriate ratios that make for team work and relate workers with specific trade skills to specific kinds of equipment. The capacity, unused and used, represents a fixed cost that, when spread over increasing production, brings unit costs down. Because expansion is an expansion of all factors of production in a technically defined and fixed ratio, no such thing as diminishing returns occurs. What occurs is that capital utilisation rises or falls spreading the fixed costs over a varying output.

All this was largely worked out by a critic of the neoclassical school, Piero Sraffa in a paper written in 1926 that was published in the Economic Journal (Sraffa, 1926 ). It forms the basis for the chapters in Steve Keen’s book from which I have taken this very brief account. Keen quotes Sraffa:

Business men, who regard themselves as being subject to competitive conditions, would consider absurd the assertion that the limit to their production is to be found in the internal conditions in their firm, which do not permit of the production of a greater quantity without an increase in cost. The chief obstacle against which they have to contend when they want to gradually to increase their production does not lie in the cost of production – which, indeed, generally favours them in that direction – but in the difficulty of selling the larger quantities of goods without reducing the price, or without having to face increased marketing expenses. (Keen, 2011, pp. 116-117)

This way of explaining things helps to explain the rise and rise of the marketing industry. If, as neoclassical economists claim, it is diminishing returns and rising internal costs that prevent companies selling more and more then why would they bother to advertise? If the adverts worked they would be pushing themselves into a zone where rising internal costs would choke off further production anyway. On the other hand, if unit costs fall as production expands, then as long as the price is greater than that unit cost the company will make more the more that it sells. What limits the company then is the ability to sell its product. If the company reaches full capital utilisation then what limits it is the ability to raise 166 new capital to expand – and that partly depends on being able to convince an investor of increased sales in the future.

Capital in neoclassical theory

The fact that the theory does not match reality does not stop marginal productivity theory and diminishing returns being reproduced in the textbooks because it is useful ideologically as an “explanation” of income distribution. “Land”, “labour” and “capital” “get what they contribute at the margin” according to the theory when things are presented in this way. It is not within the scope of this book to go into these ideas in depth because I am trying to review the foundational issues that underpin economics in a simple way. Unfortunately, it is not possible to ignore them either and, in fact, there is a whole set of questions about “capital theory” where Ricardian economists in Cambridge in the UK and neoclassical economists in Cambridge in the USA (at the Massachusetts Institute of Technology) clashed about how to understand the “returns to capital”. These are described in Steve Keen’s book Debunking Economics where he does a good job in describing a very complex debate in which neo-classicals like Samuelson eventually acknowledged that the Cambridge economists in the UK had established their point. In effect, the UK economists challenged the idea that profit is the reward for capital’s contribution to production.

For neoclassical theory to be a complete picture of income distribution in society it has to scale up from how individual firms operate. This meant that economists needed to assume that units of labour and “capital” were identical or homogenous entities that move between economic sectors and firms as they adjusted continually to try to achieve their optimal outputs. Now, that idea is understandable when it comes to labour moving from one company or economic sector to another. But a loom cannot “flow” into work as a lathe. A lorry is a piece of capital equipment that cannot flow into use as a computer. Land cannot flow either. It is stuck where it is.

Economists have had lots of fun over the years dreaming up metaphors to try to get around this problem. Much effort has been devoted to creating “models” where “capital” as a physical entity is thought of in malleable terms in order to rescue neoclassical distribution theory. Capital in a “putty” form, or models using capital that could be reconstituted in a different form like Meccano, have been put forward. This was all in order to have “capital” that could move from sector to sector.

J B Clark started the process with what was called the “jelly theory of capital”. Naturally, Clark recognised that capital goods differ from industry to industry and from time to time. To cope with this conceptual problem, he regarded capital goods as being specific and transient embodiments of a general and permanent “essence of capital”. This is the fund accumulated by the economy’s savings up to any point in time and ploughed into specific capital goods.

Mason Gaffney describes this way of thinking as “endowing capital with a Platonic essence”. The ancient Greek philosopher Plato thought that what we experience in the physical world is an imperfect reflection of eternal perfect “forms” that exist somewhere. Ideal objects that capture the “real essence” of the things dimly reflected in our imperfect everyday physical existence. Thus, particular machines – lathes, looms, tractors – were an imperfect reflection of the “essence of capital”. The rationale of thinking in this way is something like this: capitalists use their resources in processes that “turns over” capital. Assuming they are involved in production they start with money, go on to buy machines, buildings, materials and hire workers, organise a production process and then sell the products to make a “return” which brings their money back with, as they hope, more money than they started. In this process, and over time, they will hold back some of the money returned to replace and buy new machinery. (Gaffney, 1994)

However, the only thing that looms, lathes and lorries, as items of capital equipment have in common is the fact that they have a money value. Neoclassical economists ignore the differences and just count the money value of the different kinds of machines as the common element making for comparability and measurability. But there is a problem of using price as a common way of counting different kinds of capital goods. The price of capital goods depends on the rate of profit and the rate of profit is the very thing that you are trying to explain. What one can do, however, is think of “capital goods” as commodities which enter into the production of other commodities. With this idea, Piero Sraffa at Cambridge UK succeeded in showing that you could make calculations based, not on money prices, but from calculating commodity inputs into the economic process as “dated labour inputs”. Ultimately, any lathe, loom or lorry is made with labour and with other inputs. These other inputs were made from labour and even earlier inputs. The earlier inputs were made from labour and other inputs made even further in the past and so on. If you go back far enough, you only have labour inputs – but you have to adjust your calculations to allow, at each stage, for a profit rate which has been taken out; and for the fact that different kinds of commodities enter into the production of other kinds of commodities in variable ratios.

What this exercise establishes is that, rather than the rate of profit depending on the amount of capital used as neoclassical economists would like us to believe, the measured amount of capital depends upon the rate of profit.

This, in turn, grounded the idea that the distribution of income is not the result of impersonal market forces but reflects the power relationships between different social classes as well as the technical capabilities of factories.

In later chapters I will explore ideas about production not developed by either Cambridge, England or Cambridge, USA – to explore the idea that the production of society depends on one input in addition to labour that enters into absolutely all economic activity – energy. Since energy is a commodity that enters into the production of all commodities, it is absolutely crucial and, as we will see, if the amount of energy needed to produce energy rises, and if the amount of energy needed to produce other raw materials rises too, then society will be in deep trouble.

J B Clark was not just interested in providing ideological cover for the property income to capitalists. He was concerned about landed income too. Perhaps conscious of the need to counter the arguments of Henry, George Clark described “land” as just another purchased input, another form of capital. Adding land to the picture of capital as Clark did was, as Tobin pointed out, a step that destroyed the equation of the capital stock being equal to the society’s accumulated savings. One may save resources (hold back from consuming them) in order to create machinery instead, but no one saves up to create land. Leaving aside polders and other reclaimed land, land is already there.

No matter – for Clark capital could “transmigrate” into land – a metaphor that made land and capital the same kind of stuff. This theoretical sleight of hand had the useful function of getting rid of the Ricardian theory of rent and provided the appearance of an answer to Henry George in the process.

Henceforth, most economists just focused on “labour” and “capital” as concepts to explain production. Land, with its distinctive features – spatial, temporal and environmental, largely disappeared from economic theory.

Thirty years after Clark, John Maynard Keynes wrote his General Theory of Employment, Interest and Money and declared that the influence of land was restricted to an agricultural age. It was capital and particularly, financial capital, which was the important influence in the modern age (cited in Harrison, 2005, p. 142)

Trying their best to be helpful to the elite, the idea of rent was also muddled by creating a new definition for it. “Economic rent” is now said to be the difference between what each factor of production is paid and how much it would need to be paid to remain in its current use – a definition of rent that rests upon the idea of opportunity cost.

Taking land out of economic theory meant that economic theory was “dis-located” or “dis-placed”. The conceptual category of “land”, and the linked concept of “rent”, represented real influences in the world that the system of ideas called “economics” was struggling to represent. Making these categories disappear from the constellation of ideas that made up economic theory had serious implications. The theory lost dimensions of inclusiveness and clarity. It was impoverished. More events could now happen in reality than the concept system had terms to explain. What was disappearing from theory when the concept of land was fudged into the concept of capital was the likelihood of further investigations into the distinctive features of land – spatial, temporal, environmental and ecological – all those things that I have tried to put back into this book. Even considered in narrowly economic terms, land is a very distinctive kind of asset because it is one of the main forms of collateral for the banking and finance system.

Discussions of production as the relationship between capital and labour were no longer “grounded”. The embodiment of economic activity in the physical world disappeared. The sense that it entails natural fertility; specific production locations; the extraction of matter and energy sources from out of the planetary crust and, consequently, putting wastes back into the earth; into the rivers and the atmosphere. All these kind of things were effectively out of sight of the theory and out of the mind of the theoreticians. Out of sight and out of mind was exactly how the landed elite liked it – particularly in Britain where the power and inequality involved in landed property has been deliberately hidden by an aristocracy anxious to avoid the threat of a land value tax and to enjoy their privileges undisturbed.

Kevin Cahill’s book Who Owns Britain sets out the figures starkly: the UK is 60m acres in extent, and two-thirds of it is owned by 0.36% of the population, or 158,000 families. In Scotland it is even worse – 432 individuals own half the private rural land. In contrast 24 million families live on the 3m acres of the Britain’s “urban plot” – and then buy into the idea that Britain is a severely overcrowded country in which land is extremely scarce. (Adams, Tim 2011 ).

“Much of this can be traced back to 1066. The first act of William the Conqueror, in 1067, was to declare that every acre of land in England now belonged to the monarch. This was unprecedented: Anglo- Saxon England had been a mosaic of landowners. Now there was just one. William then proceeded to parcel much of that land out to those who had fought with him at Hastings. This was the beginning of feudalism; it was also the beginning of the landowning culture that has plagued England – and Britain – ever since.” (Kingsnorth, Paul 2012.)

However, in the last few years a large amount of landed property in the UK has been purchased by the moneyed members of the global elite from the descendants of early medieval gangsters. The astronomic house prices and rents in London as well as in some of Britain’s country estates is because the property magnates of the world are buying up the place. (Adams 2011)

Concluding remark – different meanings of “diminishing returns”

It was Ricardo who first utilised the concept of “diminishing returns”. He realised that different areas of land as a resource had different fertility and different degrees of desirability in other senses too e.g. distance to markets. He used this idea of differences in desirability in his theory of rent. Ownership of the most fertile land nearest to market meant the ability to charge more rent than in less fertile and more out of the way places. What happened was that the neoclassicals tried to adapt Ricardo’s explanation for rent for other factors of production by claiming diminishing returns in different circumstances – where factors of production were used in differing ratios with each other. As we have seen, this was not an appropriate thing to do in most industrial production processes but the idea of diminishing returns is useful in some contexts. As we will see, it is useful in office work and service contexts and it is, above all, useful in describing the relationship between the economic system and the ecological system. As the size of the economic system expands in relation to the fixed size of the ecological system, there are indeed diminishing returns. When the best sources of fuels, minerals and soils are used first, depletion means that the cost of extracting increasing amounts for economic use increases. More resources have to extract resources. Furthermore, if wastes and pollution from production increase then more resources have to go to deal with the consequences. This is diminishing returns. Those problems are the limits to economic growth. Ironically neoclassical economists seem unable to acknowledge these diminishing returns as a problem.

The School of Globalism

From the keyboard of James Howard Kunstler
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Originally Published on Clusterfuck Nation April 6, 2015

“…we may be headed into a world where capital is abundant, deflationary pressures are substantial and demand could be in short supply for quite some time.”

Lawrence Summers, former Secretary of the Treasury

Professor Summers must be reading Ben Bernanke’s new blog. Or maybe he’s writing it for walking-around money. At $250,000 a pop for making a speech, Mr. Bernanke can certainly afford to pay high-toned hacks to polish his spin-o-nomics. Raillery aside, Mr. Summers’ utterance provokes some pretty fundamental questions: what exactly is this world we’re heading into, and what exactly does that capital consist of?

It is, first, a world of unraveling globalism. So many people who should know better — members of the supposed thinking class who have suspended their thinking — swallowed Tom Friedman’s dictum that globalism was here to stay, a permanent new feature of the human condition. File that idea in the dead letter office, along with Francis Fukuyama’s The End of History. With the help of competitive central bank racketeering, desperate nations have propelled themselves from financial disorder to geopolitical turmoil and history marches on — lately to the ululations of gleeful beheaders. Friedman’s flat world was predicated on a dominant and sound American polity, and we’ll have neither in that world Mr. Summers says we’re moving into.

In fact the first condition was predicated on the second: that America would continue to dominate the global economy because its polity was sound. We have clearly blown that by rigging together a corrupt troika of banks, market swindlers, and captive eunuch officials who expanded the financial sector of the economy from 5 percent to more than 40 percent, largely by pillaging the middle class and destroying the basis of their income. The USA set the tone for 21st century magical finance, in which “wealth” was “created” by digital accounting fraud. The effects at home are visible on our landscape of suburban hyperwaste and decrepitating older towns and cities.

One might say the main effect of the 50-year-long Friedman globalism orgy was the schooling of other nations in American-style financial fraud. Surely China has now surpassed the USA, considering the structural perversities of their banking and government relations. They really don’t have to account to anybody, including themselves, and the numbers they publish must be even more fantastical than the junk statistics produced by the US BLS. Europe has been a star pupil and only a few months ago announced a Quantitative Easing (fake capital creation) program as ambitious as America’s have been. Japan, of course, is just marking time until it quietly slips away and goes medieval.

Global disintegration has advanced furthest, not surprisingly, in the fragile band of regions most strung out on the primary commodity: oil. The Middle East / North Africa / Central Asia war zone is steadily combusting, and there is no sign of resolution across the whole of it, only the promise that conflict will get worse. Saudi Arabia was the cornerstone of that district, and the senile Saudi leadership finds itself in peril as its military pretends to support splintering Yemen. The other Arabian princes of other non-Saud clans must be watching the spectacle with wonder and nausea. When Arabia blows up, that will truly be the beginning of the end.

The foregoing leads to that other original question: what is that “capital” we’re counting on? I’d propose that it doesn’t exist. It is a figment engraved on the hard drives of the world, a ghost that haunts the people still in charge of that disintegrating global economy. There is still wealth in the world, but a lot less than people such as Larry Summers say there is.


James Howard Kunstler is the author of many books including (non-fiction) The Geography of Nowhere, The City in Mind: Notes on the Urban Condition, Home from Nowhere, The Long Emergency, and Too Much Magic: Wishful Thinking, Technology and the Fate of the Nation. His novels include World Made By Hand, The Witch of Hebron, Maggie Darling — A Modern Romance, The Halloween Ball, an Embarrassment of Riches, and many others. He has published three novellas with Water Street Press: Manhattan Gothic, A Christmas Orphan, and The Flight of Mehetabel.

Mainstream Money Mess

Off the keyboard of Graham Barnes

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Published on FEASTA on February 2, 2015


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The Mainstream Money Mess – three aspects… and what they mean for new money-forms


This article looks at three of the most poisonous aspects of Mainstream Money from the perspective of a currency designer exploring new money-forms:

i) the interest on debt – 97% of money issued is created as interest bearing debt with horrendous consequences
ii) capital misallocation – most of that credit is allocated away from the real economy, and with no strategic guidance on priorities
iii) the monetisation of everything – the implicit narrative that anything that cannot be expressed in quantitative (monetary) terms has no worth

Many books and articles have been written about these three factors, and they are thankfully receiving increasing amounts of mainstream media coverage. This article attempts to briefly summarise the state of play in each area, from a particular perspective – that of the currency designer envisioning new currencies that might avoid the excoriating societal, economic and ecological impacts of such built-in dysfunction on future generations.

The Problem with Interest

Interest can be seen as capital-rent. Funds flow from a lender with more money than they curently need to a borrower with less money than they need. By definition the interest flow is from the poorer to the richer. So rather than the ‘trickle-down’ effect once postulated, we have a ‘trickle-up’ effect. In previous ages the power imbalance in the borrower-lender relationship has been partially addressed via debt forgiveness (jubilees) and through bankruptcy law. The current neoliberal-designed narrative emphasises the primacy of the debt – the ‘free will’ of the borrower and the unfairness of any write-downs to the lender. Thereby all lenders have licence to be predatory.

Now if the lender is a hard working self-made person, simply ‘parking’ money for a period of time until it is needed, then there is perhaps some rationale for capital-rent. At a guess, such loans might account for perhaps 0.1% of credit. Typically 99.9% of loans will come from two source-types – the smaller portion from inherited wealth pools where the initial accumulation of wealth is a result of historical serendipity, the smart commerce of previous generations or malfeasance (or a combination thereof), and where wealth-possession implies no merit for the current holder whatsoever; and the larger portion from private banks who create the credit out of thin air [1].

This latter category is the subject of monetary reform proposals which would see the state reclaim (at least partially) the right to issue money [2] – a right it has outsourced to the commercial banks as part of an undocumented and opaque ‘bargain’. The bargain appears to be based on two foundations – the banking sector’s ‘agreement’ to operate payment and settlement systems (which could in fact be handled via a neutral third party); and the political attraction of the state being able to wash its hands of difficult strategic decision making and leave all investment decisions to the ‘market’ (or the banks as a proxy for the market) – which is the subject of the following section. (I say ‘appears’ because to my knowledge the exact nature of this bargain has never been formally described.) It has been estimated that in the UK alone GBP 192 million is paid by the nation to the banks in interest every day [3]. This ongoing seignorage represents a wealth transfer into the pockets of the high priests and gatekeepers of finance – a key factor in the creation of a terminally divisive society. And a factor which is relegating the real economy to a smaller and smaller corner of the casino.

For chapter and verse on the truly horrific effects of debt+interest, the reader is referred to the writings of Tarek el Diwani[4] and the late Margrit Kennedy [5].

Kennedy has debunked one particular myth about interest – that it only affects those who borrow. Her work calculated the embedded interest accumulated in the supply chain of various goods and services and showed that it is quite common for 50% of a price to be due to interest costs.

At this point we will resist the temptation to disentangle the idea that the cost of money – i.e. the interest rate – is related to the level of risk involved for the lender. Suffice to say its complete b******s. Interest rates are more a measure of insider-status than of forensically-assessed-risk.

Interest in Currency Design

The two functions of means of exchange and store of value should be clearly separated when it comes to the design of new money-forms. For a ‘pure’ exchange currency the primary interest-related issue is the question of whether to implement a negative interest (demurrage) regime (or to design-in alternative treatment of relatively inactive currency units).

The underlying assumption to this line of thinking is that increased ‘local-GDP’ is good. (Note: ‘Local’ here needn’t necessarily mean local-geographic – more Preferenced-Domain [6] specific). In other words more trade is good, so the velocity (frequency of exchange) of money-forms needs attending to. But we know all about the Growth Illusion [7], the impossibility of infinite growth and the disconnect between GDP type measures and well-being. So it can be argued that buying in to this underlying assumption is itself to take on board some of the neoliberal ideology we are aiming to dump. However if a new currency is predicated on preferencing real world ‘core’ transactions (food, shelter, energy, society) then perhaps growth in currency turnover could be a meaningful metric. With this proviso, we can explore further.

The basic premise of demurrage, as anticipated by Gesell [8] and others, is that if carrying money incurs a cost it incentivises spending. As I see it there are three potential problems, (other than the spending=always good axiom) :
i) The approach implies that all purchases are equal (this can be addressed via the definition of the Preferenced Domain)
ii) There may be (especially in the early stages of a new currency) nothing that the holder wants to purchase available. Thus incorporation of demurrage in immature currencies is probably ill-advised.
iii) It can be gamed. Especially with digital currencies, trade ‘cycles’ ( e.g. A->B B->C C->A ) can be used to generate fictitious trades to avoid demurrage. (Note: An embedded transaction fee could mitigate against this. Further discussion below.)

Given these issues, plus the danger of succumbing to growth fetishism (or the ‘ideology of the cancer cell'[9] as it has been described), caution is advised. Successful use of demurrage has been reported by the German Chiemgauer currency but this appears to be measured in terms of velocity – three times that of the Euro as reported in 2009 [10]. However, it is possible that the currency is being used for local transactions that would have taken place otherwise in euros, so that the overall velocity of exchange in the local economy is in fact unchanged.

Proving real ‘additionality’ looks to be tricky. But then maybe it’s not necessary to do so. The demurrage creates a small revenue stream that can be partially diverted (as with the Chiemgauer), to non-profits. And with the recent conversion of the previously dismissive European Central bankers to the idea of negative interest, maybe Gesell was ahead of his time.

In a store-of-value context, interest can be used as a mechanism for incentivising the setting-aside of money – as an asset class in its own right. But the money thus set aside is then further invested (by someone) in other asset classes, so in currency design terms I prefer to see store-of-value currencies backed by something tangible and of enduring use-value, ideally energy.

Lastly, all currencies will need working capital at some point. For digital currencies this is best achieved via the transaction fee mechanism. Interestingly this mechanism is part of the smart incentive design of Bitcoin. At present mining incentives are the major reward, but as the currency matures, transaction fees will gradually overtake them in importance. Creating a separate store-of-value companion currency for a designed exchange currency might well be an interesting direction, but not with interest as its key value enhancement device.

Misallocation of Capital

As noted above, the lion’s share of issued money appears in the form of credit allocated by private banks. It may be harsh to say these funds are allocated on a whim, but there is certainly a herd-mentality, and the idea that there is a competitive money-rental market mediated by independent minded banks via the interest rate charged is an illusion. The end result is that insufficient funds are made available to the real economy. Most goes to the financial sector and to secured personal loans, largely mortgages. In theory this allocation is guided by a risk-weighting process underpinned by the Basel agreements. Different weightings are defined for different generic asset categories – government bonds being the ‘safest’.

Click to enlarge

The key point here is that there is no strategic guidance on capital allocation. Governments therefore are showing an implicit blind faith in the ability of markets (or banks as their proxy) to determine what is best for us and for following generations. This ‘social experiment’ has lasted now for around 45 years and in the words of Wren’s epitaph at St Pauls ‘si monumentum requiris circumspice’ [11].

Thanks to the reforming efforts of Positive Money and other pressure groups, the case for so-called ‘sovereign money’ is reaching a wider audience but the inertia of entrenched vested interest and the political expediency of being able to delegate national investment strategy to the ‘markets’ represent enormous obstacles to change. We must hope that this market supremacist phase of capital is temporary.

Capital Allocation in new currencies

As noted above all new money-forms will have need of capital at some point for development. If at this stage they are forced to return to fiat currency markets to borrow, they immediately become dependent on a competitor. Whether this dependency prevents the new money-form from achieving its objectives will depend on those objectives, but it is likely to act as a constraining influence.

The gradual accumulation of capital via embedded transaction fees is preferred but this means that the hard yards have to be put in to achieving critical mass in an old-fashioned save-and-invest sort of way; and that unless goods and services can be sourced via payments in the new currency, they are not acquired. Development is postponed. In this context smart strategies for bootstrapping a currency into sustainable existence are clearly needed.

When sufficient capital has been accumulated, the focus then turns to governance. New currencies must design-in governance mechanisms that are transparent and fit for purpose.

The ‘Proxy Pounds’ or Transition Currencies are backed by fiat – that is the Brixton/ Bristol pounds are issued in exchange for sterling. The sterling received is then ‘banked’ and a proportion can be loaned out to local borrowers. But unless interest is charged on those loans, the lending risk cannot be covered and scheme costs (which are generally payable in sterling) cannot be met. The interest ‘problem’ is linked to the capital accumulation ‘problem’.

The Monetisation of Everything (TMOE)

The TMOE mindset is related to the 1980s consulting mantra that ‘if you can’t measure it you can’t manage it’. Both display a complete disregard for the ineffable. It is difficult to argue a case for the complete abolition of metrics, but it is a rare metric that is widely accepted as an unambiguous measure of something that matters. Putting a numeric value to an entity can lead to unintended and unpredictable side-effects as experience (for example with the NHS) has shown. Numbers can also be gamed by insiders with a vested interest in specific outcomes.

Money’s function as a unit of account – as a yardstick – a measure of comparative economic value – shares some of these challenges. Perhaps the two main money-related metrics are personal-wealth and GDP. The first has become a fetishised proxy for personal-worth; the second is widely accepted to be unrelated to happiness/ well-being. War and car crashes are good for GDP. Attempts to identify a more meaningful index have led to work on the ISEW [12], GPI and the German NWI [13]. This process normally involves putting a numeric value (in money terms) on social and ecological parameters.

The dominance of money-measures in the shaping of economic policy has led to this ‘quantification’ approach being applied to many aspects of life not heretofore addressed by economics – to the ‘price’ of carbon, to the ‘value’ of housework and so on. Commentators talk glibly about natural capital, social capital, human capital. The quantification juggernaut is a key facet of the extension of markets into areas not previously treated as such. The market economy has become the market society. The classic neoliberal response to a failed market is to create a new market to address the failure, and money-metrics are central to this process.

The idea of the perfectly functioning market is a deeply attractive one. The invisible hand ensures that goods and services are traded at the right price, and, like the subcontracting of money-issue to the private banks, absolves the politicians from having to trouble their tiny minds on strategic human priorities. Unpopular outcomes can be attributed to the mysterious workings of the ‘deus-ex-machina’ of the market. This cloak of machine-like impersonality in turn can be used to obscure the influence of the puppet-masters. In the process we all adopt the language of the market and its prevailing narrative without realising it. It’s a shame such a market does not exist.

Quantification is also an important ingredient for the agnotology [14] central to neoliberalism – the spreading of doubt and uncertainty in order to paralyse meaningful citizen action while strings are pulled and neoliberal ducks lined up. There’s nothing better to argue over than numbers, their meaning and consequences.

Quantification in currency design

Exchange currencies – beyond the gift economy and simple barter – need a unit of account. So, whatever that is, there is a numerical representation of an account balance. As long as the rules concerning the exchange of these units are clearly set out; that non-trade uses for the currency (e.g. exchange with other currencies, fees) are transparently understood, and the underlying payment system is secure, then this particular metric is fine.

Over and above the individual transaction, however, there is an ongoing process of development of the community-of-users of the currency. This process involves the reciprocal assessment of various soft factors, of which the most important is probably trust.

We have recently seen some hyperbolic claims that Bitcoin does away with trust, and articles on trusting vs trustless schemas. But Bitcoin has not done away with the need for trust – it has moved the trust boundary. The blockchain manipulation algorithms allow the emergence of consensus as to whether or not payment has been made. Further development of cryptocurrencies – for example the determination of embedded contract conditions – will probably move the trust boundary further out. But they will not do away with it entirely.

Some of the existing ecommerce platforms address the matter of trust via a reputation metric. Reputation can be seen as a qualifying parameter. There may be people with the goods/ services you need (or the requisite units of currency) that you choose not to do business with. The reason is usually related to some facet of reputation. I hope to cover this more fully in a later article. But when reputation is expressed via a metric, it can be gamed.

The last family of ‘gameable’ currency-related metrics relates to the use of incentives in currency design. In other articles I have suggested that one aspect of behaviour-change-via-currency is the identification of various pro-currency behaviours [15] or achievements and their reward via new currency issue. Some of these triggers might be one-off events (e.g. recruiting a new member, recommending a new local source), but much of the thinking in this area has been around increasing activity levels. This type of reward can be gamed via fictional circular trading. And we also find ourselves back at square one if we incentivise the local-GDP of the currency irrespective of transaction ‘quality’ – its correspondence with the Preferenced Domain [6].


There are a number of ‘ways-in’ to the design of new money-forms. Identifying problem areas of mainstream money and then seeking to avoid them by design is but one.

Interest payable on credit is associated with never ending growth. New currencies will need to be more attuned to stability and ‘right-sizing’ than to the ideology of the cancer cell. So different ways of accumulating capital, allocating it productively and dividing the value-added are needed. Embedding transaction fees seems a promising way of achieving this, together with fair and transparent governance that can adapt to changing circumstances. But steady incremental organic growth (or indeed degrowth) requires patience and doggedness and is culturally alien to the dominant wham-bam entrepreneur-lionising value-set.

Convertability with mainstream money can ease a start-up but it creates a dependent relationship that is difficult to break. The new money-form child never leaves home. The road less travelled will involve a purposeful separation from mainstream money with consequent challenges for building critical mass and, when maturing, some form of capital controls to isolate or at least moderate harmful interactions.

Lastly, while metrics can perform a useful input to developmental discussions, an awareness that many of the important things in life cannot be expressed numerically will be useful. Judgement must be applied – in a transparent and pre-agreed way by a community of users. We cannot, using digital technology or otherwise, create an adequate money-form that is 100% algorithmically self-managing.


[9]: Edward Abbey, The Journey Home: Some Words in Defense of the American West
[11]: If you seek [its] monument [handiwork], look around yourself

Featured image: Measuring tape. Author: Colin Broug. Source:

Wall Street: “Quite measurably out of its mind.”

From the keyboard of Thomas Lewis
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Forget the bull statue they have in the street in front of the stock exchange — this is the guy who’s taking over in 2015.  (Photo by Tambako the Jaguar/Flickr)

Forget the bull statue they have in the street in front of the stock exchange — this is the guy who’s taking over in 2015.
(Photo by Tambako the Jaguar/Flickr)


First published at The Daily Impact  December 3, 2014

John Hussman runs a very large mutual fund whose performance for the past five years has not been great. He is reviled by many of his fellow Masters of the Universe for saying of them, as he did in a recent client newsletter, that Wall Street, collectively, is “quite measurably out of its mind.” Others balance the scorn of the gamblers against the fact that Hussman was saying much the same thing just before the crashes of 2000 and 2008.  In a world whose collective memory maxes out at 90 days, in which logic and mathematics are optional belief systems, Hussman is an historian and number cruncher. What do the numbers tell him? To brace for impact.

What history, and the numbers, tell him [as explained by Ilargi Meijer in a post on The Automatic Earth], and should tell us, is that stocks in general are hysterically over-valued; what the sellers and buyers and hawkers of stocks believe they are worth has no basis in the real world of assets and earnings. Buy a share of just about any company in today’s market and you are paying more than twice what it’s worth. There are only two other times in the history of the stock market when over-valuation has been worse than it is now: in 1929 just before the crash that ushered in the Great Depression, and during the dot-com bubble just before the crash of 2000. It was about this bad in 2007 just before the Great Recession.

But, say the MOUs who despise him, he’s not making as much money for his clients as we are, so you shouldn’t listen to him. They feel much the same way about Tyler Durden at Phoenix Capital, who says it this way:

1) “Investor sentiment is back to super bullish autumn 2007 levels.

2) Insider selling to buying ratios are back to autumn 2007 levels (insiders are selling the farm).

3) Money market fund assets are at 2007 levels (indicating that investors have gone “all in” with stocks).

4) Mutual fund cash levels are at a historic low (again investors are “all in” with stocks).

5) Margin debt (money borrowed to buy stocks) is near record highs.

In plain terms, the market is overvalued, overbought, overextended, and over leveraged. This is a recipe for a correction if not a collapse.”

There are many other things wrong with our stock market and those of the industrialized world. At the same time the equities markets are shooting the moon, bond yields and commodity prices (oil, copper, steel, etc.) are in the basement digging holes. Thus three super reliable indicators of the financial future are pointing in opposite directions, one up, two down. Is one mistaken, or are two of them mistaken?

One the one hand, you have gamblers slinging borrowed money, or other peoples’ money onto the table to bid for trinkets whose value only they and the people at the same table can see. They’re having a good time. But the people who make the trinkets, using stuff like oil and steel, and the people who lend money to the trinket-makers — they are in the basement digging holes that are beginning to look like bunkers.

So what about the gamblers, up on the roof drinking champagne, throwing confetti and blowing on noisemakers? “Honestly,” says John Hussman, “you’ve all gone mad.”




Thomas Lewis is a nationally recognized and reviewed author of six books, a broadcaster, public speaker and advocate of sustainable living. He also is Editor of The Daily Impact website, and former artist-in-residence at Frostburg State University. He has written several books about collapse issues, including Brace for Impact and Tribulation. Learn more about them here.



Money as Commons

Off the keyboard of Graham Barnes

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Published on FEASTA on September 5, 2014


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From one particular point of view – that of money as private property – the idea that money could be treated as a Common Pool Resource (CPR) [1] seems patently absurd. The money I have in my account is mine alone. The more I have of it the more I am concerned that it should keep its value intact until I want to spend it. How can it make any sense that its stored value be shared?

But going forward money is either a reward for past work, or (when issued through the device of credit) an advance secured in expectation of future work. From this viewpoint we can see money as an aspirational commons – a Common Pool Resource backed by our collective efforts, that with the right governance regime could be managed equitably and to mutual benefit.

This article is *not* a specification of a commons-based money-form. Rather it is an attempt to explore the concept of money from a commons perspective.

Some aspects of mainstream fiat money are less than ideal – how it is issued, passed on and accumulated…

i) Allocation of new money. Private banks create money out of nothing and allocate its first use as credit to whomever they see fit. This bank-centric oligopoly can be challenged by new currencies that are effectively controlled by their users [2]. The level of effective control over current money supply and distribution exerted via the democratic process is close to zero.

ii) Influence of old money. A considerable proportion of existing wealth is inherited. Its possession confers no merit whatsoever. It is not a reliable indicator of past effort or innovation. The ‘soft power’ of its owners acts to prevent progressive reform and reinforces inequality. New currencies may be designed so as to prevent capture by this soft power.

iii) Coagulation in Asset-Form. Money coagulates as various asset classes (including money itself). This has two effects that may be considered negative to a sub-economy – firstly it removes currency from being available to exchange trades and thereby reduces economic activity; secondly it encourages the rentier class – those who live by charging for the use of acquired assets rather than by doing any work – allowing outsiders to sequester our assets and rent them back to us. Newly designed currencies may incorporate mechanisms to hinder asset coagulation or manage asset formation to insider (currency user) benefit.

… but one particular aspect – the way it facilitates division of labour – will be hard to match.

The desired result

The Money we are working towards here is a value-led means of exchange – the manifestations of value being decided by its users – the commoners. What follows is a consideration of three important design areas from a commons perspective: convertibility, the equitable allocation of issued money, and how to provide capital investment; followed by a comment on division of labour.


Convertibility we can define as the extent to which the currency design and operation supports or hinders exchange with fiat. If we look at a parallel situation with a more easily thinkable CPR, land, then we can see that the key danger is of a commoner selling their rights to an ‘outsider’ who may not share the values of the community. Elinor Ostrom’s number one key design principle in her rebuttal of the so-called Tragedy of the Commons [3] is “clearly defined boundaries (effective exclusion of external un-entitled parties)”.

A guaranteed fixed exchange rate with fiat, as operated by the proxy-pounds for example, means that currency can be bought by outsiders, but the localised acceptance of the Brixton, Totnes or Bristol Pounds means there is limited scope for outsider disruption. Convertibility is certainly a plus in terms of starting up a currency because a user whose commitment wanes can always bail out and cash in for fiat.

In future, though, we can imagine circumstances where the Preferenced Domain [4] of a currency incorporates some access rights or goods and services that are reserved to (or supplied at a preferential rate to) the users – the commoners. Engineering this will help to attract users. In this context, some means of defining, identifying and excluding ‘un-entitled parties’ is needed.

To address any concern that this form of exclusion is elitist in some way, it is best to consider it as a protective measure – to keep a new developing currency safe from the Deprecated Domain [5] – from outsiders wishing to appropriate it as capital and rent it back to its users. Because that would be a natural course of events in a pure capitalist eco-system. It’s one interpretation of what has happened with fiat.

There is a feasibility issue here too though. In an open market economy there is nothing to stop an exchange developing that would manage supply and demand for our new currency and ‘discover’ a fiat market price for it. This can be addressed via a ‘right to use’ status held independently for each user separate from their currency account balance. Such a right to use would be based on an individual’s reputation – their track record in supporting the values and extending the reach of the currency. This line of thinking was anticipated by Feasta’s co-founder, the late Richard Douthwaite [6]. Interestingly, the role of ‘oracles’ in Bitcoin, as trusted assessors of some external condition that will trigger a payment (or some other blockchain transaction) gets us into the same ground. As assessments required become progressively more subjective and less ‘factual’, reputations of assessors will matter more and more.

Equitable Issuance

For our proxy-pound example, issuance is only achieved by purchasing with fiat. Essentially no new currency is created. Fiat can clearly not be considered a CPR – it breaks every one of Ostrom’s eight design principles [see Annex]. So we are here concerned with currencies that issue new money in some form. The issuance regime of Bitcoin allocates new coins to the miners. It has been argued that this is just substituting a tech-geek oligarchy for a financial oligarchy. Perhaps there is an element of shared-value anti-government sentiment in that community, but rewards appear to be accruing to accounts in an inequitable manner. At its heart is an important development – the blockchain – but Bitcoin is not a value-led currency suitable for treatment as a CPR.

For an equitable issuance regime, we can turn back to ‘to each according to his needs and contributions’. The needs part of this equation can translate into some form of issuance related to a Basic Income or Citizen Dividend (maybe one-off, maybe recurring). The criteria for inclusion could be a combination of targeted audience (geographic, demographic, interest-group) , charter-value sign-up and the completion of some initial tasks appropriate for the particular value-set. A handful of Altcoins are already pre-distributing currency – for example Auroracoin to the citizens of Iceland.

The contributions part implies a continuing, ideally peer-reviewed process assessing the contributions of each user to the currency itself and to its underlying value-set, with appropriate reward levels. There is admittedly a chicken-and-egg problem here in that the pro-currency and pro-value activities have to be assessed ahead of the distribution, and therefore issuers need to recognise that the use-value of the issued currency is at that stage unguaranteed. Work is being undertaken for uncertain reward, energised primarily by the communal shared value-set, and underlining the need for clear articulation of that value-set.

Capital Investment

A good issuance regime can make sure there are enough ‘insiders’ with enough currency to circulate to facilitate exchange between users. It cannot, without additional design features, cater for currency to be set aside for capital projects. Arguably it should not do this at all because we know that saving (or hoarding) slows down circulation with a consequent lack of liquidity and exchange. There are after all many asset classes out there competing for investment, and in a money-diverse future new currencies will operate alongside fiat.

But it is tempting to set out to address one of the problems with fiat – that capital is available to most only as a loan at interest. If our new currency can be created out-of-nothing (just like the banks do with fiat) then we have the option of varying the terms. Most of the rationale for interest disappears anyway with ex-nihilo fiat, except for its justification as a ‘hidden subsidy’ for the issuer banks in return for their unholy partnership with government and the operation of a payment clearing system (which could incidentally be run itself as a commons).

The incorporation of any form of capital accumulation and allocation, even for projects which clearly benefit the CPR itself, adds a significant level of complication to the currency. But if investment in the CPR itself is needed, as is likely, external financing brings with it the possibility of part-capture or enclosure by outsiders, so designing-in forward access to capital will have to be attempted.

Division of Labour

We have come this far without mentioning Mutual Credit, and have done so mainly to avoid specifically critiquing it in the cause of a wider exploration of the issues. Mutual Credit and Timebanking are both interesting money-form models, but they both illustrate a key issue – that of facilitating the re-combination of labour into the co-operative production of goods (and services).

As individuals we can essentially issue our own currency based on forward commitment of work. Fiat currency effectively allows the capitalist to put a numeric value on individual contributions (via wages) and inputs, add a profit element and set a price. Who performs this role in a mutual credit or timebanking context? And how is this co-operative process governed?

Unless we accept that new CPR-oriented currencies must restrict themselves to exchange between individuals, it seems necessary to complement the core currency design with the governance design of an institution which takes on the ‘capitalist role’ in the management of collective endeavour. To this extent, the institution-type *is* the currency. And if the corporation is the flawed and outdated institution-type of fiat currency capitalism, what might the preferred institution-type of a commons currency look like?


The paradigm of money as a common pool resource may be able to provide insight and encourage radical monetary innovation. The complexity and multi-functional nature of the fiat money form should not be allowed to conceal the fact that the root backing for money is work – past work rewarded and future work pledged. An exchange currency needs a stability of value (non-volatility) but it does not need to provide an appreciating store of value. Fiat money has become a toxic asset class in its own right. Because of the manner in which much of it has been created and passed on , holding it implies no associated merit; it confers increasingly unequal social power which may in turn be exchanged for political and economic influence.

New money forms do not need growth. Designers can choose to exclude or discriminate against deprecated behaviours, recognise and reward behaviour compatible with an explicit transparent value-set, and prioritise the well being of commoner-insiders. In so doing the exemplars created will lay the foundations for a post-modern version of common wealth.

Annex: Ostrom’s 8 principles (from Wikipedia)

Ostrom identified eight “design principles” of stable local common pool resource management:

  • Clearly defined boundaries (effective exclusion of external un-entitled parties);
  • Rules regarding the appropriation and provision of common resources that are adapted to local conditions;
  • Collective-choice arrangements that allow most resource appropriators to participate in the decision-making process;
  • Effective monitoring by monitors who are part of or accountable to the appropriators;
  • A scale of graduated sanctions for resource appropriators who violate community rules;
  • Mechanisms of conflict resolution that are cheap and of easy access;
  • Self-determination of the community recognized by higher-level authorities;
  • and In the case of larger common-pool resources, organization in the form of multiple layers of nested enterprises, with small local CPRs at the base level.


[1] A clarification from my Feasta colleague Brian Davey: “A common pool resource is the resource itself. (e.g. the earth’s atmosphere). A commons is a shared set of management arrangements for a common pool resource. (eg a cap and share arrangement organised through a global commons trust). Thus a common pool resource can be managed with privatising principles and arrangements or with commons arrangements and the practice and the values of commoning. Of course a common pool resource can be the subject of an “aspirational commons” – a set of arrangements that does not yet exist either partially or fully but which could be brought into existence or developed.”

Disclaimer: Feasta is a forum for exchanging ideas. By posting on its site Feasta agrees that the ideas expressed by authors are worthy of consideration. However, there is no one ‘Feasta line’. The views of the article do not necessarily represent the views of all Feasta members.

Wealth Confiscation & Destruction

Off the microphone of RE

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Aired on the Doomstead Diner on July 6, 2014


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SAMSUNG CAMERA PICTURES…For today, I want to look at the specter of Wealth Confiscation coming down the pipe, which has already occurred in places like Cyprus, but looks likely to expand in scope as the general financial Ponzi of the World implodes.

Graham Summers of Capital Research is a regular contributor to ZH, and a regular predictor of Financial Doom as well.  His schtick is how you need to set up your portfolio for Doomsday.
In his latest piece below, Graham talks about how TPTB will come after anyone with financial assets over around $200K, striking FEAR into the Heart of every 1%er out there.

The idea here is, TPTB will do anything and everything they can to try to keep the financial system floating another day, and if that means they have to confiscate the paper wealth of 99.9% of the people with some money in the bank, they will do so.

While worrisome to the 1% crowd out there, this is probably not quite so worrisome to the .01% with wealth measured in $Billions$.  These folks are “Key Men”, and though they may take a Haircut at the beginning, they won’t lose it ALL

For the rest, LISTEN TO THE RANT!


Schilling Shilling

Off the keyboard of James Howard Kunstler

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Originally Published on Clusterfuck Nation  November 4, 2013



     Such is the power of wishful thinking that a set of fool-making memes now pulses through the word-clouds of financial chatter in America spreading the false good cheer that our economic troubles are behind us and pimping for perpetual motion in wealth expansion. A poster boy for this bundle of falsehoods is financial analyst A. Gary Schilling. Just last week, he was talking out of his cloacal vent about US “energy independence” and “the manufacturing renaissance” that will allow this country to magically decouple from the compressive contraction driving the rest of the world.

     Shilling is among the growing chorus of cheerleaders who believe that the shale oil and gas boom will make it possible for so-called “consumers” (what we foolishly call ourselves) to keep driving to Wal-Mart forever — which is the master wish behind all the current fantasies of endless expansion. That idea is going to leave a lot of people disappointed and put the nation further behind in the necessary reorganization of all the key systems that support everyday civilized life, namely: food production, commerce, transport, and the management of capital.

     Here’s what’s actually going to happen with shale oil and gas. Best case scenario: shale oil production rises for three more years to about 2.3 million barrels a day and then crashes so quickly that in 10 years the shale oil industry ceases to exist. A less rosy forecast would admit that the exorbitant costs of drilling-and-fracking will not find the necessary capital to even take the industry that far. Rather, dwindling capital will see the shocking decline rates of shale wells (commonly 50 percent the first year and double digits the following) and will run shrieking for other places to hide.

     Contrary to Gary Schilling’s blather, America is not practicing “energy conservation.” Rather, an economy engineered strictly to run on cheap oil has gotten crushed by oil that is not cheap. Does Schilling believe, for example, that American suburbia works just as well on $90-a-barrel oil as it did on $11-a-barrel oil, or that it has a future as the basic armature of daily life, or that we are doing anything meaningful to alter the burdens of living this way? My guess is that he has never thought about it.

            Likewise, as the American economy got crushed by no-longer-cheap oil, all the working classes in this country below the one-percenters got crushed, hammered, and trashed. Among other things they can no longer afford is gasoline. Total vehicle miles driven has gone down by almost 3 percent since 2007. It will keep going down, and the Happy Motoring matrix will collapse for another reason: capital scarcity will translate into fewer available car loans for Americans, and fewer qualified borrowers, and Americans are used to buying their cars on installment loans.

    The shale gas situation is also not the “energy savior” it’s cracked up to be. Because it costs so much to export the stuff, and we don’t have the export infrastructure in place — ocean terminals, fleets of special (expensive!) tanker ships — shale gas is hostage to the US domestic market. The initial boom was so extravagant that it produced a gas glut, which drove the price way below the level that makes it economically rational to drill for the stuff. Now, a lot of those drilling rigs are migrating to North Dakota, where the Bakken shale oil fields require perpetual increases in rig-counts to offset the rapid decline of existing wells.

      The shale gas regions of Barnett (Fort Worth), Haynesville (Louisiana), and Fayetteville, Arkansas, are already dwindling. The “sweet spots” turned out to be smaller than the hype suggested. The Marcellus (Pennsylvania and New York) is next. Several of the other hyped shale gas “plays” — the Antrim and the Utica — proved too unpromising to even bother with and never made it out of the wish bag.

      The problems with fracking and groundwater pollution are secondary to the economic quandaries as far as the fate of the industry is concerned. At under $8 a unit (1000 cubic feet), shale gas is not worth drilling-and-fracking for. It’s currently around $4. Above $8, Americans are going to have a hard time paying for it. So, enjoy the temporary glut and now stand back and watch the industry begin to dry up and blow away.

      As for the “industrial renaissance,” clowns like Gary Shilling can’t put together the obvious trends. The talked-about new factories will be operated by robots, so there would be no employment renaissance to go along with them. Then there is the question of who might the products be sold to? To Americans who have no jobs and no money? To Europeans who are also going broke and also have the ability to roboticize industrial production and impoverish their own working people? To Asia, which is already at industrial over-capacity — and which will only grow worse as Americans and Europeans buy less stuff? I guess that leaves South America and Africa. Well, good luck with that.

     Schilling is really only shilling for delusional stock market psychology, which tends to be a self-reinforcing racket until it reaches a threshold of credulity criticality and then implodes from a sudden loss of faith, ruining even a great many one percenters. Money may indeed keep pouring into the US stock markets, especially from other countries, where the money is frightened. I’ll tell you what it ought to be really frightened about: that it doesn’t represent genuine capital, i.e. has no real value. One day not distant, all the nations will discover that their money is only notional and that notions have a way of going up in a vapor. Foolish ideas, though, appear more durable and plentiful. They just keep coming, no matter what’s going on in reality.

     My basic wish is that we would quit all our wishing in America and get on with the job of transforming our economic arrangements to a scale and mode that are consistent with the resource and capital realities of these times — before they whap us upside the head and put and end to the project of remaining civilized.


James Howard Kunstler is the author of many books including (non-fiction) The Geography of Nowhere, The City in Mind: Notes on the Urban Condition, Home from Nowhere, The Long Emergency, and Too Much Magic: Wishful Thinking, Technology and the Fate of the Nation. His novels include World Made By Hand, The Witch of Hebron, Maggie Darling — A Modern Romance, The Halloween Ball, an Embarrassment of Riches, and many others. He has published three novellas with Water Street Press: Manhattan Gothic, A Christmas Orphan, and The Flight of Mehetabel.


Small Bizness in the Sea of Irredeemable Debt

Off the keyboard of RE

Published originally on the Doomstead Diner

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My good friend and Cross Posting Blogger here on the Diner Steve from Virginia published an article this week called Watch the Banks…. on his Blog Economic Undertow.  It’s one of Steve’s trademarks to title many posts with three Periods after them….LOL.  I cross posted the article here on the Diner yesterday.  It touches on many themes explored here on the Diner with respect to the Creation of Money,  and how Biznesses function  in this economy, both Large & Small.

Indeed,  watching the Banks is the KEY element in following the progress of the collapse.  The “System of the World” as Neal Stephenson put it, the Monetary system we all depend on is run by a few Large Banking Houses, JP Morgan Chase, Bank of America, Goldman Sachs et al, and the Central Banks they control like the ECB, the BoJ, the BoE, the PBoC and of course Da Fed as well.  All coordinated through the Bank for International Settlements Headquartered in Basel, Switzerland.  The BEST way to follow the Collapse in Progress is to watch the machinations and currency manipulations being undertaken to keep this very large and complex stucture floating another day.

One of the Key Points Steve touches on in his article relates to the primacy of “Small Bizness” as an Economic Driver, in a sense making the postulate that Small Biz preceeds Big Biz in the development of an Economy.  Does it REALLY though?  As I see it,  perhaps in the Dawn of History for Homo Sapiens Small Biz preceeded Big Biz,  but since the development of large scale Agiculture around 8000 years ago, the opposite has been true, and the main economic drivers for this period were the large scale generally Slave Driven Ag enterprises and the War Machine they support and which supports it in a synergistic relationship.

Steve and I have already gone a few rounds in debating how this economy develops on Economic Undertow, I will include these posts as a preface to better grasp the global issues.

From RE:

 I don’t think any “small bizness” earns any “organic returns”, at least not while all biznesses operate under a failing currency structure.

Small Biz is essentially Parasitical off of Big Biz. If Big Biz borrows Capital to put up say a GM Auto Plant in Janesville, Doctors, Dentists, Property Sellers, Retailers and Restaraunters all open up small biz that sieve off the central source of money.

When the Big Factory shuts down, all the Small Bizmen go Broke too, even if they took out no Loans to grow the Biz. Customers with MONEY are no longer in the neighborhood buying their goods or bidding up the price of housing. Just the monthly overhead of the Restaraunt makes them insolvent.

Without Large Public Works feeding money at great scale out into the economy, the ancillary small biz all goes broke too. I wrote about this on the Diner in the Large Public Works Project series.

For the recent Generation in the Age of Oil, the BIG LPWP was the Interstate, and then the Shopping Malls and McMansions that built up around the Ring Roads.

Without such LPWPs, there is no way to distribute out centrally created “money” which has any value. There is nothing for Small Biz to sieve off.

It is unlikely we will create any new LPWP to replace the one built courtesy of the thermodynamic energy of fossil fuels over the last 3 centuries or so. In the absence, Money on the Grand Scale of International Finance will irretrievably FAIL.

Whether any more Local forms of Money can be substituted remains an Open Question.


From Steve

 RE, there is a big information gap before industrialization.

The Middle Ages were as prosperous as Roman period and succeeding modern periods, not for all at all times but the same can be said of the present. Americans live better than Kenyans, Venetians lived better than Saxons in England after William arrived. What mattered most in Europe was tide of war.

Post-Constantine, the wealth of the Western Roman Empire was directed toward the church and away from government and the private sector: this was a big reason for the decline then collapse of the empire. The church made itself the beneficiary of all estates without heirs or issue, over centuries it absorbed vast amounts of property from extinct estates. It became property recorder and mediator of disputes great and small, which gained it fees. The Western Roman government became unable to compete with the church as a business enterprise.

The militaristic Franks eventually absorbed and reorganzed Roman activities in Western Europe, trade was continuous from Asia to Spain, trade centers such as Genoa, Siena, Venice, Constantinople became rich.

The traders in the 8th century were wealthy and successful … as any number of ‘entrepreneurs’ today. They borrowed their fortunes and hived to costs onto their trading partners!

The Romans understood steam power but not plate glass or railroads. Franks understood printing but not moveable type or firearms. The Chinese understood rocketry but not airfoils. Information was hard to come by, in the West the church had a monopoly on education as well as on books. It took moveable type — and a series of bloody wars — to break the church’s information cartel.

The war periods inform the public imagination of European life, up until the rise of publicly available information in 15th century.

This is also when looted gold from the Western Hemisphere began to arrive on European shores by the shipload:

– It financed the renaissance,

– it triggered the largest, longest-duration bout of hyperinflation in history, over 100 years, over America, Europe and Asia,

– it financed the industrial revolution,

– it financed the rise of Netherlands and UK as naval powers to rival Spain,

– it also financed the 13 British colonies,

– it financed 2 centuries of religious wars in Europe which ended with the collapse of the papacy’s temporal power.

Spain ended up bankrupt, Portugal and Netherlands were severed from Spain, both France and Italy expelled entrenched foreign influences to become powerful nation-states, the Holy Roman Empire dissipated to reformulate itself over time as modern Germany … Ireland became a slave state of England, which itself endured a violent revolution and civil war to become a military power … the English civil war extended overseas to North America ending with the American Revolution, then a revolution against the French monarchy. Afterwards came Bonaparte. All of this and much more besides was paid for with Peruvian and Mexican gold (some Eastern European silver, too).

Between wars and recoveries there was a lot of room for enterprise. Both Europe, China and South Asia were wealthy, during the Middle Ages there was strong demand for consumer goods such as sumptuous clothing, carriages, villas and town houses, exotic foods, private botanical gardens and arboretums, paintings and sculpture, illuminated books, lavish public entertainments, theater productions, permanent installations such as public parks, fountains, bridges, stone-paved roads, elaborate structures such as enclosed markets and forums for public gatherings, gigantic cathedrals (filled in places with Roman articles), private galleys, teams of horses, livestock, etc. A common complaint was that people could not determine who was wealthy or a noble and who was not because the commoners wore the same or better clothing. All of these things were made by more or less small-scale craft level workshops, lots of them.

Any town would have stone-and brick masons, a quarry, a brick maker, a foundry, a tannery, a carpenter, a blacksmith, a tinker (make pots and pans), silver- and gold smiths, embroidery shops, tapestry weavers, yarn spinners, shoe-and boot makers, stable hands, street pavers, armorers, arborists, vintners and brewers, gardeners, window makers, musical instrument makers, cabinet makers, roofers, livestock tenders, butchers, barbers, etc. Regardless of ones’ station there was always something to do. Most did not have to toil incessantly, there were many holidays and feasts. The grim peasants in rags … Monty Python or Lord of the Rings.

Most towns in America or Europe do not have any of these things at all: we are dependent upon welfare and television … the poorest medieval town was more prosperous than any of our towns today!

 From RE:

Steve, you won’t get an argument from me that Medieval Towns were more self-sufficient than modern cities, of course they were. From an economic standpoint though, all those Craftsmen you revere so much STILL were parasites off the Big Biz of the era, which was mainly Ag and Warfare.

First off, the fact most goods and services were produced locally meant that commoners used little money at all, they bartered. If you needed the services of the local Quack to Bleed you due to contacting Plague, you paid him 2 chickens. If you Tanned nice skins, you traded them for a bushel of potatoes. etc.

The main way money got into the economy was from Soldiering and Plundering. The local Lord would conscript up promising to Pay in Silver, after they got back from stealing the silver from the next county over. Eventually of course they consolidated up to Kingships and incipient Nation-States of course, then went about ripping off Gold wholesale from the New World, leading to the inflationary period you spoke of. VERY Big Bizness there!

The other way money got distributed out was through the Holy Roman Catholic Chuch (the Mega-Corp of the Era) in the building of Cathedrals, the Large Public Works Projects of the era. This of course provided lots of work for Stone Masons, Carpenters, Stain Glass Window artists, etc. If your Community could get the HRCC to build a Cathedral in your nabe, it was a thriving little Metropolis. No Cathedral, you were a dirt poor backwater town.

As it further evolved, the Big Biz of Plundering via Tall Ships equipped with Cannon led to those next Massive Corps, the Brit and Dutch East India Companies. Said Big Biz of course provided tons of work for Shipwrights, Carpenters, Sail Makers, yadda yadda not to mention the guys forging the 20 pounder Cannon, which was NOT done in a small Blacksmith’s shop.

In the background of all of this of course were the Financiers, floating Stock Issues in Amsterdam and London, and in fact in 1692 when the BoE was chartered, they were pretty much Fresh Out of Gold, as the Spanish had nailed down the best Gold Theft locations and they got stuck with North America, which until the Railoads got built into the interior did not offer up much gold. They got their money for financing up their colonial adventures courtesy of Master of the Mint Sir Isaac Newton, and began to do well providing Letters of Marque to Pirates who would hit on the Spanish Cargo ships on the High Seas. Their Big Biz controlling the Sea Lanes with the Brit Navy brought in the money that all those local craftsmen used fo commerce.

In all cases going right back to Ancient Egypt and Mesopotamia, It was the Big Biz of Ag centrally controlled which got the Money going, and the Big Biz of Warfare which brought in the PMs to use for coinage. Large Public Works projects such as the Great Wall(s) of China, the Pyramids, Cathedrals et al were symbols of successful cultures running the Ag-War Economy. All the small craftsmen and small biz expanded to sieve off this economy. They don’t exist independent of it.


From Steve:

Various non-industrial employments in the 18th century:,+it+is+the%22&source=gbs_quotes_r&cad=6#v=onepage&q=resources%20for%20the%20employment%20of%20males&f=false

A Treatise On Indigence: Exhibiting A General View Of The National Resources …
By Patrick Colquhoun

Professional soldiery was a tremendous burden to the state prior to Spanish gold which meant most militaries fielded militias, irregulars or mercenaries. Governments offered letters of marque to privateers to augment their navies.

Another list of medieval (pre-industrial) employments which saves me the effort of making one:

There was another list over on Guy McPherson’s web site but I can’t find it …

Globe Town

To the east of Bethnal Green (London) lies Globe Town, established from 1800 to provide for the expanding population of weavers around Bethnal Green attracted by improving prospects in silk weaving. The population of Bethnal Green trebled between 1801 and 1831, operating 20,000 looms in their own homes. By 1824, with restrictions on importation of French silks relaxed, up to half these looms became idle and prices were driven down. With many importing warehouses already established in the district, the abundance of cheap labor was turned to boot, furniture and clothing manufacture. Globe Town continued its expansion into the 1860s, long after the decline of the silk industry.

The 20,000 looms supported 20,000 households and employed at least that many along with suppliers to the trade, the makers of looms and the houses, the merchants and peddlers of silk goods. This was during periods when population in England was relatively small. Beside Bethnal Green there were other districts in London and in other cities and countries weaving all kinds of cloths … this took place over long periods of time … the citizens always require things to wear. The customers of a country’s goods were often overseas and there was a money trade in even the old Byzantine, Frankish and Roman issues. Before 1520 funds flowed from the East as the Venetians and other Italians traded with the Chinese, the Caliphates, the Turks and Mongols. Afterward the flow was from the West and there was no outbound trade: there was quickly too much money and nothing flowing out to balance it.

The customers of distributed production were pilfered by manufacturers with credit and steam-driven machines, ‘low prices’ and uniformity, the distributed producers working in their houses became little more than serfs.

From RE:

“Professional soldiery was a tremendous burden to the state prior to Spanish gold which meant most militaries fielded militias, irregulars or mercenaries. Governments offered letters of marque to privateers to augment their navies. “-Steve

The great expense of the non-stop warfare in Europe didn’t prevent it from occurring and driving big bizness. It certainly bankrupted a few treasuries and indebted these Kings to the Banksters also.

The Medieval towns you talk about all grew up around Feudal Estates owned by the Nobility, the Pigmen of their time. Ag was the Energy Driver of this economy, and was Big Monopolized Bizness. War was the other Big Bizness, and there is a good reason those medieval castles had 5 foot thick stone walls around them with Moats, Drawbridges and Porticullises. The townees hadda run there every time some neighboring warlord needed to replenish the Treasury. They didn’t build those castles just for show.

“To the east of Bethnal Green (London) lies Globe Town, established from 1800 to provide for the expanding population of weavers around Bethnal Green attracted by improving prospects in silk weaving. The population of Bethnal Green trebled between 1801 and 1831, operating 20,000 looms in their own homes. ”

Steve,from 1803-1815 the Brits were fighting the Frogs in the Napoleonic Wars!! I’m sure the women were doing fine at home on the loom, but a whole lotta poor limeys were being Bayonetted in the French countryside.

If they weren’t conscripted to fight on French soil, they were being Press Ganged to serve as Gunners on the Frigates of Her Majesty’s Royal Navy, consisting mainly of Privateers aka Pirates, a VERY Big Bizness indeed.

Anyhow, I am all for distributed production over Industrial production, but said societies STILL were Central Control Ag-War societies, and the individual craftsmen sieved off of the surplus created by that society.

Anyhow, more tonight, I am just about done with a response article “Small Bizness in the Sea of Irredeemable Debt ” I’ll publish later tonight.

While just about everyone Loves to Hate Big Biz and Corporations, at least in the Heart of most Americans is a Reverance and Respect for the Small Bizman.  The Plucky Guy who started with nothing, works for himself Independently and makes a Good Living, even if not getting Rich off of it.

There is the notion that the Small Bizman is the “Backbone of Amerika”, Small Bizmen “Built this Country” etc.  Although this is a popular meme and one promulgated in the History Books and the MSM, and even on the pages of numerous Blogs, it is not the TRUTH by any stretch of the imagination.

In any country which runs a Centrally Controlled Monetary System, the plucky Small Bizman is just engaged in the process of trying to accumulate the Accepted Currency of the Nation-State.  To Sell at a price higher than he buys at, to pay workers less than the total Value Added to the product so that there is some PROFIT to be made in the extant Currency, against which ALL things, both labor and resource are measured.

Where does this MONEY come from though?  If you look at the Dollar for instance, prior to the end of the Revolutionay War separating the Colonies from Jolly Old England, there were ZERO Dollars in existence.  War is finished, Founding Fathers get their OWN Printing Press, now Dollars EXIST!

In order to have REAL value of course, these Dollars have to Buy stuff in the real economy.  The stuff is the products of the land, through farming, mining and logging to begin with.  It gets more complicated as time goes by and more things are created, but even by itself this is enough to understand what goes on here in Money Creation.  It is essentially coming from the total resources available to the Political Construct of the Nation-State that Rules over those resources.  The Nation-State operates in Synergy with the Money Masters, Banking Houses established long ago which control all Trade and Valuation of any Currency a given Nation-State will create.  This is done through Privatization of the Resource Base for any given country, as well as Privatization of the Industrial Infrastructure since the beginning of the Industrial Revolution.

The newly created dollars get valued against already extant currencies circulating in Europe, Brit “Sterling”, Frog Franks, Kraut Marks, whatever.

The main constraint any given country has in how much currency it can create depends on how the International market will value said currency.  When just based on Resources it isn’t horrifically complicated, but once you factor in labor and trade of manufactured goods it gets VERY complicated.

Anyhow, what were only a few Dollars created in 1789 at the end of the Continental CONgress has morphed over the last 200+ years into TRILLIONS of them, and that is just what is listed on the Balance Sheet of Da Fed.  Thing is, not JUST Da Fed can create new Dollars, anybody with a Big Enough Bank can do it too!  They do it by creating Paper Contracts which have some Notional Worth attached, say a contract to pay off $1M if some company or Nation-State goes BK.  These contacts are called Credit Default Swaps, or CDS.  Said contract is now traded about as though it is worth $1M, or some fraction of that.  It is more “Money” flowing around the notional economy of traders, though it never shows up in the real economy until somebody goes Belly Up, somebody ELSE has to Pay Off on that and then since they can’t because they don’t REALLY have enough to pay off it gets tacked onto the Taxpayer Balance Sheet.  IOW, the way this shows up in the real economy in the end is as a LOSS, a BIG ONE.

To return here to our Friend & Hero the Small Bizman, the money this fellow is using to conduct Bizness is all subject to the grand pressures created in the International Money Markets.  At any time if/when confidence is lost in a given currency, even the most Prudent Small Bizman can go OUTTA BIZ in an INSTANT.

Let’s take the example of our friends the Nipponese, who make their living converting Oil into Carz and Electronic Gadgets. Because the Demand is falling oveseas for their products, in order to remain “competitive” in the market the Nips want to Devalue their currency.  Except if they do that, it will make the Oil Import necessary for production MORE expensive, so no matter how Efficient he is or How Low he can Go on Salaries or how many Robots he can substitute for Homo Sapiens Workers, he STILL will LOSE MONEY!

Every Small Bizman is going to be subject to the FACT that money on the Grand Scale is NOT being loaned out into the general economy.  Why not?  Because it no longer makes any SENSE for the folks in CONTROL of the resources to do so!  The game NOW is to CUT OFF access to the resources, which occurs either by the currency not being distributed (deflation), or excessive currency being distributed (inflation).  Either way, the Small Bizman is OUTTA BIZ.

The ONLY folks with access to the Money to keep on going here with this paradigm at the moment are those at the very TOP, closest to the Center of Money Creation.  Since the Industrial Age began, this Center began in Venice under the Medici Banking Family, moved to Amsterdam and London, then to Wall Street and after that to Hong Kong, Singapore and Beijing.  In the end of course, it will all collapse. The resources are no longer there to back it up.  The debt cannot be collected anymore.  It is IRREDEEMABLE Debt.

To try to simplify this,  imagine the entire World Economy as the Big Island of Hawaii right after the first Catamaran rigged Sailing Canoe made it there from the Marquesa Islands around a Millenia Ago.  The Island is the WHOLE ECONOMY,  which the smart Navigator who piloted the Canoe claims as HIS OWN.  The way he Distributes out HIS resources to everybody elso is to LOAN them Money to buy said resource.  Which he does, with an Interest Charge attached of course, so that a percentage of the exploited resource he controls always flows back to him, keeping him (and his heirs) wealthy in perpetuity.  The more of the resources that get exploited, the larger the population gets, the RICHER he gets!

He keeps floating out MORE credit endlessly so he can sell the resources of Hawaii to other Hawaiians and it works JUST GREAT until Hawaii is Chock FULL of People and FRESH OUT of resources.  They have fished out the local waters and the Lagoons are stinking sewers filled up with Human Waste.

This of course did not occur in Hawaii because it was not a closed system, but something similar did occur on Rapa Nui (Easter Island), populated by the same extraordinary Polynesian Navigators who found the Big Island of Hawaii a good 500 years before Cook found it.

The entire Earth though IS a closed system, so no matter how much Credit you issue, if you no longer have resource to sell, the Credit is worthless.  Creating more Dollars does not make more Cheap easy to pump up Oil available, and it doesn’t replenish the Ogalala aquifer either.  When you are Out, you are OUT, nothing left to sell here.

In fact we are not COMPLETELY out of Oil or Water, but relative to the size of the population that ballooned up here through Rapid Exploitation of these resources, they are becoming scarce and so the Credit necessary to buy them is being Triaged off, most obviously in places like Greece and Spain, but really occuring everywhere now.  It shows up here in the FSoA as 50M people on Food Stamps and an ever decreasing percentage of people participating in the Workforce, because just about ALL jobs are not productive of ANYTHING!  You waste more energy getting to work each day in your SUV or even on the Subway than any “value” you add to the economy in ANY job in the Industrial Economy.  All you do by participating in it is waste the energy of fossil fuels a bit faster.

In such an environment, the Small Bizman is the Individual Version of the Small Country like Greece.  You get Triaged Off the Credit Bandwagon first here.  You can’t make a profit, first because your customers ALSO are outta credit to buy your stuff; second because some TBTF Big Bizness still DOES have access to credit, so they can dump products on the market cheaper than it costs you the Small Bizman to make them and drive you outta biz!  This of course has been the meme of Capitalism since the beginning of the Industrial Revolution at least, though it really does go back to the Dawn of Agriculture and Money.

At NO TIME in the last 8000 years or so has Small Biz been the Driver of Economics, only a Passenger in the Back Seat.  The driver during  the Ag Era was Big Ag utilizing Slave Labor and in the Industrial Era,  Factories  burning copious quantities of Fossil Fuels.  Through BOTH eras, the Banksters controlling the flow of credit directed it in such a way to bring the maximum Benefits to themselves at the expense of everybody else, and Mother Earth as well.

Nothing lasts forever of course in a world of Finite Resources, and this paradigm is coming to a close.  The only question remaning here is how long the Triaging of the Small Bizman and the Small Countries can go on before Billions of People with Nothing Left to Lose get very, VERY angry.



Off the keyboard of Steve from Virginia

Published on Economic Undertow on November 22,2012

Discuss this article at the Epicurean Delights Smorgasboard inside the Diner

When you wish upon a star … the auto industry … you don’t get a pony you get Detroit. This is the lesson the world is in the process of learning right this minute.

Kyle Bass speaking about debt. Like most analysts, Bass blames Japan’s fix on excessive debt …


“Thematically, the bottom line is … the total credit-market debt to GDP globally is 350%, it’s $200 trillion dollars worth of debt … against global GDP of roughly $62 trillion … “


Nobody bothers to ask why there is so much debt in the first place. The question is a finance analyst taboo … something not discussed, like underwear with dollar-signs printed on it.

The reason for the silence is that industrialization is unable to retire its debts. If machines could pay for themselves and ‘earn’ a profit they would be doing so already and there would be no debts at all. That machines cannot pay their own way is self-evident.

The debts taken on to make the ‘machine idea’ work are impossible to retire because they are too large. @ $200 trillion and 350% — plus additional hundreds of trillions in non-tendered liabilities — even if the world’s industries were to function magically ‘properly’ the debt burden is out of reach. What is available to service and retire debt is the modest marginal increase in GDP year-over-year: this increase itself is borrowed!

Debts cannot be serviced — much less retired — with the economies at death’s door: future GDP growth is theoretical.

Repayment is a fairy tale … it is also the cudgel of creditor repression. If there was the merest prospect of growth, economies would not bother with debt repayment but would take on even more … Not only does industry require debt but the waste-based industrial economy will always and under every circumstance increase its debts until it is physically incapable of doing so.

More Kyle Bass:


“So … this is a debt super-cycle that is coming to an end. It’s coming to an end at different end-points for different countries … A lot has happened in Japan in the last 12 months, in fact, in the last two months we believe they crossed that proverbial Rubicon … we think that you’ve seen 20 years … of conjecture regarding Japan’s eventual demise and now we see a point where in the last couple of months what you see a continued deterioration in their balance of trade. It’s actually running at about negative- $100 billion on-the-dollar … a hundred-billion dollars, or close to ten-trillion yen … and we think given this resurgence of Chinese nationalism over the Senkaku crisis … you are going to see that (trade imbalance) move another … one-and-a-half or two percentage of GDP … or another $100 billion dollars. To put that into perspective, what that means is we could see full current-account negativity in Japan in October (actually, November)… that’s something nobody is ready for … We think about it: we have a secular decline in the population happening, you have a balance of trade literally being re-written and falling off a cliff … and their GDP is tracking negative 3.5, negative 4 percent.

In other words, Detroit.

Japan has reached the point where it cannot borrow any more because it has already borrowed as much as it possibly can. As long as Japan borrows the (borrowing) cost is manageable. Debt is a treadmill, once on you can never step off or slow down. Japan will learn that as the borrowing slows the real cost ramps. Repayment does not work because doing so increases the worth of the money used to repay. Returns on Japan’s industries are not an issue: they never did matter because they never existed. What matters is the narrative of ‘progress’ and ‘innovation’ which for Japan has soured: the narrative is collateral. The country has become hopelessly old-fashioned … passé and unworthy of credit. Japan tries on new narratives but the only ‘innovation’ in the cupboard is more quantitative easing (QE).

Like the Motor City, Japan hitched its fortunes to the automobile industry. The car business has succeeded by more efficiently devouring its own capital basis. Since the ‘peak oil’ low in 1998, the incredible basis has been repriced, there is a scarcity premium added. It does not matter whether capital is officially recognized as scarce or not! What matters is the market price of capital relative to other goods. Resource capital is now too pricey to waste. The waste-based enterprise is stranded by its capital costs and there is nothing the establishment can do about it!

In Japan and elsewhere, the strategy to ‘manage’ debt has been to always add more of it until the cost becomes prohibitive ridiculous. Instead of debt, labor costs are cut by eliminating jobs … even though labor costs have little to do with the debt and are not the cause of it. Businesses borrow to pay executives and business owners, not labor which is expendable.

Michael Hudson suggests that the burden of taxation has been swapped for interest payments/economic rents to financiers. Instead of flowing toward governments- then cycling back toward the public, funds flow toward banks and to tycoons. The consequence is not taxation without representation, there is taxation without the means to pay the taxes: a strategy of pauperization that leaves the labor force dependent on meager handouts and indebted to both business and government.

– Detroit is a ‘company town’ dependent upon a single industry. It gained net cash flow from outside the city/the rest of the world. Japan is a ‘company country’ dependent upon manufacturing of so-called ‘high value’ goods including automobiles.

– Japan requires export trade income — net cash flow from the rest of the world — in order to service debts and subsidize their industries. The government can borrow from the central bank but for only a short time. Then it must either stop borrowing or pay higher prices on international credit markets and subject itself to credit embargo. Detroit obviously cannot borrow from its central bank because it does not have one. It is already subject to credit embargo.

– Detroit and Japan ‘play the resource spread’: buying resources then repackaging a portion of these into costlier forms so as to subsidize their own consumption. The increase in input costs has made spread(s) impossible to finance as the needed debt is too costly.

– Detroit is almost 90% African-American, Japan is 90% Japanese. Both cultures are rigidly resistant to changes in the status-quo. In Detroit, difficulties are blamed on Negroes rather than automobiles. Time will tell whom the Japanese will blame their difficulties on … certainly not the automobiles, which are the real culprit.

– Aging Detroit’s population is entering retirement, workers have few assets outside of real estate (personal homes). Japan’s population is nearing retirement, workers are converting non-monetary assets into currency by selling Japanese bonds, that is, they are not lending as much.

– Both Detroit and Japan have little in the way of native resources, both seek to exhaust the resources of others. Detroit has exhausted available resources and Japan is on the way to doing so.

– Both economies feature smokestack-manufacturing industries that have migrated to China and other low-wage countries … associated wage arbitrage has reduced discretionary incomes of both Detroit- and Japanese workers.

– Managements of both places are inept and cruel, beset with cronyism and corruption … leading to catastrophic consequences. It is hard to say which place is more ruined. Neither ‘systems’ allow imagination or risk, any persons exhibiting imaginative tendencies are excluded. Conventional managers are allowed to fail conventionally until they are unable to do so by the extent of their failures.

– Legacy obligations are carried forward with increasing amounts of new debt required to service and retire (roll-over) the older maturing debts. Japan’s lending capacity is entirely consumed meeting the burdens of existing debt. Detroit has almost no capacity to borrow at all and is dependent upon begging.

– Japan’s so-called ‘Bubble Economy’ was a hedge against rising energy costs … a hedge that was unraveled by increased energy costs. Hedge versus expedient: Detroit’s success was the reason for Japan’s economic strategy in the first place. The auto industry’s destroys the capital the industry requires over the longer term. It has also foreclosed the future, destroying capital that was-and is needed for actual productive enterprises … that have not be imagined yet! Motown’s strategy has been to deploy successive expedients .. good for the moment and costly afterward.

– Monetary policy — in the form of multiple rounds of bond-buying/quantitative easing and super-low interest rates — has failed/is irrelevant. The desire has been to create monetary/currency inflation: Japan is mired in deflation! The end-game for Japan is identical to the end-game in deflationary Detroit: ruin.

Figure 1: Japan’s crude oil consumption: the failure at Fukushima and the resulting shutdown of the country’s nuclear park left an expensive energy deficit that the country must close by importing petroleum and liquified natural gas. Every yen diverted to the petroleum suppliers is a yen extracted from other sectors of the Japanese economy … including debt service.

The world is not in danger of becoming Japanese with its 20-year deflation. Instead, the danger is Japan becoming Detroit, (James Howard Kunstler):


Finally, I have one flat-out prediction, one I have made before but deserves repeating: Japan will be the first society to consciously opt out of being an advanced industrial economy. They have no other apparent choice really, having next-to-zero oil, gas, or coal reserves of their own, and having lost faith in nuclear power. They will be the first country to enter a world made by hand. They were very good at it before about 1850 and had a pre-industrial culture of high artistry and grace – though, granted, all the defects of human psychology.


Japan is trapped. It must maintain enough of a functioning industrial economy to support its fleet of crumbling nuclear reactors for an indeterminable period of time, perhaps centuries. Imagine Detroit with reactors.

Industrialization is supposed to bring more goods at lower costs to customers who have to work less in order to enjoy more. From cradle to grave, modernity promises more of everything for everyone.

Goods are not enjoyable or useful. For example: the promised mobility has degenerated in a set of unremarkable yet rigid rules. It is the traveling in drainage canals from noplace to noplace, from one slum to another slum in pursuit of … low quality, unsatisfactory goods!

The systemic costs of ‘goods’ are unaffordable to the system. The customers discover they cannot work because they are unemployed or they find the work is too hateful to bear. There is no enjoyment utility: the ever-multiplying poor struggle to survive while the rich increasingly and for good reason fear the poor.

Meanwhile, waste — which is the real product of modernity — overwhelms the natural life-support system for rich and poor alike. Modernity cannibalizes the capital the system needs to run. The waste products and the loss of capital — and their associated increase in costs — is why modernity is failing. The problems discussed by Kyle Bass and other analysts are all symptoms of extinguished capital.

The managers desperately seek solutions that don’t change anything because of the perceived costs of change. What they miss right under their noses is to resist change is to become Detroit … or worse. Changes are inevitable, they will occur as a result of intent or as a result of system breakdown … which in turn forecloses the possibilities of creative alternatives. It is best to seize the day … to assign costs where they belong and start making the hard choices about what we need to give up … so what remains can be made available to ourselves and our offspring. What is needed isn’t anything extraordinary, only restraint.

The establishment has nothing left, they are scraping the bottom of the ‘solution’ barrel. Everything is offered but energy conservation and doing with less. This is total nonsense … the end of it is at hand. There isn’t enough room on Planet Earth for unlimited humans + cars + associated ‘other goods’. Something has to go, otherwise, the world = Detroit.

Central Bank Failure…

Off the Keyboard of Steve from Virginia

Published originally on Economic Undertow on September 14, 2012

Discuss this article at the Epicurean Delights Smorgasbord inside the Diner

Ongoing rush of monetization world-wide took a predictable step yesterday as the Fed Chairman announced open-ended lending to mortgage industry. This is on top of ongoing lending to the government (LSAP/Operation Twist) and the promise of ‘unlimited’ lending to banks (by way of governments) in the European Union. On the way is more central bank lending in Japan, UK as well as more stimulus in Chinaand elsewhere.

As was pointed out in the Economic Undertow short-version:


Modernity cannibalizes its capital, as such our crisis is irreversible. Conventional marketplace remedies such as debt jubilees/write-offs, re-distribution, bailouts, stimulus, austerity policies, monetary easing, etc. have no effect on outcome other than to worsen conditions. These are efforts to reclaim capital that no longer exists. Consequently, remedies accelerate unraveling process by increasing gross debt (claims against capital) while exposing remaining capital to consumption at higher rates.Economists insist that capital is symbolic (money) rather than material. Capital = resources (Daly), all industrial money is debt. Abstract money is infinitely reproducible, material inputs are not.


The central bankers endeavor to reproduce as much of the abstract ‘money’ as possible, hoping that consumption can grow to ‘normal’ levels. The central banks lend, this is all they can do. Despite talk about ‘tools’, they only have one: making- or not making loans. The banks’ only form of medicine is more of what put the world in the hospital in the first place!

The economies are like a car that cannot start. First one person then another puts the key into the ignition and cranks the engine. New people arrive and say, “I can start the car,” and take their turn with the key. They declare the problem is with the battery or the starter or the engine or the electrical system. Each believes the other simply does not know how to start a car. The gas tank is empty the car will not start regardless of who turns the key. Eventually, the battery fails.


Battery Failure = Great Depression


Most of the people in the world do not want a second Great Depression. There are also very few on this planet that do not acknowledge the possibility/likelihood of another depression. The people will do whatever it takes to forestall it. If this requires believing the establishment’s lies … they will become believers. They will repeat whatever lies they must to themselves, to their children, they will live the lies until they are submerged by them.

When the central bankers promise the children that they will save them, the children act accordingly … even though the fact of the central banks having to make such promises speaks for itself. When the Fed and the rest are the last line of defense, there really is no last line of defense.

What people don’t understand is the nature of our crisis, it is an energy crisis in drag. High real input prices due to scarcity are stranding trillion$ of infrastructure used to waste resources, (sunk capital investment). There is no coming back from this. When capital resources are gone they are gone forever, wasting infrastructure is worthless junk. The process has arrived at the point when the various actors are beginning to come to understand what ‘forever’ actually represents and that they are confronting it.

The monstrousness of our predicament is almost beyond the ability of the human mind to grasp its scale. We burn up our resources today, there will be no more resources to burn for millions of years. We’re it. Apres moi le deluge!

Central bankers cannot issue value-on-demand. They cannot offer anything other than symbols for value, items that have worth only under circumstances that do not currently exist and cannot again! They cannot print crude oil, topsoil, surface water, they cannot increase waste-carrying capacity, they can add to the assault on these things by way of their lies and the willing credulity of others. They can only make matters worse, the central banks are at odds with themselves.

As far as it goes, the entire world is in the grip of resource deflation, from which there is no escape. Our voracious machines dig the graves of our grandchildren faster and deeper, capital is destroyed more utterly, what remains becomes unaffordably expensive, at some point the costs are bankrupting … see ‘Greece’.

Greece is all of our futures, our children’s futures, our grandchildren if they are very, very lucky and can dodge the consequences of our stupidity and blindness. They will live in small villages, they will till what fertile soil they can find,  they will make things by hand they will wish all of us had died before we were born.


Loans without end … just not for you!


Tens of millions are unemployed worldwide! The solution is to offer loans at near-zero cost to bankers! That will solve the problem … right? Let the Fed Chairman’s friends take they money and run … to Peru!

Figure 1: This graph of Fed total assets and liabilities from Cleveland Federal Reserve Bank (click on for big). This amount is set to grow by another US$480 billion per year into the foreseeable future. Keep in mind, the central bank balance sheet expands because the private sector balance sheet contracts. Fed credit supplants private credit, it is not added to it. If there is no private sector deficiency there is no need for easing! The end of the day has no net increase in available funds for the public, only balance sheet problems pushed further into the future.

The breakdown of Federal Reserve balance sheet can be seen on the Fed statistical release page. Regardless of what the report says, all assets held outright by the Fed are loans made by them: the purchases of Treasury- or agency bonds are loans to these agencies.

The flow of credit is from the central bank into reserve accounts at the Fed (not circulating currency). Reserves do not appear in the greater world unless there is demand for them in the form of redemptions/depositor withdrawals that exceed the requirements of ordinary, day-to-day business. A good example of this excess depositor demand would be a bank run.

What the central bank has done is guarantee all bank deposits by offering what amounts to unlimited reserves.

It’s not clear guaranteeing deposits is what the Fed Chairman intends to do. Bank runs are underway in Europe, China, Argentina and elsewhere. The reason is there are no effective lenders of last resort, the consequence of central bank over-promising/making unsecured loans. When central banks leverage themselves they become no different from ordinary, commercial banks/shadow lenders who are insolvent because of their unsecured lending. The central bankers promise ‘unlimited’ supplies of liquidity, they cannot possibly deliver it. The central banks are collateral-constrained. There is less good collateral available: collateral is capital, there is a shortage of it: our crisis is the consumption of capital. Adding claims against what little remains is pointless particularly when the form of the claim is accelerated consumption.

The Chairman guarantees bank deposits with the left hand while making the guarantee necessary with the right.

More left hand-right hand: or perhaps left foot-right foot: the central banks place the petroleum industry’s boot on the throat of the world’s economies (click on for big):

Figure 2: Brent crude continuous front-month contract, chart by TFC Charts: the financing needs of the petroleum extractors is at odds with those of the extractors’ own customers (Guardian):


Further quantitative easing in doubt as petrol prices near record high.

Phillip Inman

The Bank of England could be prevented from boosting the economy with another round of QE if inflation rises

Petrol pump prices jumped to 139.7p a litre this weekend, within 3p of the 142.5p record set in the spring, according to figures from the AA.

The cost of diesel also rose as Europe’s major refiners blamed hurricanes in the US and a string of refinery shutdowns for a spike in the cost of crude oil.

A rising oil price will spook the Bank of England, which has relied in its inflation forecasts on a fall in oil prices linked to falling demand across the world. The central bank’s monetary policy committee, which sets interest rates, could be prevented from adding to its £375bn programme of quantitative easing to boost lending in the economy if inflation takes hold, analysts said.

Higher pump prices will also add to concerns that the UK will join continental Europe in a stagflation trap as inflation rises while growth remains flat.

Fears that the economy will remain in recession for the rest of the year were heightened by a report on Monday that found optimism among UK businesses has hit a 20-year low.


There is an upper bound to the price of petroleum, where the costs of consumption become unaffordable and demand is constrained. In the US, the price is a little over $4 per gallon of motor gasoline: at this level the entire fuel wasting enterprise becomes unaffordable, including the precious tract house- and office developments, sectors of the economy the central banks are desperate to revive.

Figure 3: Got gold? (TFC Chartz, click on for big) How about silver? It is hard to see a green light given to Wall Street asset speculators that won’t push up the price of all commodities. Unlike crude oil, which cannot rise in price without self-limiting demand destruction, gold is not strategically important. An ounce of gold can be bid up to a cool million dollars per ounce without effecting the so-called ‘productive’ economy. Gold is a fetish, like a Tiger tank or a Warhol Car Crash: a very high price might reflect uncertainty about the worth of other goods (including currency) but the implied shortage of gold would not materially effect output of necessary goods.

The central banks think only of creating asset price ‘bubbles’, in our ruin of a world there is nothing left.

Avalanche Theory of Debt Cascade Failure

More from the The Concepts of Money and Capital thread on TAE.


Quote from Skipbreakfast

I don’t think the Fed has any illusion it can truly replace all the credit currently in existence, should credit actually start evaporating exponentially. In truth, the Fed doesn’t believe it will need to do that–it naively believed it could reverse the tide before such catastrophe. Maybe even the Fed is starting to wonder if things are now out of hand, however.

The deflationists have persuaded me that the trickle of credit destruction soon becomes a torrent and the CBs are simply overwhelmed. They will have to change tact and embrace deflation at some point, by shoring up their own assets, once it suits them to do so.

One thing I think is not grasped well is the concept of Cascade Failure, best exemplified by an Avalanche or Toppling Dominoes.

What we have here is a MOUNTAIN of debt, which although it has been exponentially increasing at an obvious pace over the last decade, has in truth been growing exponentially right from the beginning of this supercycle, best pegged IMHO to the chartering of the Bank of England in 1692.

All through the ensuing years, one economy after another has been subsumed into this ever expanding Ponzi scheme. The whole Bizness isn’t REALLY managed by Da Fed, its managed by the Bank for International Settlements (BIS) in Switzerland. Da Fed is simply the most powerful among many client Central Banks in this schema.

The snow falls over many years on a Mountain, and in fact you can to extent control Avalanches by setting them off on purpose periodically when you see the instability growing. So in fact it is likely that many of the prior depressions which followed events like the bursting of the Tulip Bubble or the failure of Credit Anstaaldt were to an extent “controlled explosions” which briefly brought down the snow and then collection began again.

This iteration is somewhat different, because in each of the prior iterations after the avalanche there was still surplus ENERGY to access, first by the theft of the New World from its original inhabitants, and then progressively moreso first through the Age of Coal which took us from around 1750 through to around 1900, then the Age of Oil which took us from 1900 through to present day.

The monetary pyramid here through this entire time has used as its Capital the ENERGY accessible from the thermodynamic application of fossil fuels, through a whole variety of neat inventions during the time period. So every time a new invention like say Edison’s Light Bulb appeared on the scene, vast amounts of new Credit was issued to build such things as a nationwide electric grid. In reality of course, none of these things could ever pay off, they always only existed through constant credit subsidization. It was possible to do this by seriously underpricing the cost of energy, putting off the Day of Reckoning hopefully long enough to come up with the Holy Grail of something like Fusion Power, with the “promise” of limitless and clean Energy. However, despite all the years of experiments with Superconducting Supercolliders and the like, Fusion Power remains basically a drawing board type idea to this day, though all the time we get reports it is “just around the corner”.

Anyhow, without such a last minute rescue by the Fusion Power Cavalry here, the Credit Mountain of Money built around accessing ever more amounts of energy per capita will come down, and the AVALANCHE is just beginning here. As I wrote in prior posts in this thread, there is little worth buying here anymore, because just about EVERYTHING is based on continuing sources of energy to power it. Even Farms are based on this in the current model. Much of the production off the Great Plains “Breadbasket” of the world depends on irrigation water pumped up from the Ogalala Aquifer. That pumping is mostly done with diesel pumps, and while you might substitute some with Windmills, the depth now that has to be pumped from is probably too great for a Windmill to handle except in a Tornado, in which case the Windmill is destroyed anyhow.

What you have here as a result is a Cascade Failure of IMMENSE PROPORTIONS, a Credit Collapse Avalanche such as the world has never seen in all of recorded history. IMHO, our Iluminati Masters of the Universe are running around now like Chickens with their Heads Cut Off trying to figure out how best to protect their own “Wealth”, when in fact that wealth is ALREADY GONE. It’s floating around up there in the atmosphere as moelcules of CO2. THAT is where all the “Capital” is now, and it’s not terrifically useful Capital in this form.

I suspect the various CBs will continue to print in concert here for a while longer, and the Funny Money will slosh around in Bank Reserves keeping the TBTF from going under immediately. In the end though, they will CAPITULATE to reality, and the reality is that a MOUNTAIN of Snow collected up here since 1692 is ALL going to come down the Mountain at the SAME TIME. You cannot stop this avalanche from coming down, all you can do is to RUN AWAY. RUN AWAY FAST! Run away NOW. Get just as far away as you reasonably can from the center of this collapse, the Big Shities all over the world built upon Credit and the Thermodynamic energy of Fossil Fuels. They are DEATH TRAPS.


Hyperinflation vs Deflation: Rebutting FOFOA

Discuss this article at the Economics Table of the Diner 


One of the first Economic/Monetary threads begun when we openned the Doomstead Diner for Bizness a few months ago was a Hyperinflation vs Deflation thread.  As often as this debate has been engaged in all across the internet, it still remains one of the most vehemently argued topics from both sides, and no clear “Winner” in this has emerged as of yet.

The arguments surrounding HI & DF crossover into arguments about the worth of Precious Metals and their possible value in resolving the monetary crisis we have confronting us now.  Particularly lively arguments come off the keyboard of a Blogger who goes by the Nom de Plume of FOFOA, or “Friend of a Friend of Another”.  Apparently, all Austrian School Gold Bugs are very Friendly people, at least with each other. LOL.

Anyhow, I got into discussing the HI vs DF questions with Ashvin Pandurangi of The Automatic Earth a while after trolling and plugging the new DD Blog and Forum on TAE. Ashvin has now decided to resurrect his analysis of FOFOA’s “Freegold” Theory, and is also soliciting other critiques, so I’ll pitch in my 2 Gold Eagles on this subject now.  I’ve been over the fallacies in the thought process of what conventional economists of both the Austrian and Keynesian variety come up with many times already, but I haven’t really addressed specifically the work of FOFOA.  So I will do that here and now.

Like Ashvin, I will also make my disclaimer.  I don’t profess a complete knowledge of WTF the Freegold advocates are talking about, and frankly I have a whole lot of issues as far as wading through the stilted prose style FOFOA writes.  I am just going to look at some underlying assumptions made in this most recent justification for Freegold and for a likely Hyperinflation of the Dollar in the near term, though FOFOA refuses to make any real timeline predictions.

Let us begin here first with a major fallacy underpinning FOFOA’s entire Worldview as far as Money is concerned:

The answer is the concept of money. This is the ability, unique to humans, to use numbers, mental constructs, to relatively value the goods and services of barter in a way that enables economic activity and commerce. It is the enabler of economic activity and commerce. It is a primeval instinct.

Emphasis there is mine of course.  Primeval?  It seems FOFOA believes that Homo Sapiens dropped down out of the trees with the innate ability to create and use money, and the subtext is that it goes back in ALL cultures into the great myst of Prehistory.  He is cock sure that money in some form is an essential ingredient to the primeval Homo Sapiens mindset, but this is so untrue as to be completely laughable.  It’s pretty clear that money only evolved around the time Agriculture did, and that is only around maybe 10,000 years old.  This does not qualify as “Primeval” by any stretch of the imagination.  There is a good 60,000 years here between the time Toba erupted and the beginnings of Ag and Money, and Homo Sapiens appears to have been quite successful through that whole period.

Moreover, its not some mythical Xanadu or Utopia in which large cultures flourished without the use of money, really only once the Europeans arrived on the West Coast of the Amerikas was any Money introduced to a very large culture of First Nations people who used a Potlatch or “Gift” Economy.  FOFOA sweeps all that stuff under the rug, because it doesn’t fit the construct he wants to make regarding Money, and then more specifically Gold as Money.

Here you get into a real problem with the “Primeval” argument, since metal working, even in Gold and Silver which is a bit easier than Iron working is a VERY late coming technology here overall, and again doesn’t fit the description of “Primeval”.

Now, FOFOA does get some of the early history right in the use of PMs in barter, but he never does cover the Coinage issue here.  Metals in early tech worked very well to form difficult to counterfeit Tokens to represent stored wealth in a Warehouse.  Because of their scarcity, a token could be made with an ascribed VALUE to it representing a certain amount of grain held in a warehouse.  The Coin doesn’t have INTRINSIC value, the value gets Stamped on the coin by Da Goobermint.

Using Gold and Silver worked OK for a while, but suffered problems all along the way.  First off, Hoarding is a problem, Savers will hoard the metals and take them out of circulation.  This runs you into Money Supply problems for commerce purposes.  Worse still, in periods of famine either nature caused or induced by Human Greed, the actual amount of Food or other necessities can decrease, and then when saved Gold comes back out to buy now scarce items, there isn’t enough of the stuff to go round  to redeem with the Gold.  So the Gold value isn’t really Steady, its only relatively steady during periods of surplus.

The next problem is Increasing Population size.  If the amount of Gold is relatively fixed, but the Population is growing rapidly, in each generation there is less Gold to go round per capita than the last generation.  Today, with 7B people on the Earth, there is less than 1 ounce of the stuff for each person walking the Earth at any given time.  If Gold is the ONLY money around, then as the population grows larger the Gold becomes increasingly more scarce and valuable, so its value is NOT steady.  Its ALWAYS going to increase in value in this situation.  Increased productivity can keep prices more or less stable, but at the point at which real productivity does not match the population increase, a fixed quantity money supply will skyrocket upward in value.  It doesn’t work the same way as fiat, but it is still not truly a stable form of currency when you have a fixed supply working against a population that is growing rapidly.

We still have not worked our way into the biggest problem with PMs though, which is that of consolidation over millenia.  FOFOA himself describes the “Big Players”, long term consolidators of the Gold resource who have sequestered away MOST of the Gold ever mined up here.

Modern bullion banking is a carryover from this past. When Nixon abruptly took the dollar off the gold standard in 1971, the billions of ounces in private ownership didn’t just disappear. They weren’t cast into the streets in disgust. And these giants with 100,000 ounces or more didn’t take those tonnes home to the basement. No, they stayed right there in the bank vaults and literally JUMPED in value.

FOFOA goes on to register his complaints with the Gold ETF market (“Paper Gold”), and the fact that there is fractional lending of this through the Bullion banks just as there is Fractional Lending of Fiat (and no doubt a good deal of Rehypothecation going on with that asset as well!)

MANY claimants to this Gold now, but who REALLY gts to claim it in the end?  Generally speaking it is whoever owns the Keys to the Bank Vault.  The LAST person in the line responsible for making exchanges keeps the Asset, like MF Global whisking away depositors accounts into their own account, which then gets shifted to JP Morgan accounts.  How does Gold as a currency backer stop this from happening?  It doesn’t, and in fact probably makes it easier to accomplish.

Anyhow, with so much of what is admittedly already a pretty limited supply of Gold for 7B people on the Earth already sequestered, its pretty clear that only a very small subset of that population has sufficiently high claim and control to actually take possession of it at some point.  The amount leftover from this for people to actually do some commerce with is exceedingly small, far less than the sub 1 oz in theory available to each person based on what has been mined throughout history.  How do you De-consolidate Gold already Owned and Sequestered away by powerful people and families and then use it once again as a currency medium?  You can’t do it, and so you are left with the creation of Notes or Digibits created to represent Gold, but not Gold which ever is really available for most people to redeem.

In reality, the best arguments for how money works come from the world of Thermodynamics and Heat Flow across gradients.  In order for any Work to be done Heat has to flow from a Hot reserve to a Cold one.

PMs in their Consolidation phase measured the amount of work being done as the PMs were mined and collected up.  The energy was used to reverse the Entropy process of dispersal and consolidate the piles of metal.  During this time, the metals flowed through the economy and could be used as money.  They represented the work being done.  However, all along the way there was a lot of waste Heat expended, and you are not going to get the same amount of work done by taking the piles of Gold and sending them back the other way.

This brings us to FOFOA’s arguments regarding what “Capital” is.

I’m not going to go into great detail on the concept of capital, other than to give you a mental exercise. Because the term “capital” can be quite confusing in our modern paper/electronic world, I want you to imagine a much simpler human civilization. Imagine an ancient Greek city. All the buildings made of stone and mud, the horse carts and agricultural tools, the linens and skins worn as clothing, the knowledge base passed down through generations; all these creations of man’s intellect were the capital of the time.

Now imagine the destruction of capital. Imagine an earthquake or volcano that destroys the fruits of many generations. Or a plague or war, perhaps, that destroys the knowledge base. That’s the loss of real wealth you are imagining. And it is this cycle of capital creation and destruction that tells the story of mankind throughout many civilizations.

The modern analogy to FOFOA’s Stone and Mud Huts and Horse Carts in the Ancient World are today’s McMansions and Carz.  In his version of Capital destruction it takes an Earthquake or Volcano to destroy this “Capital”, but he doesn’t address the fact that Capital of this kind can become worthless even if it is still standing.  The McMansions and the Carz are losing Value because the Energy is no longer there to use them.  The “Capital” that was expended to build said infrastructure was the Oil burned, which now exists only as molecules of CO2 in the atmosphere.  What “Capital Destruction” has been going on for the Age of Oil came in the form of the burning of that Oil.  The OIL was the Capital here, not the stuff that was built with it.

Finally, WRT arguments about Hyperinflation and the relative worth of Gold in a monetary system collapse such as the one we are undergoing now is concerned, most of the perceived value of the Industrial Era has been “accounted” for by using the Dollar as a measure of the relative worth of goods and services through the era.  In order to try and keep nominal values from collapsing even though the real value of assets is decreasing, more dollar liquidity is being pushed into the center of the system at the TBTF Bank level.  However, said liquidity is not escaping into the real economy as of yet, and until there are some signficant Policy shifts, it is not likely to escape either, except into the pockets of a few well connected thieves.

Shifting onto Gold at this point in the Game would be outrageously Deflationary, which I think the Austrians overall view as a Good Thing as the Credit Cycle gets a Reboot that way, but in practical terms it would pretty much halt all trade since most of the Gold in the world is sequestered in the vaults of only a few people and Sovereign holdings, to which there is also likely Private Claim on.  Such a shift to Gold WOULD of course be Hyperinflationary for the Dollar, so for Gold Bugs that is a self-fulfilling prophesy.  In essence, the constant propaganda being written by Gold Bug websites for people to take their Dollars and convert to Gold is meant to increase the perceived value of Gold and in turn force a hyperinflation of the Dollar.  This is proving a bit harder to accomplish IRL than in the mind of the Gold Bug.

Because the Fiat structure is so large and complex, the value system of all assets including the PMs are being subjected to tidal forces as it implodes on itself, resultant from the fact the Capital underpinnning of Oil is becoming more scarce. Oil however isn’t disappearing overnight, and the overall game is being balanced out some by Demand Destruction.  The Dollar’s preemminence as World Reserve Currency isn’t yet being challenged effectively, despite Chinese claims that Renminby will soon be the World Reserve Currency, or Gold Bugs claims that it will soon be Gold.  This is not to say the Dollar will not eventually collapse in its value, it most certainly will.  However, many more parts of the peripheral economies and other currencies will get hit on here first, and during that period the Dollar is likely to remain perceived as the Safest Haven in a War Zone.

In the deleveraging that must occur by any economic argument, all asset classes are going to come under pressure, that includes Gold and it includes Oil too.  The CBs may work in concert to try and maintain nominal values, but this will simply turn their own balance sheets into TOAST as well. The Market in turn will react to that, and eventually you do get your currency collapse of the Dollar as well.  Whether Gold is turned to as an alternate Currency Medium in this phase remains an Open Question.  I do not think so based on my thermodynamic arguments or in sheer practicality terms, but I wouldn’t rule it out.

Far as FOFOA, FOA and A are concerend, they are all just shills for a very old concept of money, and who all also likely have skin in the game for making their prophesies come true.  Anyone who does hold a lot of Gold in the Basement safe clearly would be ecstatic if it rocketed up in value to $10K/oz or more.  I will be very surprised if that occurs, I think the whole trading system would collapse if PMs took on those kind of valuations, but only time will tell on that one.  In the medium term here though, an HI of the Dollar seems unlikely to begin inside the next couple of years anyhow.  The Euro definitely has to collapse first, and that will take some time yet to play out.



Hiding in Plain Sight …



Hiding in plain sight:

It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.
Henry Ford

Q: How would you describe the economy?

A: It is a system that allows a select few to borrow immense fortunes. The rest of us … you, me, everyone else … repay the debts.

Q: That’s it?

A: That’s it.


The face of Peak Oil. [1]

We are in the middle of a crisis that has been ongoing for almost five years now: the managers demand the economic system be bailed out. Of whom do they make demands? Entrepreneurs? Innovators? The finest minds of a generation?

A: Pensioners.

The economies must become more productive which means increasing the efficiency of output. Consequently, pensioners are called upon to sacrifice their retirements in the UK, Greece, Ireland, Portugal, in the US … in cities and states pensions everywhere are under attack.

Why not more machines? If machines are productive, wouldn’t deploying more machines solve the economic problems around the world rather than deploying pensioners? Technology is supposed to save us but raiding pensions insists otherwise: the scraping of the bottom of the barrel in real time. It’s an admission that technology won’t work, from the people who are in a position to know.

What happens after the retirements are pilfered? Who knows? Nobody has a plan.

The world is shocked to discover a shortage of capital, not for investments but to prop sagging balance sheets. Who could have guessed as capital has been shoveled into the furnaces of ‘development’ for decades? Only economists and bureaucrats believe that we never run out of inputs.

China’s Biggest Banks Are Squeezed for Capital

Neil Gough (NY Times)

China’s banks are among the biggest and most profitable financial institutions in the world. But the state-backed banks are also starved for capital after an aggressive lending spree that was encouraged by the government.

Maybe they are profitable and maybe not. “Starved for capital,” suggests not. The operating idea is that capital is money rather than material inputs. These inputs are mispriced so that the money-equations used by industrialists add up to something ‘positive’. Cheating works until it doesn’t any more: substituting debt for unaffordable inputs doesn’t produce anything. Debt isn’t capital and self-delusion isn’t capitalism. Maybe we should call our economic system ‘Delusionism’ and be done with it.

Within the last year, seven of the biggest Chinese banks tapped the markets for 323.8 billion renminbi ($51.4 billion ) in new funds, according to Citigroup estimates. Several financial firms are expected to raise another $17.7 billion in the next few months, with China’s fifth-biggest lender, the Bank of Communications, accounting for $9 billion.Banks around the world have been tapping investors for new funds as they struggle with slumping share prices and waning profits. But Chinese firms have maintained that their profit growth is strong and their balance sheets are solid, raising red flags among some analysts about the banks’ persistent capital needs.

Chinese bankers and business tycoons, each more corrupt than the last: raise that Red Flag high! The Chinese need capital because so many are stealing it and removing themselves overseas.

The problem is that paying out high dividends blows holes in their base capital. Thus, banks need to continue tapping the markets for fresh funds, often diluting minority shareholders by issuing new shares. The finance ministry, the banks’ ultimate controlling shareholder, always buys in, keeping its stakes topped up.

Somebody at the bottom always takes it in the neck. Today, it’s the minority shareholders, tomorrow it will be the senior bondholders or the pensioners or the schoolchildren forced to eat radioactive school lunches. This is part of an ongoing process, not a new feature within delusionism. It was invisible when everyone was busy getting rich: now that the abuses are visible it can only be on account that fewer are getting rich. The endgame heaves into view.

The amount of cash that is churned in the process is staggering. In 2010, China’s five biggest banks (the Big Four plus the Bank of Communications) paid more than 144 billion renminbi in dividends and raised more than 199 billion renminbi on the capital markets, according to GaveKal.“This is the nonsense of it,” says Fraser Howie, a managing director at CLSA Asia-Pacific Markets, who is based in Singapore and is a co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.” “There’s an awful lot of money just going round and round from one pocket to another, giving the appearance of strength when it’s really not there.”

Fraser Howie cannot see what is under his nose. What else is he missing? How about Peak Oil? The owners of industrial enterprises borrow (steal) their fortunes and oblige the rest of us to repay the loans. The lending-go-round is the reason for industrial economies, their purpose in the first place. “Money just going round and round from one pocket to another,” is the theatrical production that is collateral for the loans. More appearances of strength means more loans — and bigger fortunes — for the owners. The churning of the bank funds is a feature, not a bug: modern finance villainy hiding in plain sight!

The public must accept the process at face value otherwise loans to ‘entrepreneurs’ could not be justified. There would be nobody able to commit to debt-service. As it is, the public has over-bought, the cost of fuel crowds out debt service. The solution is to chop off pensions with a samurai sword.

It’s not just Chinese banks that are starved for capital and it is not just banks. The world is capital constrained.


Europe’s Capital Flight Betrays Currency’s Fragility


The euro area’s financial troubles appear to be flaring up again, as this week’s gyrations in the Spanish bond market show. In reality, they never went away. And judging from the flood of money moving across borders in the region, Europeans are increasingly losing faith that the currency union will hold together at all.

The flows are tough to quantify, but they can be estimated by parsing the balance sheets of euro-area central banks. When money moves from one country to another, the central bank of the receiving sovereign must lend an offsetting amount to its counterpart in the source country — a mechanism that keeps the currency union’s accounts in balance. The Bank of Spain, for example, ends up owing the Bundesbank when Spanish depositors move their euros to German banks. By looking at the changes in such cross-border claims, we can figure out how much money is leaving which euro nation and where it’s going.


Figure 1: Surprisingly, there is still capital in Greece and Ireland remaining to flee. Perhaps the last capital out the door in these countries will please turn out the lights.

This analysis suggests that capital flight is happening on a scale unprecedented in the euro era — mainly from Spain and Italy to Germany, the Netherlands and Luxembourg. In March alone, about 65 billion euros left Spain for other euro- zone countries.The idea that Europe’s current incremental approach has the advantage of saving money is an illusion, and not just because the disintegration of the currency union could trigger a global financial meltdown. As the capital flight figures demonstrate, the stricken nations of the euro area are bleeding private money and becoming increasingly dependent on taxpayers. In all, the debts of struggling banks and sovereigns to official creditors such as the EU, the ECB and national central banks now exceed 2 trillion euros, much of which would be lost if the debtor nations dropped out of the currency union.

What isn’t mentioned is the flight out of euros into other currencies or assets such as US equities. Wait until the euros start flowing out of France. Bloomberg will have to draw a much larger chart.


What have you … done for your car, today? [2]

Resource nationalism should be giving more billionaires reason to pause. The game has instantly become much more interesting:

Argentine government to pay Repsol ‘zero pesos’ for YPF seizure as Spanish oil company issues legal warning

Fiona Govan (Telegraph, UK)

Spain’s Repsol has threatened legal action against any company that attempts to invest in YPF following its expropriation by Argentina last week as the government expressed determination to “pay nothing at all” in compensation to the Spanish oil company.

The move would discourage external partners from providing the investment YPF needs to exploit vast shale oil deposits discovered within the Latin American country and is the latest attempt by Repsol to fight back against the illegal seizure of its subsidiary.

“We reserve the right to take legal action against any party investing in the YPF and its assets following the unlawful expropriation of the company,” Kristian Rix, a spokesman for Repsol in Madrid, told the Daily Telegraph on Monday.

The Spanish energy company believes billions of dollars are required to develop Argentina’s prospects including at least €25bn a year over the next decade to exploit the Vaca Muerta shale discovery made last year.

Resource colonialism on a foundation of paper promises and graft will prove to be worthless as the distances to overcome are too great and leverage of the colonialists insufficient. The Argentine example is appropriate for the various biofuel plantations landgrabbed in Africa and elsewhere by the Saudis, Chinese and others. When the locals decide the renege on the contracts and expropriate the ‘goods’ there will be nothing the ‘New colonialists’ — and their Blackwater-esque goons — can do about it.

Hiding in plain sight: peak oil.

Nobody mentions that the reason for the Greek economic unraveling and that of the Eurozone is caused by peak oil. The blame is fixed on Greece’s debt exceeding it GDP by a few percentage points. Ditto the other countries under siege around the world.



Figure 2: Chart by Jon Stewart/the Bonddad: Greece borrowed euros hand over fist for ten years to import fuel that increased in price 600% since the beginning of the euro. All the other countries in Europe (except Norway and Denmark) did the same thing. Why did the price increase from $20 per barrel to $120? Because of diminishing supply relative to exploding demand. Meanwhile, Greece earned absolutely nothing from burning/wasting the fuel. Greece also has little in the way of non-fuel output to pay for imports: it’s ‘Uncompetitive’.

The Greeks were conned into believing that they could live like Americans. That they could borrow as do other large debtors at very low cost. That they that sovereign privilege and could roll over their debts as they came due just like other states. They believed they could monetize pyramiding debt the way the Japanese and other large debtors do.

They would have been able to do so if the Eurozone was a country instead of a Ponzi scheme with the euro a sub-prime mortgage, if the industrial economy wasn’t a debtonomy and capitalism a delusion. Greece gulped the Kool Aid and ignored its own absence of real output and the structural deficiencies of the EU. Greece’s lenders did the same thing: once these lenders got cold feet and strangled cash flow the credit Greece depended on was cut off.

No credit and fuel is cut off, the Greek cash flow diminishes further, there is less output in a vicious, self-amplifying cycle. The outcome of peak oil process is Greece, destitute.

It’s also Ireland, Spain, Belgium, France … and Syria. Those who believe that the endgame of peak oil is Mad Max are wrong. The outcome for the unlucky is ten- times worse. The movie warriors did not have armor or heavy artillery and the willingness to turn it loose on civilians.

[1] Unidentified cinematographer, ‘The Character Humongous from the film, Road Warrior’.
[2] Unidentified photographer, ‘Syrian armor on the streets of Homs’.

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