Currency

Epiconomics 101: Our Fiscal Genome

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Published on Peak Surfer on May 8, 2016

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"Vital public services like health care, education, transportation and communication should be free."

 

In the May 2d New Yorker, Siddhartha Mukherjee wrote an ode to his mother and aunt, identical twins, taking the opportunity to dig into the roles of nature and nurture in shaping our lives, Going a step farther, he brought in one of our favorite topics here, epigenetics, or the ability of the same DNA strand to issue different instructions depending on external stimuli.

Last year, in our discussion of quantum entanglement, we observed how little of what we call our own bodies is actually our own DNA. More than 95 percent belongs to our unique, personal, coevolving microbiome that not only helps us breathe, digest, and heal illness, but influences our patterns of thought and intentions.

Mukherjee chronicled the gross result of this conspiracy, describing how two brothers, separated by geographic and economic continents, might be brought to tears by the same Chopin nocturne, as if responding to some subtle, common chord struck by their genomes, or perhaps by their epigenomes, and how two sisters — separated long before the development of language — had invented the same word to describe the way they scrunched up their noses: “squidging.”

Mukherjee overlooked the closely entangled microbial web of alien presences, but we’d observe that although these twins may have placed distance and culture between themselves, they had been together long enough to have nearly identical microbiomes from gestation, birth and infancy.

Nucleosome crystal structure at 2.8 angstrom resolution showing a disk-like shape. DNA helices at edge, histones and free proteins in center. The worm-like structures are RNA messengers. reasonandscience.heavenforum.org

Mukherjee writes:

It is a testament to the unsettling beauty of the genome that it can make the real world stick. Hindu philosophers have long described the experience of “being” as a web—jaal. Genes form the threads of the web; the detritus that adheres to it transforms every web into a singular being. An organism’s individuality, then, is suspended between genome and epigenome. We call the miracle of this suspension “fate.” We call our responses to it “choice.” We call one such unique variant of one such organism a “self.”

In his visits with various scientists Mukherjee probed the complex connections of the histones that occupy the empty spaces within the double helix and seem to possess a mysterious power to trigger or silence gene expressions. What he seems to overlook is the role of non-human microbiological agents in making these sorts of choices for their hosts. Indeed, his description of a histone begs comparison to other life forms:

In 1996, Allis and his research group deepened this theory with a seminal discovery. “We became interested in the process of histone modification,” he said. “What is the signal that changes the structure of the histone so that DNA can be packed into such radically different states? We finally found a protein that makes a specific chemical change in the histone, possibly forcing the DNA coil to open. And when we studied the properties of this protein it became quite clear that it was also changing the activity of genes.” The coils of DNA seemed to open and close in response to histone modifications—inhaling, exhaling, inhaling, like life.

***

These protein systems, overlaying information on the genome, interacted with one another, reinforcing or attenuating their signals. Together, they generated the bewildering intricacy necessary for a cell to build a constellation of other cells out of the same genes, and for the cells to add “memories” to their genomes and transmit these memories to their progeny.

While we were pondering these things, bicycling through a Spring rainstorm one morning, we tuned our mobile cyberamphibian prosthesis to Michael Hudson’s interview on Extraenvironmentalist #91. Hudson described how debt deflation is imposing austerity on the U.S. and European economies, siphoning wealth and income to the financial center while impoverishing the periphery. Its the theme of his latest book, Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy.

Crossing two hot wires in our rain soaked brain, the comparison between economic theory and genetics wafted a blue smoke that trailed out from under our bike helmet.

The system itself — the DNA code — is monetary policy, trade rules, labor, capital assets and other components of what we call “the economy.” The histones are the central banks and the FED that set the policies epigenetically by turning switches on or off. The wild cards are those alien protein agents that seem to bring about changes in the histones. A century ago those might have included J. D. Rockefeller and J. P. Morgan. Then came Henry Wallace and Franklin D. Roosevelt. Today they would include Jaime Dimon (Morgan Chase), Lloyd Blankfein (Goldman Sachs), Christine Lagarde (IMF), and Prince Mohammed bin Salman bin Abdulaziz Al-Saud.

It is pretty clear from most indicators that since at least 2008, and likely much earlier, our economic DNA has been instructed to express a cancer. As Gail Tyerberg observes:

Both energy and debt have characteristics that are close to “magic” with respect to the growth of the economy. Economic growth can only take place when growing debt (or a very close substitute, such as company stock) is available to enable the use of energy products.

Back in the era of cheap energy less debt was required. In our era of expensive energy, gigantic and growing debt is required. But you can only build debt on itself up to the point where confidence in repayment by those who are owed the money falters. After that, watch out. No debt, no energy. No energy, no economy.

Greg Mannarino of Traders Choice says:

Let’s just look at the stock market… there’s no possible way at this time that these multiples can be justified with regard to what’s occurring here with the price action of the overall market… meanwhile, the market continues to rise. … Nothing is real. I can’t stress this enough… and we’re going to continue to see more fakery… and manipulation and twisting of this entire system… We now exist in an environment where the financial system as a whole has been flipped upside down just to make it function… and that’s very scary. … We’ve never seen anything like this in the history of the world… The Federal Reserve has never been in a situation like this… we are completely in uncharted territory where the world’s central banks have gone negative interest rates… it’s all an illusion to keep the stock market booming.

… Every single asset now… I don’t care what asset… you want to look at currency, debt, housing, metals, the stock market… pick an asset… there’s no price discovery mechanism behind it whatsoever… it’s all fake… it’s all being distorted. … The system is built upon on one premise and that is confidence that it will work… if that confidence is rattled the whole thing will implode… our policy makers are well aware of this… there is collusion between central banks and their respective governments… and it will not stop until it implodes… and what I mean by implode is, correct to fair value.”

It’s created a population boom… a population boom has risen in tandem with the debt. It’s incredible. So, when the debt bubble bursts we’re going to get a correction in population. It’s a mathematical certainty. Millions upon millions of people are going to die on a world-wide scale when the debt bubble bursts. And I’m saying when not if… … When resources become more and more scarce we’re going to see countries at war with each other. People will be scrambling… in a worst case scenario… doing everything that they can to survive… to provide for their family and for themselves. There’s no way out of it.”

Jason Heppenstall, who lives in Cornwall, England, writes in the 22billionenergyslaves blog:

Aside from the police and the shops closing, public toilets are closed virtually all of the time, and the Post Office too is soon to close down, having been privatised and now asset stripped. The council is being forced to raise its taxation rates by 4% this year to cover the shortfall caused by spiraling costs and diminished funding from central government. Clinics and charities are being squeezed out of existence and the local council tried (and failed) to privatise the town’s midsummer festival.

My wife works in the care sector. The stories I get to hear will make you never want to be dependent on the state in your old age. If you can’t rely on your kids to look after you in your dotage it might be wise to keep a bottle of whisky and a revolver in your bottom drawer. Or maybe you'd rather die of thirst lying in your own mess because the 19-year-old unqualified carer who works for minimum wage is too busy checking Facebook on her phone to hear you pressing the emergency button by the bed.

Former US Budget Czar David Stockman wrote this week:

Owing to the recency bias that dominates mainstream news and commentary, the massive expansion of the Fed’s balance sheet depicted above goes unnoted and unremarked, as if it were always part of the financial landscape. In fact, however, it is something radically new under the sun; it’s the footprint of a monetary fraud breathtaking in its magnitude.

***

In essence, during the last 15 years the Fed has gifted the US economy with a $4 trillion free lunch. Uncle Sam bought $4 trillion worth of weapons, highways, government salaries and contractual services but did not pay for them by extracting an equal amount of financing from taxes or tapping the private savings pool, and thereby “crowding out” other investments.
 

This is not Al Gore. It is Elon Musk, a beneficiary of govt largess

Instead, Uncle Sam “bridge financed” these expenditures on real goods and services by issuing US treasury bonds on a interim basis to clear his checking account. But these expenses were then permanently funded by fiat credits conjured from thin air by the Fed when it did the “takeout” financing. Central bank purchase of government bonds in this manner is otherwise and cosmetically known as “quantitative easing” (QE), but it’s fraud all the same.

In essence, Uncle Sam has gotten $4 trillion of “something for nothing” during the last 16 years, while the Washington politicians and policy apparatchiks were happy to pretend that the “independent” Fed was doing god’s work of catalyzing, coaxing and stimulating more jobs and growth out of the US economy.

What the Fed was actually doing was falsifying and inflating the price of financial assets. As Michael Hudson points out, the prime error is placing the financial sector in the same column as honest labor or capital contributions. Finance is actually a drain on those things. It is a withdrawal from productivity, not a contributor to GDP.

Stockman agrees:

But financial engineering does not add to GDP or increase primary spending; it results in the re-pricing of existing financial assets. That is, it gooses stock prices higher, makes executive stock options more valuable and confers endless windfalls on the fast money speculators who work the financial casinos.

Last month, Mario Draghi, the European Central Bank president, became the first central banker to take seriously the idea of helicopter money – the direct distribution of newly created money from the central bank to eurozone residents.
 

Germany’s leaders have reacted furiously and are now subjecting Draghi to nationalistic personal attacks. Less visibly, Italy has also led a quiet rebellion against the pre-Keynesian economics of the German government and the European commission. In EU councils and again at this month’s IMF meeting in Washington, DC, Pier Carlo Padoan, Italy’s finance minister, presented the case for fiscal stimulus more strongly and coherently than any other EU leader. More important, Padoan has started to implement fiscal stimulus by cutting taxes and maintaining public spending plans, in defiance of German and EU commission demands to tighten his budget. As a result, consumer and business confidence in Italy have rebounded to the highest level in 15 years, credit conditions have improved, and Italy is the only G7 country expected by the IMF to grow faster in 2016 than 2015 (albeit still at an inadequate 1% rate).

The Automatic Earth

With England jumping ship and Germany saying nicht to every reform proposal, the EU is headed for a disaster but Italy seems to be able to still think outside the box. To us this suggests the potential for alien-led histone modification in the DNA of modern finance.

Heppenstall says:

The irony of being called anti-European is that I am ardently pro-European. I’ve lived in four different EU countries, travelled all over and am married to an Italian Dane. Europe, to me, is the most diverse place in the world and has an amazing spread of history and culture. My ideal life would involve spending several months each year travelling around Europe in a camper van and getting to know it in an even more intimate manner. The EU is not Europe; it’s an abstract concept masking a faceless undemocratic organisation that funnels wealth from one place to another and keeps its modesty intact behind a fig leaf of supposed liberalism.

It doesn’t have to be that way. We could still have a Europe united around some core values other than money and power and capitalism. How about a Europe focused on an emerging eco-consciousness? Or what about remaking it as a loose cooperative of bioregions? Or perhaps, at the very least, we could all agree on a shared constitution founded on liberty, equality and fraternity. Former Greek finance minister Yanis Varoufakis has suggested something along those lines, setting up a pan-European umbrella group called DiEM25 that aims to shake things up ‘gently, compassionately but firmly.’ Perhaps there could be more debate about what kind of Europe would be better suited to weathering the coming financial, ecological and energy shocks without causing so much collateral damage to both itself and other nations.

Until that happens we’ll just have to stand back and watch the fireworks. Big institutions like the EU are like skyscrapers; they don’t come crashing down to the ground without taking out plenty of other nearby buildings and the EU is like the leaning tower of Pisa on steroids.  Big things are an artifact of the age of oil – the future is necessarily smaller and more local. The best course of action is to stop arguing over whether it is best to be stood on top of the creaking tower it or beside it, and simply get the hell out of the way before it goes over. 

Draghi’s Italy, it should be recalled, was the country whose Supreme Court last month ruled that Roman Ostriakov, a young homeless man who had bought a bag of breadsticks from a supermarket but had slipped a wurstel – a small sausage – and cheese into his pocket, had acted out of an immediate need by stealing a minimal amount of food, and therefore had not committed a crime. Carlo Rienzi, president of Codacons, an environmental and consumer rights group, told Il Mesaggero, “In recent years the economic crisis has increased dramatically the number of citizens, especially the elderly, forced to steal in supermarkets to be able to make ends meet.” La Stampa said that, for supreme court judges, the right to survive still trumped property rights, a fact that would be considered “blasphemy in America.”

Michael Hudson

Hudson is another epigenetic secret agent. He advocates a debt jubilee similar to what Truman pushed on Europe after World War II, creating the “German Economic Miracle.” In Hudson’s view, the quickest route to reform would be shifting from taxing honest labor to taxing unearned income and capital gains; from burdening the shrinking middle class to shrinking the rentier class. Vital public services like health care, education, transportation and communication should be free.

Ellen Brown, who has been beating the drum for public banks from her Web of Debt page and books, notes that the Bank of North Dakota, the nation’s only state-owned depository bank, was more profitable last year than J.P. Morgan Chase and Goldman Sachs, and that was after the fracked gas bubble burst. She urges local governments everywhere to bypass the Fed and the vulture banking system and create their own public banks.

Ellen Brown

North Dakota has led the way in demonstrating how a state can jump-start a flagging economy by keeping its revenues in its own state-owned bank, using them to generate credit for the state and its citizens, bypassing the tourniquet on the free flow of credit imposed by private out-of-state banks. California and other states could do the same. They could create jobs, restore home ownership, rebuild infrastructure and generally stimulate their economies, while generating hefty dividends for the state, without increasing debt levels or risking public funds – and without costing taxpayers a dime.

The ability of these foreign antagonists to infect the global economy with a new narrative is a relatively recent phenomenon. The false narrative embedded by Bretton Woods and the Chicago School are not that thoroughly ensconced that they can’t be evicted. There is no reason why the inane policies of economic astrologers could not be quickly reversed by protein protagonists with simple but compelling histological reforms, such as basing the future on a bioeconomy that sequesters carbon and runs on sunlight.

Next week: Epiconomics 102: The Sunlight Economy 

Motivations for New Currency Design

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Published on FEASTA on November 15, 2015

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There appear to be four main ‘flavours’ of motivations driving new currency innovation:

a) deprecatory: informed by a view that mainstream fiat money is toxic and a better form can be usefully invented
b) economic: driven by the desire to preference a given sub-economy
c) value-led: where specific social outcomes are sought through the device of a currency
d) commercial: currency invention with narrow commercial aims

The first three map (loosely admittedly) on to Kenichi Ohmae’s ‘strategic triangle’ of competitor, customer and corporation. The first identifies fiat currency as the competitor and sets out specifically to address perceived weaknesses and faults of fiat. The second defines a group of target customers/ users, usually but not always based on geography. The third seeks to build an institution founded on a specific value-set (think mission statement) – albeit that the imagined eventual institution may well be more co-operative and/or digital/ autonomous than standard corporation. (Examples: bitcoin, Brixton Pound, timebanks). Mixed motivations are of course possible.

This article is an attempt to drill down into these motivation flavours and see what insights we can extract. It is part of the Feasta Currency Group’s work programme on Intentional Currencies, and anticipates a diverse future monetary ecosystem where currencies are more under the control of their users. (Who knows? Taxes could be payable in a user’s currency of choice.) Thanks to Phoebe Bright and Ciaran Mulloy for the discussions that preceded this particular brain-dump.

The Deprecation of Fiat

Fiat money operates within and is notionally controlled by an individual state (the euro being the problematic exception). Its main success is that of total acceptance within the relevant nation state. But it is an invention of man, and the question is ‘can we do better?’. Dissatisfaction with fiat revolves around its private creation as credit by an oligopoly of banks; its subsequent rental (via interest) transferring wealth from the have-nots to the already-haves; its misallocation away from productive use to fuel the casino and asset bubbles; and its lack of democratic or strategic control.

Currency reformers are gaining some traction in the unenviable task of effecting policy change in the teeth of enormous vested-interest resistance. [1,2,3,4,5]

But the nation states (who are in theory if not in practice the custodians of money-issue privilege) are being increasingly undermined by globalisation. Multinationals spearhead a race to the regulatory bottom. Trade trumps virtually any ethical or environmental concern and the sole recognised measure of progress is increasing GDP.

Against this background, the oft-inferred libertarian ambition behind Bitcoin – taking back money-issue-control from the state – hardly seems worthwhile if that control is already being outsourced to corporations. Anyway, setting aside the issue of Bitcoin’s democratic credentials [6], we can still assert that its underlying technology, the blockchain, does open up possibilities for decentralised co-operative management of information, and will clearly pave the way for the development of other digital currencies.

Given the multi-faceted and anarchic but energetic nature of cryptocurrency development it is starting to look as if the nation state’s only choice might be how exactly it wishes to be undermined – by globalised capital from the inside or by citizen-led ‘digital heteropeia’ [7] from the outside. Or maybe both at the same time, meeting in the middle to contest the emaciated remains of national sovereignties.

We have suggested elsewhere that the attitude of new currencies to fiat can usefully be made explicit – as fiat-friendly, fiat-cautious or fiat-averse [8]. But there is probably a fourth category – fiat-agnostic – for currency designers that haven’t the time or inclination to understand precisely the nature of fiat-toxicity.

Economic

The motivation here springs from an identification with a given sub-economy, and a desire to preference that sub-economy over the outside-world. The most common manifestation of this is where the sub-economy is a town or identifiable region that senses it is losing its sense-of-place under an onslaught from major brands and centralised supply. The preference then is for genuinely locally-rooted independent businesses and for keeping money circulating in the local economy, against the tide of centralised supply chains.

Currency projects of this sort, like the proxy-pounds, can be seen as much as local-identity reenforcers as economic interventions. Claims are made for increases in ‘local-GDP’ due to increase in velocity of exchange, but real additionality is difficult to prove. Some substitution of local for remote supply surely takes place, but the key objective – the creation of new local businesses – is elusive. The heavily centralised (out-of-area) supply of stuff-of-life transactions such as food, energy, shelter makes this a huge challenge.

Local economy currencies tend to attract activist support during start-up, but can struggle to retain a progressive mindset. Recently a tendency has been observed for them to attempt to grow via inter-connection [9], thereby arguably undermining the local-preferencing objective. Other ways of keeping up the progressive enthusiasm include new technology, local council integration and aggressive anti-consumerism.

Value-led

Value-led currencies are the most potentially interesting of the motivation-types because they are exploring the ability of a currency to be used for good. This positioning sets aside the economics professions conceit that money is neutral and replaces it with the assertion that if monies always carry values/ promote behaviours/ trigger specific outcomes then designers should be explicit about their objectives and how they are to be achieved. [10]

However, to move from no-brainer propositions such as ‘transactions are not all equal’ and ‘growth is not always good’ to a rigorous theory of value-led currencies is a bit of a challenge. It is hampered by the fact that there aren’t too many examples to study. The best examples are perhaps the Fureai Kippu [11] elder-care currrencies of Japan and the timebanks of various flavours that facilitate the exchange of participant-hours.

Review of the literature does suggest a number of challenges for such currencies. Staying true to themselves is perhaps the most severe. There is always the temptation to try to scale inappropriately by extending into non-core transactions. This is not to say that such scaling is always unwise – more that the potential value-conflict it surfaces should be carefully scrutinised and assessed. Part of the pressure for scaling is the underlying assumption that currencies must be as widely used as possible. But in a future diverse monetary eco-system this rationale potentially disappears. Another part of that pressure is the human desire for what might be called qualitative growth. The operators perhaps tend to get bored if the game isn’t perpetually changing. Tech developments deliver a continuing stream of possible futures and it seems unadventurous to ignore them.

Since around 2010 there has been a surge of interest in Behavioural Economics [12] – fuelled to a large extent by the Nudge unit set up within the UK Cabinet Office [13] and now being replicated world wide. There is likely some read-across from this experience to value-led currencies. One particular potential mindset-clash however needs to be addressed. The would-be discipline of Behavioural Insights, like it or not, carries a hint of citizen manipulation with it that sits ill with the sort of fully participative governance anticipated for value-led currencies. Put it this way – if we are going to be nudged then its important that we buy into the process and are aware of the intervention. It is clearly a hierarchichal process with the nudger and the nudgee. It would be good to see the nudger nudged; the policy makers directionally influenced via an understanding of their underlying psychology – #reversenudge .

Commercial

The proposition that corporations should be free to issue their own currencies and have them competing in a free market goes back to the seminal paper by Hayek [14,15], probably before. Arguably, the emergence of multi-nationals with multiple brands and a diverse range of ultimate products should encourage this approach, but as yet no examples seem to exist.

Of course, we have a proliferation of loyalty schemes but these tend to operate at the individual brand level, (though coalition loyalty schemes such as Nectar are obviously an attempt to widen the redemption options available). There does seem to be a recent pattern of the ‘superbrand’ asserting ownership of its sub-brands. Unilever comes to mind, as does the ‘peel-off’ corner on Danone ads. So there is probably a brand bun-fight going on internally at some of these organisations. Indeed, taking the Unilever connection further, their recent well-resourced attempts at CSR initiatives [16] might indicate a fertile ground for a value-based superbrand currency.

Loyalty schemes on their own are significant for one reason. They have driven the engineering of an alternative payment mechanism – when I go into Costa I can pay in cash or in Costa points if I have enough of them. The significance here is that the Point of Sale systems, settlement and back office systems permit it. The card swipe takes my Costa loyalty card and routes data to the back-end Whitbread servers rather than to the merchant acquirer. So loyalty systems are paving the system way for the diverse monetary ecosystem that is coming.

Summary & Conclusions

There will clearly be mixed-motive currencies – indeed most new and developing currencies will want to explore the various motivations and set out for themselves – ideally explicitly – their balance of motives. This process should not be seen as an additional chore, rather it can be part of developing a coherent and compelling narrative for a currency project – feeding into statements of mission and values in a way that gives a currency real brand-value. It can act as a guide to future action and as a mandate with external partners including potential funders. The tensions that the process of motivation disclosure surfaces should themselves be treasured. They will form an important part of the agenda going forward, and their publication will underline the transparency of governance that is needed for real progress. Feasta would be happy to play a part in such motivation audits.

References

[1]: Swiss group says it has signatures for ‘sovereign money’ vote
http://uk.reuters.com/article/2015/10/31/uk-swiss-sovereign-money-idUKKCN0SP0FW20151031

[2]: Sovereign Money : Joseph Huber
http://www.sovereignmoney.eu/

[3]: Creating a Sovereign Monetary System: Positive Money
http://positivemoney.org/our-proposals/creating-sovereign-monetary-system/

[4]: Iceland looks at ending boom & bust with radical money plan [March 2015]
http://www.telegraph.co.uk/finance/economics/11507810/Iceland-looks-at-ending-boom-and-bust-with-radical-money-plan.html

[5]: International Movement for Monetary Reform: Coalition of 22 national sovereign money groups
http://internationalmoneyreform.org/member-organisations/

[6] For example around 2% of BTC addresses control over 92% of BTCs:
https://bitinfocharts.com/top-100-richest-bitcoin-addresses.html

[7]: Miscione G & Kavanagh D : UCD School of Business, University College Dublin [July 2015]
Bitcoin and the Blockchain: A coup d’état in Digital Heterotopia?
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2624922

[8]: http://www.feasta.org/2015/07/29/new-currencies-and-their-relationship-with-fiat-currency/

[9}: For example the ‘Town Pound’ project
http://guildofindependentcurrencies.org/wp-content/uploads/2014/11/GoIC_Conf2014_TownPound_GW.pdf

[10]: Series of articles on Intentional Currencies at:
http://www.feasta.org/author/graham-barnes/

[11]: Hayashi, M. (2012) ‘Japan’s Fureai Kippu Time-banking in Elderly Care: Origins, Development, Challenges and Impact’ International Journal of Community Currency Research 16 (A) 30-44 <www.ijccr.net>

[12]: https://en.wikipedia.org/wiki/Behavioral_economics

[13]: https://www.gov.uk/government/organisations/behavioural-insights-team

[14]: https://en.wikipedia.org/wiki/The_Denationalization_of_Money and

[15]: Hayek’s Plan for Private Money:
https://mises.org/library/hayeks-plan-private-money

[16}: https://www.unilever.com/sustainable-living/

Featured image: spices. Source: http://www.freeimages.com/photo/many-kinds-of-spices-1566276

Greek Chicken Souvlaki Kabuki

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Aired on the Doomstead Diner on February 17, 2015

 

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The Game Continues…

For you Rant Fans, I found a New Gear for this one, and got it into OVERDRIVE by about the 7 minute mark, channeling Peter Finch.  🙂  A little Charlton Heston for Spice too!

Also, be aware I started the script for this last Friday during the first meetings, so the first part is not about the stupidity today, but a preview of that stupidity.

Snippet:

…Well, a thoroughly anti-climactic day here in the Greek Souvlaki Kabuki, as DieselBoom and Souvlakis spent a whole day talking past each other, with absolutely no indication that anyone is going to give an inch here. The Can Kick for this now is back to the 'Deadline' date of next Monday and the ultimatum that the Greeks will be CUT OFF from their Euro Gold Card and left to twist in the wind.

So what's the chances that they can come up with a SOLUTION to the problem on Monday they couldn't come up with today? Slim & None of course, unless somebody capitulates, and neither side can do that. The market of course believes that this is just another one of the endless series of “Deadlines” that will be Can Kicked down the road once again, and that very well might happen. Or maybe not.

What will it take to get a reaction here? Basically, the day the Greeks finally declare a Bank Holiday and start printing New Drachmas. Then Mr. Market finally wakes up from the stupor and does a Charlton Heston Planet of the Apes scene.

You did it! You finally really did it! You Blew it all Up! Damn You! Damn you all the HELL! LOL…

 

For the rest, LISTEN TO THE RANT!!!

 

In case you missed them, here are the last 2 installments of Greek Kabuki…

Mainstream Money Mess

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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

Background

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].

Summary

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.

References

[1]: http://www.positivemoney.org/how-money-works/how-banks-create-money/
[2]: http://www.positivemoney.org/our-proposals/sovereign-money-creation/
[3]: http://www.positivemoney.org/2014/12/change-money-change-world-talk-ben-dyson-video/
[4]: http://www.kreatoczest.com/kz_publishing_ourtitles-pwi.htm
[5]: http://kennedy-bibliothek.info/data/bibo/media/GeldbuchEnglisch.pdf
[6]: http://www.feasta.org/2013/11/19/designer-currencies-and-the-preferenced-domain/
[7]: http://www.aislingmagazine.com/aislingmagazine/articles/TAM24/Sustainable.html
[8]: http://www.utopie.it/pubblicazioni/gesell.htm
[9]: Edward Abbey, The Journey Home: Some Words in Defense of the American West
[10: CHIEMGAUER REGIOMONEY:THEORY AND PRACTICE OF A LOCAL CURRENCY Christian Gelleri
https://ijccr.files.wordpress.com/2012/05/ijccrvol132009pp61-75gelleri.pdf
[11]: If you seek [its] monument [handiwork], look around yourself
[12]: http://en.wikipedia.org/wiki/Index_of_Sustainable_Economic_Welfare
[13]: http://www.wikiprogress.org/index.php/German_National_Welfare_Index
[14]: http://en.wikipedia.org/wiki/Agnotology
[15}: http://www.feasta.org/2013/07/26/designer-currencies-and-behaviour-change/

Featured image: Measuring tape. Author: Colin Broug. Source: http://www.freeimages.com/browse.phtml?f=view&id=1432929

Capital without Capitalism: A Currency Design Perspective

Off the keyboard of Graham Barnes

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Published on FEASTA on November 11, 2014

Capitalism

Discuss this article at the Economics Table inside the Diner

In the capitalist model, capital accumulates as ‘surplus value’ following a production process supervised by the capitalist, with labour as a key input. The resulting tension between capital and labour is a fundamental aspect of capitalism, though it has become rather less visible in the past 40 years, as ‘free-market’ economics has progressively favoured capital over labour. Globalisation has helped capital to become way more mobile than labour, in the process limiting the bargaining power of the employed.

The recent surge in interest in the design of new currencies is partly informed by a creeping realisation of the unfairnesses of the so-called free-market and its associated monetary dysfunction.

The zeitgeist of this (still small but fast-growing) activist/ alternative movement tends to coalesce around diverse bottom-up, often peer to peer solutions. It tends to be anti hierarchical-imposed-solutions no matter how apparently well-intentioned. And it frequently unites left and right in strange ways.

The currency approaches that are developing tend to prioritise the means of exchange function over the other functions of money-forms[1]. The mutual credit approach, for example, needs no central authority (other than some form of collective risk management/ insurance) and is backed solely by the users’ self-professed ability to produce going forward. It is likely that this form of P2P exchange, facilitated by social media and underpinned by new technology developments can evolve into rather more scalable economies than was ever possible with LETS schemes.

One of the challenges facing sub-economies based on these types of approach is the need, at some point, for capital investment. With preferred governance models that proscribe the accumulation of capital via profit, and deprecate the capitalist role in favour of peer-managed production, how might that capital be formed?

One possible mechanism is via the incorporation of a form of FTT (Financial Transaction Tax) whereby a peer-agreed proportion of the value of each bilateral transaction is set aside for a ‘community-account’ fund. But the mechanism is perhaps the easy bit.

For what purposes should the funds be set aside? To what extent can/should these be agreed in advance? What is the consensus mechanism for agreeing those purposes? Is that consensus subcontracted to a trusted sub-group? How are members of that group appointed over time?

The basic shared interest of a mutual exchange function could be undermined by differences of opinion over legitimate capital expenditure needs. Commons need protecting against enclosure attempts, but setting aside excessive resources will act as a drag on the economy.

The unit of account of the currency concerned is also a factor. For example timebanks, where the unit of account is one hour of the participant’s time will accumulate hours. But other inputs than labour will be needed. And the organisation/ combination function that is traditionally the role of the capitalist must be recognised, allocated and rewarded.

The multi-functional complexity of mainstream money is non-trivial to replace. But as bubbles burst around us, it is increasingly clear that over-complex entities are prone to fragility. Re-engineering money offers us the chance to imagine and create a more sustainable economic infrastructure.

Endnote

[1] For an overview of the different functions of money see the introduction of Richard Douthwaite’s Ecology of Money.

Podcast- Nicole Foss (Stoneleigh) of The Automatic Earth on Currency Issues: Part 1

Off the microphones of Nicole Foss, RE & Monsta

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Aired on the Doomstead Diner on August 28, 2013

logopodcast

Discuss at the Podcast Table inside the Diner

How will the monetary system implode on itself?  Will Inflation, Hyper-Inflation or Deflation rule the day as the system seizes up?  What will occur with Asset Values and Derivatives?  Who has the strongest claims to underlying wealth remaining in the system?  Can Gold & Silver substitute for a failing Fiat Monetary System?  How will the Just In Time Shipping paradigm react to dislocations in the Credit Markets?  Will Financial Contagion overtake the Supply Chains?

These and other questions are discussed in the latest Diner Podcast with Nicole Foss, Stoneleigh of The Automatic Earth.  Nicole is a former Editor of The Oil Drum Canada, and was a Research Fellow at the Oxford Institute for Energy Studies, where she specialized in nuclear safety in Eastern Europe and the Former Soviet Union, and conducted research into electricity policy at the EU level.

The second part of the Podcast with Nicole will focus on Energy Issues, and will be available for listening on the Diner next week.  In this podcast, Nuclear Energy will be discussed as well as Renewable Energy issues.

In addition, in the next few weeks, the Diner will begin Vidcasts featuring multiple Bloggers, Researchers and Authors discussing and debating the various topics of Collapse Dynamics.  The first of these Vidcasts will be focused on the upcoming Occupy Monsanto demonstrations scheduled for September 17, 2013.  However, if the War in Syria escalates over the next couple of weeks, this may provide additional discussion material.

I discuss the Upcoming Diner Vidcasts in the next Episode of I Spy Doom.  You get a nice little tour of the Last Great Frontier of Alaska from the Passenger Seat of my Ford Explorer SUV in this one also.  LOL.

RE

Catastrophic Shocks in Complex Socio-Economic Systems—a pandemic perspective

Off the keyboard of David Korowicz
Podcast off the Microphones of David, RE & Monsta

Article Published on FEASTA on July 19, 2013
Podcast aired on the Doomstead Diner on July 20, 2013

logopodcast

Discuss at the Podcast Table inside the Diner


The globalised economy has become more complex (connectivity, interdependence, and speed), and delocalized, with increasing concentration within critical systems. This has made us all more vulnerable to systemic shocks. This paper by David Korowicz provides an overview of the effect of a major pandemic on the operation of complex socio-economic systems using some simple models. It discusses the links between initial pandemic absenteeism and supply-chain contagion, and the evolution and rate of shock propagation. It discusses systemic collapse and the difficulties of re-booting socio-economic systems.

Download the paper

Related posts:

  1. Sustainable currency and the green economy: An Irish perspective
  2. Trade Off: Financial system supply-chain cross contagion – a study in global systemic collapse
  3. Comment on Liquidity Networks: local trading systems using a debt-free electronic currency by Bruno Ricardo
  4. Energy & Food Constraints will Collapse Global Economic Recovery
  5. Seeing Systems: a short course on applying systems thinking

The Greatest Risk

Off the keyboard of Steve from Virginia

Published on Economic Undertow on June 13, 2013

oilwell

Discuss this article at the Epicurean Delights Smorgasbord inside the Diner


Stock Charts 061313

Figure 1: if a picture is worth a thousand words, a chart should be worth more … in this case a lot more than securities listed on various Asian stock exchanges right now.

Conventional analysis suggests not-quite soothing words from the Federal Reserve Chairman and The World Bank as the cause for Wednesday’s market rout in Asia. The focus should be on Japan’s trade deficit; that country has become a failed exporter/mercantile state.

This failure gives pause to the other nations who are also exporters or whose ambition is to become one. Due to persistent high energy prices and the associated burden upon credit, the exporters’ customers are broke and unable to finance their own consumption, they are in turn unable to subsidize the consumption of others.

It is indicative when the only exporters who can afford ‘junk’ right now are the energy producers … because of high prices these producers can afford too much junk! The result is more wasted energy resources and less fuel to export.

What is emerging are the effects of Peak Oil. Supply constraints relative to increased demand lead to generally higher prices with all the associated credit consequences; these in turn effect Japan and other top-tier exporters ‘on the bounce’ as customers’ ability to meet high prices is diminished/destroyed. Afterward, the prices for goods including fuel decline as any price no matter how low is out of reach. There is the race for the bottom, the process feeds on itself, it is ‘energy deflation’: countries like Japan are perched at the edge of it.

The ‘cost’ of loans taken on to buy Japanese goods in years’ past reaches forward to ration purchases, today. Very little of Japan’s export trade — mostly cars and electronic gadgets — provides any return for the purchasers, this means little in the way of income to retire debt. Instead, there is perpetually rolling loans over plus the tricks by central bankers to shift the lenders’ risks onto others, none of these tactics are enough to support gigantic industrial economies for more than shortest periods. As risks emerge like vampires from out of coffins, there is less desire for customers to either take on new loans or for lenders to offer them, or for capitalists to hold securities for a future that is ever-less likely to arrive.

 

Global Stocks Slide as World Bank Pares Outlook; Yen UpGlenys Sim & Stephen Kirkland (Bloomberg)

Global stocks fell, sending the benchmark index to a seven-week low, after the World Bank cut its growth forecast amid concern central banks will pare stimulus. The yen and Treasuries advanced while Portuguese bonds declined.

More than $2.5 trillion has been erased from the value of global equities since Fed Chairman Ben S. Bernanke said May 22 the central bank could scale back stimulus efforts should the job market show “sustainable improvement.”

The global economy will expand 2.2 percent in 2013, the World Bank said yesterday, paring a January forecast of 2.4 percent. The Federal Open Market Committee meets next week after the Bank of Japan this week left its lending program unchanged. Stocks have plunged 5.4 percent worldwide from their May 21 peak this year on speculation the Fed may ease stimulus.

 

Stocks fluctuate, daily movements don’t matter, what does is the market dependency on monetary cheerleading and moral hazard … followed by hiccups when the cheerleading is revealed to be something less than adequate to the task at hand.

Markets want unlimited state support at the exact same time the market cannot tolerate their being perceived as being dependencies. Monetary authorities are anxious to provide whatever they can in the way of support for markets at the same time they dare not be caught out by a panic or over-extended. Here is a paradox: to gain the ability to provide support the central bank must withdraw it … even when there are severe consequences to doing so. This is the gist of Chairman Bernanke’s “tapering” remarks. Should markets stagger when monetary authorities are offering what is in effect unlimited credit at very low cost, there is are no additional remedies the authorities can effectively offer. The central bank must curtail its support now … so that it might be able to offer unlimited credit again in the (near) future.

The central banks cannot lower interest rates further because rates are already near-zero; they are negative relative to inflation, the demand for credit too modest to press rates. Central banks can lend against collateral but are already doing so to the degree there is a severe shortage of acceptable collateral. The central banks have exhausted ready resources … just like the rest of us.

Walter Bagehot famously remarked, “John Bull can bear many things, but he cannot bear two percent.” A rate too low for Victorian English would be dangerously, perhaps fatally high, today. Such a rate might also be unobtainable, at least for self-issuers of credit. For those borrowers where credit is not natively available such as within the euro-zone, there are credit embargoes and crushingly high rates. What matters isn’t price as much as the certainty of being unable to earn enough from the use of the loan so as to retire it.

This in turn illuminates our fundamentally unproductive nature of our physical economies: output emerges from lenders rather than from factories which must be financed by debt before they can be built … and before the first products can be spat out of them and sold. Our factories make us modern, that being so they are fashionable; we like our factories and their cheap output of mostly useless junk. It does not matter to us that the factories are unable to pay their own way. We can borrow using the factories and the junk that is produced in them as collateral. In return, the financiers use our own lust for modernity, our insecurity, to obtain dominion over us. We obey the financiers’ commands otherwise they withhold credit. Without credit there are no goods, no progress, there is nothing; we are creatures of bankers and tycoons: “I borrow, therefore I am.”

We are also creatures of petroleum, without it everything comes undone including finance …

Marginal Oil Cost 061313

Figure 2: More marginal crude price increases, from Bob Brackett/Bernstein Research/Business Insider, (HT Glen):

Bernstein suggests higher crude prices are in the offing as the Shale Oil Revolution is revealed as a dud. As noted previously, new plays offer less crude per driller dollar than previous conventional plays. As these last are depleted the amount of available oil declines — Peak Oil.

Bernstein does not indicate how customers who cannot afford today’s high prices will somehow magically afford higher prices in the future. More likely is a steady decline in prices as bank accounts and credit are emptied out, as per Japan. When folks become broke they cannot afford fuel even at the lowest price.

Meanwhile, bankruptcy lurks in the shadows of even putatively prosperous countries as they confront Peak Oil:

Unrest in Sweden among frustrated emigrants, many from the Middle East, who have been left out of the general prosperity. Riots are the outcome of a police killing and include the burning of dozens of cars.

Sweden Oil Consumption 061313

Figure 3, map by Mazama Science (click on any chart for big): Cosmopolitan Swedes would suggest that the country’s 2.4% decrease in fuel consumption over the past year was due to greater efficiency. It is more likely that the savings have been extracted from those at the bottom of the economic food chain: Islamic immigrants from the Middle East.

Few vehicles were hurt in the making of this Turkish video but hundreds of Turkish youths wound up in hospitals nursing wounds at the hands of police.

Turkey Oil Consumption 061313

Figure 4: Red everywhere: Turkish petroleum consumption relentlessly increased until about 2008 as Turkey morphed from a military dictatorship to a neo-liberal market state. The country is now facing hard limits, its fuel consumption is set to decline. Turkey has very small reserves of natural gas and crude petroleum. The country’s energy policy includes an all-out assault by the establishment on the country’s most vulnerable citizens; those to be excluded from current and future fuel consumption. With less to go around, bosses and their cronies reserve access to fuel to themselves, this can then be sold on the black markets, while the citizens are left to fend as best they can.

More signs of status-quo unraveling in real time are seen in China, the Chinese lending edifice looks to be cracking, (Bloomberg):

 

China Everbright Bank Co. failed to repay 6 billion yuan borrowed from Industrial Bank Co. on time yesterday because of tight liquidity conditions, Market News International reported today, citing three unidentified people in the interbank market.Industrial Bank said market speculation that Everbright Bank failed to repay it more than 100 billion yuan was “untrue and exaggerated,” according to an e-mailed statement from the lender. Everbright Bank said in an e-mailed statement that its relationship with Industrial Bank is good and that “all liquidity indicators for Everbright Bank are good.”

“Some smaller banks may be unable to cover cash openings as big banks are unwilling to lend cash,” said Chen Jianheng, a bond analyst in Beijing at CICC, the nation’s biggest investment bank. “If the central bank doesn’t inject more capital into the financial system, the cash shortage will probably last for the rest of June.”

 

The Chinese say everything is fine but money markets suggest otherwise as there is a scramble for liquidity with many left out (like the Chinese government). As in Japan there is a shortage of funds and a central bank trying to keep up, (Bloomberg):

 

China PBOC Halts Open-Market Operations First Time Since MarchChina’s central bank refrained from draining funds from the financial system for the first time in three months after a cash squeeze pushed up the overnight money-market rate to an all-time high.

The People’s Bank of China hasn’t offered repurchase contracts or bills today, according to two traders required to bid at the auctions. Two calls by Bloomberg News to the PBOC’s media office went unanswered. The central bank has held repo operations every week since February to drain cash and resumed sales of bills in May for the first time since December 2011.

The overnight repo rate, which measures interbank funding availability, touched 9.78 percent on June 8, the highest since May 2006, when the National Interbank Funding Center started compiling the weighted average. China’s financial markets were shut in the first three days of the week for the Dragon Boat Festival holiday. The rate was at 6.32 percent as of 10:39 a.m. in Shanghai today, little changed from June 9. The seven-day repo rate dropped 34 basis points to 5.63 percent.

“If the PBOC sold repos or bills today, the market would have collapsed,” said Liu Junyu, a bond analyst at China Merchants Bank Co., the nation’s sixth-biggest lender. “The cash shortage hasn’t eased and banks are still busy borrowing money.”

 

China exporters with dollars in hand offer them to private lenders for yuan instead of swapping at the official rate with the Chinese central bank, (Caixin):

 

Money Supply Grows on Banks’ Continuing Forex Purchases

Financial institutions’ net acquisitions continued for fifth straight month, putting pressure on central bank to actLi YuqianThe country’s banks bought 294 billion yuan more in foreign exchange than they sold in April, posting the fifth straight month of net acquisition and increasing pressure on the central bank to control money supply.This comes on top of nearly 800 billion yuan in new bank loans. By the end of April, the broad measure of money supply, M2, had increased by 16.1 percent from the first four months of last year, outpacing the government’s target of 13 percent.In response, the central bank used open market operations to absorb liquidity, resuming bills sales for the first time in 17 months on May 9. This is in addition to regular repurchase agreements.

The surge in money supply coincided with a jump in the yuan’s value against the U.S. dollar. The central parity rate of the yuan against the U.S. dollar climbed to a record high at 6.1980 on May 8 and has been fluctuating around it since then.

 

The official exchange rate of yuan per dollars is approximately six-and-a-fraction to one. Inflation in China suggests that private lenders have been buying more dollars than has the central bank, they have been offering a better price, bailing out stressed export manufacturers and adding more credit to the Chinese economy at the same time. The China central bank tolerates the private market because it allows the Chinese currency to appreciate relative to the dollar @ the central bank … even as it is being depreciated ‘on the street’ (and in the alleys). What is underway currently is that credit is over-extended both in the official and ‘underground’ markets, there is too much leverage, little in the way of good collateral. So-called ‘shadow bank’ loans must be refinanced when they mature due to the high cost. When refinancing is difficult there are panic shortages of overnight credit. Lenders in China are playing the most dangerous game, ‘Lending Long and Borrowing Short’: there is either too much credit or not enough. Constraining credit to contain speculation and asset-bubble inflation threatens to deflate the bubble all at once causing a crash. So does a bank failure and the associated demand for liquidity.

Like Japan, China relies on a constant flow of subsidy funds from overseas customers: these customers are going broke like everyone else as a result of paying exorbitant fuel prices. Because they are broke, they are less able to subsidize the Chinese. Add this to the top-heavy credit regime in China groaning under its own weight and there is unsupportable risk.

Everything is of a piece: There are fuel shortages due to decades of wasteful consumption = fuel price increases due to supply and demand = customers going broke trying to meet the higher prices = customers who cannot afford to buy non-fuel goods from China or Japan who also go broke = borrowers defaulting and banks failing = less credit/money for fuel extraction = more shortages. This cycle is not something that central bankers can effect. They can mark assets to disbelief and shuffle some risk around but the greatest risk of all is running out of affordable petroleum fuel.

That risk is growing every single day.

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