Fiat

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

All Your Money Are Belongz to US!

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Published on the Doomstead Diner on October 30, 2015

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All over the Collapse Blogosphere, and even in the MSM, the latest greast paranoia is the disappearance of CASH to STASH in the Bank of Sealy.  Tom Lewis on The Daily Impact wrote a post on this last week which I am cross posting today here on the Diner.

Over in the MSM on Biz Insider, they also had a nice FEAR INDUCING article on NEGATIVE INTEREST RATES coming down the pipe for retail banking customers.  In this case, instead of the bank paying you some interest for the priviledge of gambling with your money, you pay the bank so they can risk your life savings on some dogshit IPO like Poop-On or Alipoopoo.

Quite obviously, the Banksters and their Political Puppets have reached the end of their rope here, not to mention having lost their sanity in trying to keep their monetary system from imploding.  In today's rant, we look at why this fucking nonsense cannot possibly work and is the last gasp of a dying monetary system.

Snippet:

…This week in Doom, I do have a specific topic of interest getting a lot of play not just in the Collapse Blogs but in the MSM as well. This is the rampant FEAR that TPTB running the TBTF Banks and their Marionettes running Da Goobermint are going eliminate CASH, aka Paper Notes in favor of an all digibit monetary system. There is a certain amount of irony to this, since the people most upset and outraged are the same people who hate Paper Fiat Notes to begin with! LoL. Just in this case, they hate the digibit money even more, except for Bitcoin which some folks think is a new and more secure form of money itself.

Now first of all, paper money is already only a small fraction of the total pool of notional money currently being pushed around by supercomputers sporting HFT algorithms, a maximum of 10% of the money supply and that is not counting all the notional money wrapped up in derivatives contracts, which nobody knows the actual amount of, just that it is probably more than a quadrillion dollars…

For the rest, LISTEN TO THE RANT!

Golden Showers

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Aired on the Doomstead Diner on December 11, 2014

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Snippet:

 

my_precious…One of the more interesting and somewhat comical manifestations of the ongoing banking collapse, manifested mostly in the crashing currency value of the Yen and Euro but visible elsewhere in skyrocketing Stock prices is the attempt by various countries like Germany, Switzerland and Belgium to “Repatriate” Gold they have stored overseas in the Basement Safe of Da NY Fed and the BoE primarily. Well, it is supposed to be there anyhow…

Why do they want to repatriate said stacks of Gold? Obviously, because nobody TRUSTS anybody anymore, so everybody wants their own hands on their Precious, Gollum style.

Of course, very little of this stuff is actually moving around from one safe to another, various excuses are made for this, but of course the main reason is that there are multiple claims to every Gold Bar in existence, many times over here. It is “leased” out, which is the most preposterous idea you can imagine, HTF does Renting a Gold Bar improve your financial situation? Besides that, there is an enormous amount of “Paper Gold” traded every day, which has no corresponding Gold bar attached to it, it is just a bet on what the current and future price of Gold might be.

To demonstrate how ridiculous this whole deal is though, let us do a Thought Experiment and imagine what occurs even IF all this Gold actually still is in the Basement Safes of Da Fed and the BoE, AND all the countries requesting return of their Precious actually get it back!…

http://www.quickmeme.com/img/de/de7b0d100f2bbdfcb3686fb5c4e35ddb3a1657a43f8c190eff9d1ee0e721a2e9.jpghttp://www.quickmeme.com/img/d1/d131e378f41f1d548fd565cc09cca5c3e60b9d35b3dc82d1465f2494152cc4d3.jpg

For the rest, LISTEN TO THE RANT!!!

Note: For Non-Native speakers of English and folks who prefer to read rather than listen, you can find the Full Transcript of this Rant HERE

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

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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

Clusterfuck Nation Double Feature

Off the keyboard of James Howard Kunstler

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Published on Clusterfuck Nation August 2013

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Nowhere to Run, Nowhere to Hide

August 19, 2013

KunstlerThe Federal Reserve answers only to God, but Ben Bernanke’s must not have known that his boss was such a prankster. All of a sudden here is the interest rate of 10-year Treasury paper rising like an angry carbuncle on Ben’s pale tuchus just when he thought he could sit back and watch the mud wrestling contest between Larry Summers and Janet Yellen.

Poor Ben, sedulous student of the Great Depression, who didn’t notice that the country had changed from a nation of farmers and factory workers to a nation of pole dancers and waiters, now awaits his sublime moment of Hooverization. Like poor President Hoover, he gets to hang around the pilot house half a year after he runs the garbage barge of US finance aground on the shoals of wishful thinking and accounting fraud.

Everyone who has to pay attention to the order of things in the universe — meaning those not stewed on crank or drank, or waiting on line for a SNAP card, or leafing through the tattoo catalog, or waiting for a Kim Kardashian gangbang guest shot on Duck Dynasty, or lost in the alt reality of their cell phone — is suddenly very nervous about the order of things in this little corner of the universe. Sag Harbor is starting to live up to its name and down along the Hamptons the tide has gone out to feed a Tsunami of margin calls that soon will give the phrase “under water” a whole new life in the twisted mythology of capital. The immortal Bill Gross even sent out an SOS on Twitter at the end of the week. No wonder folks have got the heebie-jeebies.

The fear is that the central banks have finally lost control of a situation that they have only pretended to control since 2007, when the grotesque racket of mortgage re-bundling caused a psychotic break in the banking system. The prescribed therapy for that was half a decade of ZIRP and maxing out the national credit card. The ugly truth now emerging through this fog of psychosis is that the bond market probably can’t be saved, and without it all other paper markets are toast, including the stock markets and very possibly the entire fiat currency system.

In the background, of course, is the energy melodrama. How can anybody with half a brain suppose that the late turbo-industrial economy could “recover” with oil priced at $107 a barrel? Anyway, all the “recovery” memes floating around the collective media zeitgeist are based on a handful of doctored and massaged GDP numbers universally known to be false. In short, the USA can’t run the current setup on oil over $100 a barrel and has been trying to compensate for that basic fact by lending itself money. So has virtually every other advanced economy, and now they are all in trouble so there is nowhere to run, nowhere to hide — and for us, nowhere to export our financial quandaries to.

Japan is the most interesting corpse in the pathology lab. It shot its wad twenty years ago and has been self-cannibalizing ever since. It has no oil or gas of its own, and now it has a runaway nuclear meltdown that is getting only slightly less attention than its financial meltdown. I used to think that Japan had no choice except to go medieval. Now I wonder if there will be anything there in ten years but a depopulated archipelago of steaming radioactive kelp. They can’t possibly buy more US treasury paper and must desperately need to dump their accumulated holdings, and when they do they will start a financial chain reaction that will flense the pretense of value from all the world’s sovereign debt paper. It may already be happening.

If you prepare for anything, prepare for a world without financial pretense. Credibility is caught in that riptide developing off the Hamptons. When the water goes out, all you will see is ugly things wriggling in the mud, and when the water comes rushing back in again, all you will see is a spectacle of drowning bankers. The only higher ground to go to will be your local community, if you have one, and even there it will be a struggle to make sense of what has happened to the world.

August 26, 2013

How then did Ben Bernanke finally summon the fortitude to entertain tapering Federal Reserve bond purchases from $85 billion a month to, say, $84.7 billion a month come September 18th, the world may never know, but now the deed appears to be done, in his absence, by remote paranormal transmission, while the other Fed board members, with their attendant economist factotums, servelings, and catamites all beamed the message out of horsey Jackson Hole that they expected — even pined for — the vaunted return to “a normal economy.” Which left many bystanders wondering if that meant a Dow Jones industrial average at, say 3,847 around Columbus Day, the 10-year bond at 5 percent, and every pension fund in world bleeding out from a sucking chest wound — not to mention a Hindenberg-like conflagration of the US Treasury as debt payments went beyond critical.

Pardon me for saying that I don’t think these mooks of finance know what they’ve been paying for with the QE series of monkeyshines. They’ve been creating “money” for five years to offset the collapse of a no-longer-cheap-oil economy. It’s really that simple. If any of these poobahs thinks they can run a “normal economy” at $106-a-barrel then they should run out and get a realtor’s license and buy as many Arizona REO’s as the foundering banks will admit to holding on their books, and then become landlord to renters working 29 hours a week on the WalMart loading dock.

Actually, I don’t think they will have to wait that long to see the consequences of their loose, silly talk. America’s major export is now working its hoodoo in many other parts of the world as currencies become unglued and economies look down at the flimsy bamboo scaffolding that holds them up so high. America’s major export these days is economic uncertainty, specifically the question of what, exactly, will maintain the pretense that the hopelessly intertwined financial affairs of China, India, Brazil, Japan, Euroland, Russia, and everybody else, really, including ourselves, are not unraveling like some kind of cosmic sweater knitted with one needle by a cross-eyed god with the jim-jams.

A lot of people begin to suspect that there is something called “an economy” quite apart from the shenanigans and dumb shows put on by the banks and their imitators, the hedge funds. That actual economy is a very earthy thing, in so far as it is pegged to the biophysical realities of the planet — such as, can you harvest a turnip and therefore make turnip soup for dinner? After all, you won’t be making a soup out of interest rate swaps. Of course, dining on turnip soup is not as sexy as driving to work in a Tesla to a hedge fund boiler room where you get to cream off millions every week by playing Where’s Waldo with the rehypothecated accounts of the muppets who foolishly entrusted you with their own ill-gotten savings.

The nervousness out there is palpable and epochal. Not only is everyone waiting for some other shoe to drop after Labor Day; they’re waiting for it to drop on their own heads. The most visible result, I think, will be a shocking flight into precious metals, of which there is precious little to meet the kind of demand soon to overwhelm that teeny-weeny market corner of the financial universe. What else is there now? The Fed taper talk is pretty much a case of holding a gun to a puppy’s head — the puppy being the equities markets. The bond sector is a hall of mirrors. Cash is a lot less than king in several countries now, with the contagion running hot. Everything is mispriced to the upside except Gold and Silver, which are mispriced the other way, especially after the chicaneries of April and June when, depending on which story you believe, the banks ran a naked short campaign to knock the stuffing out of the metals so they could then go back in and hoover some of it up cheap in an attempt to conceal the multiple out-leasings (that is sale, or perhaps theft) of metal left by fools in their custodial charge. Or, some other sages might say, the knock-down was done to defend the honor of the evaporating US dollar (a dollar with the vapors), making it appear sturdier than it actually is. Yes, well that worked, sort of, for a few months, while Wall Street repaired to the annual East Hampton endorphin splash. I was not invited to Diddy’s party, where the pineal glands of the gathered .01 percent were audibly ringing with celestial euphoria as they swapped the reassuring pulsations of their own specialness. Those people, you can be sure, were not pining for a “normal economy.”

Long story short: we’re in for some interesting weeks ahead. Keep your hat on.

The Future of Money

Off the keyboard of RE

Published April-May, 2010 on Reverse Engineering

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Note from RE: File this article under “the more things change, the more they remain the same”.  What follows is an exchange I had with Toby Russell, a quite brilliant Brit 3 years ago on Reverse Engineering, pondering on the Economic Issues of the day and the Future of Money.  We rehearse these questions now on the pages of the Doomstead Diner for a somewhat larger audience, but in all honesty in 3 FUCKING YEARS, not a whole lot has changed here as of yet and the same questions remain to ponder on until they do.

Toby and I had many a great chat on the subject of money, and inside the Diner I will paste a few more of them.  With luck, Toby will find his way to the Diner as well, and we can renew, refresh and update the $64,000 Question on the Future of Money in the post-Industrial Economy.

RE

To begin, from my keyboard:

Who ARE the Bond Vigilantes?

Exactly how the monetary system will come apart remains an open question, but more and more each day you see a structure developing for the collapse.  It comes in the form of the internal battle between Nation States and those who have “invested” in Nation States in the Bond Market, which in Europe is currently in a Death Spiral that can only be slowed if the Sovereigns “guarantee” the bonds currently being repudiated by whoever it is who buys those bonds. The so-called “Bond Vigilantes”

So who really ARE the Bond Vigilantes, and WHO is the “market”?  Its not J6P for the most part, I mean who buys Greek Bonds with their spare change?  In aggregate J6P who actually HAS  401K might be buying some of this trash as part of his portfolio, but inr reality most of this trash is bought by the Big Banks as proxies for the Iluminati.  Once it starts to go BAD, they want to offload it all onto the balance sheet of J6P the taxpayer, that is what Bailouts amount to.

There is a BIG confusion in using the term “market” when it comes to the dealings of Big Capital.  Most people think of the market as the aggregate of what all the people in society are buying and selling, but that is not true at all with respect to sovereign debt.  The massive TRILLIONS in debt that are being issued these days by Sovereigns all over the globe cannot be absorbed by the savings of J6P, because the money didn’t exist before to buy it.  It really can only be bought by the Big Banks who can Borrow money from the Central Banks at close to Zero Interest.  The CB then writes the money into existence and loans it to them.

It’s all a big Circle Jerk, and the end result is it loads up all the bad debts on the balance sheet of the Taxpayer, which the taxpayer cannot actually pay because he is Unemployed and no longer pays taxes, so the Bond Vigilantes/Big Banks drive the interest rate up still higher for borrowing.

The problem is coming to a head now, and it pits varying Pigmen and various arms of Da Goobermint against each other.  Neil Barofsky has a plethora of litigation ready to undertake here that will make the little SEC lawsuit against the Squid look like child’s play.  T will be undertaken also, because the Political Survival of most of the apparatchiks depend on finding Scapegoats.  Besides that, you have lawsuits that will be filed on behalf of States that got fucked by the Banksters along the road as well.  Pigman vs.Pigman, the battle begins.

Greece is and remains Small Potatoes in this battle, but what is done here to Bail them out only sets up bigger bailouts for the other Hostages to the Banksters, the rest of the PIIGS.  Because their debt is “risky” now, the “Bond Vigilantes” are driving up the debt costs for the other nations also.  Which means they also must seek a Bailout. Some pundits think when this hits Spain the market will choke on it, maybe so maybe not.  However, its also going to eventually hit the FSofA market after all the weaker chickens have been slaughtered here.  Nobody is out there to Bailout the FSofA sovereign, not even the Chinese, because they hold the debt already, into the Trillions.  That is their “savings”. No reason to buy MORE worthless toilet paper for the Chinese.

So, the only “out” here is for the FSofA to buy its own debt in perpetuity, issuing more and more paper.  Hyperinflation of the money supply, but not necessarily hyperinflation of prices until and unless those newly created dollars start filtering out of the system into the hands of J6P, which is nowhere on the horizon.

The reality here?  Goldman Sachs, JP Morgan Chase et al are now engaged in a circle jerk trading with themselves, they ARE the “market”. They can keep propping it up so long as the CBs keep issuing them Interest Free Money to speculate with.  Problem is of course, that is just driving the sovereigns into ever deeper bankruptcy.

Eventually one of these sovereigns will crash, and nobody will bail them out.  The CDS will trip, and then the House of Cards will crash here.  Still has a coupel of layers to go though.  They will print the money to Bailout Greece, and probably Portugal and Spain also.  When the Debt Tsunami hits the ISSUER of the Debt, the Federal Reserve Bank, then it will come to an end.  How long will that take?  Based on progress since Bear Stearns of upward Cascade Failure, my guess is 2 years.  In the meantime, Volatility is going to be WILD. Very hard to pinpoint what asset class or what Sovereign will be the next target of the Bond Vigilates. However, target them they will, because they have to make a PROFIT here.  The only way to do that is to turn the world into their Debt Slaves.

RE

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From Toby:

I’m getting very interested in MMT, as I have posted at my blog. What we are really saying when we argue there is too much debt (there is) and this sucker is going down, is that money is the most important thing there is, that nothing can be done about it, someone’s got to pay, and so on. But in reality of course money’s just so much numbers. Ecological issues aside, real wealth is not diminishing, only debt obligations are growing. What do we do about this? Drown in our idea of what money is, or redesign it?

MMT would embrace the printing of money, by spending it into the economy interest free, into education, infrastructure etc. Tax is seen as nothing more than a drain when things start to inflate, and the issuing of and buying back of gov debt is used to control money supply and interest rates. The chief difference in printing money for the economy at J6P level rather than for the bigbanks, is that the money actually gets to do something, instead of digging deeper debt holes as the pigmen sociopathically destroy the horse they rode in on, battling it for the “honour” of delivering the final blow.
MMT welcomes fiat, seeing it as the chance to free money creation from the private credit institutions, whose activities, in the absence of a gov spending money into existence, represent an institutional ponzi scheme, one that is dragging us all down as we speak. To separate gov from credit institutions would be also to remove them from lobby power and make taxing far more effective, which would stop the vast imbalances of wealth we currently see. Gov would not rely on the pigmen. Pigman loses his leverage, gov can start to function as it should. So the theory as I have been understanding it.
I’d be interested to hear what others see in this new take on how to do money in a modern economy. Bill Mitchell’s blog has masses of work to lay out the basics: http://bilbo.economicoutlook.net/blog/ And there are two posts on MMT at my blog: http://thdrussell.blogpost.com
Cheers
Toby
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From RE:
I read through some of Billy Mitchell’s Blog and through a couple of your posts
on MMT as well. Many of the concepts we have covered in the past seem to be a
part of this. You seem to favor these days offering up the whole panopoly of
currency forms here, from Demurrage money on the international level to a
variety of state and local currencies all operating at the same time.Clearly, if this was actually operating on the local level commerce would be
quite the bear for your local Convenience Store clerk. You show up at the store
with some of RE’s Moosechips, and the clerk has to check to see first if MCs are
on the list of currencies he is authorized to take. Then he has to check the
daily (hourly?) exchange rate for Moosechips to price out the merchandise
against whatever currency it usually is priced out in. Granted, the Computer he
uses probably could be programmed to do this all automatically and even monitor
exchange rates in nanosecond intervals, but its still going to mean a drawer
full of lots of different notes, and how do you make change?Next problem is exactly how do you save your money? Do you save it in
Moosechips? This is kind of like the problem people who worked for companies
that paid in their own Scrip faced. Its only good for buying stuff at the
Company Store, and when the Company goes outta biz, its worthless Toilet Paper.
Sort of like what will happen when the FsoA goes outta biz on the grand scale.
LOL.

Beyond this, I don’t see how having many forms of currency operating resolves
the Interest problem. People who Loan out money will still expect Interest on
it, elsewise there is no point in loaning it out. With many currencies
operating, the problems you have now of unscrupulous Banskters creating more
notes than they actually have assets to back them up would be even more
intractable than it is now.

Clearly on the International level the Top Level Demmurage Money has to be used
as a settlement form, and a 5% Demurrage is liking saying you have 5% Inflation
all the time. If you aren’t growing faster than that you are gonna be losing
money. Is there room for 5% Growth in our real economy? Considering the Energy
problems we have even BEFORE the Big Spill, I think we would be lucky to keep
the Shrinkage at 5%, which is a total 10% differential between the Demurrage and
the Negative Growth rate.

As bad as our Money problem is, the real problem here for the Industrial society
remains the Energy problem. For the Transportation portion of this economy, its
more than that, its Portable Energy as well. The society needs to be
restructured along lines which require less movement of goods and people around
and a slower pace of life all around. Unfortunately, all the infrastructure we
have built here is built around precisely the opposite concept, and REBUILDING
it now with substantially less Available Energy per capita will be quite
difficult, if not impossible. Of course, a 90% Die Off of the Human Population
would solve the per capita problem by lowering the denominator, but this is not
a concept most people consider a good solution.

My guess here remains that the current monetary system we are using is going to
continue onward here in Epic Fail mode for a while yet to come, exactly how long
I am not sure. Whether it reaches a Critical Point that results in a Sudden
Stop Event or whether it just continues to deteriorate and we all slowly Boil
like Frogs also is open for debate. If/When the Dollar fails completely,
likelihood would be states and local communities will substitute their own
currencies, but even if well managed and temporarily successful all will also
collapse due to the interest problem in a negative growth environment. It
doesn’t matter if you put a Demurrage on the Money of 5% or Inflate the currency
at 5%, it’s the same result in either case. In fact 5% is even more onerous
than the 2% or so Inflation the Fed sets as a Target Rate, so I expect you would
see a monetary collapse even faster than the typical 60 –80 year cycle we see
now.

So, is it all HOPELESS and we are just spinning our wheels here to no purpose?
Well, if the hole they poked in the crust of the Earth down in the GOM keeps
spilling out PUSS here, yes its quite hopeless and worrying about what kind of
money we are going to use in the future is a massive waste of the short time we
have left breathing the last Oxygen the phytoplankton produce for us. However,
on the slim chance that the Bozo Engineers who popped this pimple can plug it up
and we are not currently experiencing the beginning of a new Permian Extinction,
the exercise is worthwhile. Not so much for us in this generation, but for
those a few generations down the line AFTER the great Die Off is finished.
Perhaps we can leave a legacy for them of how they can build a Better Tommorow
and NOT make the same mistakes half a millennia of Capitalism led us into here.
Talk about EPIC FAILURE of an economic system, Capitalism is going out with a
mighty Big Bang here. Yeesh.

RE

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From Toby:
Local currencies are already in operation and work in the various ways
they work. It is not about some guys saying accept my MCs because I say
so, or the two of us agree so, but is more well thought out than that.
I’m not going to go into all the details, but there are variants out
there in operation and have been for a while. Time will kill off the
weak ones, and favour the strong, as it always does.As for the demurrage currency, that is global and for investment and
international trade purposes only, not for saving. The demurrage
inspires investment in projects which have long term value. See the
Bernard Lietaer talk: http://vimeo.com/6491175for more details.Interest/usury still acts as it does now on the natinoal currency, as a
kind of vacuum cleaner on fiat national currencies and spur to savings,
so people will get into debt and so on, as the prudent will be able to
save, though the kind of future the changes I hope for would initiate
would change plenty, perhaps even how saving and retirement works. But
when big problems through over indebtedness arise there won’t have to be
any bail outs. Those banks that got too greedy have no leverage on the
sovereign to save themselves with, because the sovereign controls money
supply with the tools laid out in MMT (existing tools actually like
taxation and bond issuance and purchase). Life would still have its
financial ups and downs, but they would not represent systemic threats.
The ride would be a bit smoother.All of this is moot in an energy crisis, as you say, but the viable and
working alternatives to oil are out there (unless that GOM spill undoes
everything — time will tell). Also an absolute necessity is the death
of our lust for eternal GDP-growth and a corresponding transition away
from consumerism. MMT offers an attitude to money which allows us,
culturally, to be more open minded about where value lies. To my mind
real value lies in healthy relationships: ecological, socioeconomic and
societal. Technological unemployment could be embraced too by a more MMT
way of thinking about the economy, which would help us review what we
are alive on this planet for, and the kinds of activities and behaviours
which really make life sustainable and enjoyable.So in the end this is going to be about striking the right balance
(isn’t it always?). It’s not just Joe’s currency versus Jack’s, versus
fiat versus the Terra (Lietaer’s suggestion for the global demurrage
currency), but other things too, outlined above. To me MMT is but one
important plank in all this, though perhaps the first that needs to be
laid down, because the way most people think of money and value, they
seem prepared to let the world go down for money’s sake. That’s plain
stupid, and I don’t want any part of it.Toby

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Whither Gold?

Off the keyboard of RE

Published on the Doomstead Diner on April 14, 2013

Discuss this article at the Economics Table inside the Diner

The financial story of the weekend is the 4% hit Gold took going into the weekend, dropping $88 to finish below $1500/oz. The fall isn’t limited to just this week though, it’s been ongoing since Gold hit it’s peak at around $1900/oz back in early 2011. Predicitions from the Gold Bug crowd at the time being that Gold was set for Parabolic Liftoff, heading for $5K or even $10K/oz. Never happenned of course and it’s been on a pretty steady downward track since Q2 of2012.

What’s happening and why? One important factor most recently was the collapse of the Cyprus Ponzi, which led me to short Gold a couple of weeks ago.

There also is likely a Margin Call Event coming down the pipe from this in Europe. It will force Liquidation of Assets across the board, and the Eurotrash have a lot of Gold. I forsee a massive Collapse in the PMs market when the Euro Collapses. I think it is a 6 month-1 year timeline. Disclosure: I am going to short PMs and go LONG on the Dollar through this Shitstorm.

While the Cyprus Event accelerated this trend, it’s been ongoing in Eurotrashland for quite some time, everybody is liquidating assets trying to get out of the Euro Sewer. Thing is, it’s not so simple as just trading a pile of Euro Toilet Paper for a Shiny Paperweight.

The folks with large positions in Euro based assets don’t really HAVE a lot of Euros stuffed in Mattresses, they are leverred Hedge Funds who have to liquidate one asset to buy another, and if they are liquidating into a losing position they are getting progressively deeper in the hole. The have to find an asset INCREASING in value as fast as everything they have is losing value just to stay even. What is increasing in nominal value? The Stock Market of course, because that is what Da Fed is propping up! You don’t wanna buck Da Fed, so you don’t buy Gold, you buy APPL if you are a Eurotrash Hedge Fund manager looking to reallocate assets.

The next issue you have to deal with is “who has money?” and “who has Gold”?  The reality here in the FSoA (and in Europe and China too), is 80% of the population has no more in the bank than a couple months worth of Bills, which they need to keep liquid and in the bank to pay those bills. They can’t realistically keep this money in gold coins in the basement safe, run to the coin dealer when they need to pay a bill, convert it at whatever the spot rate for the day + the dealer’s charge to dollars, run to the bank and deposit it, then write a check on this to pay a bill.

Similarly, any company still in Bizness isn’t paying their employees in Gold Eagles in little Pouches, they have a Payroll Account and are paying in Dollars or Euros. Similarly, they have accounts to pay their suppliers and pay their fixed bills. They can’t keep all this money in Gold and liquidate as needed to pay bills, it’s all moving around too fast for that from one persons account to another. This is where most of the MOVING money in the system is, it’s not in large stashes of cash that some squirrels could take and shift to Gold coins to “store value”. Not to mention, when you go from $1900 to $1500 in the course of 2 years time you are LOSING money at 10% a year, which is not a great store of value. Maybe long term gold coins hold more value than fiat, but short term for the last 2 years they got HAMMERRED.

After looking at where the Money is, you gotta look at where the Monetary Gold is. When I say Monetary Gold, I mean the BRICKS of Gold held in the CB Safes, not Gold Wedding Rings, which generally don’t get sold off until somebody is really hurting. The only people with large amounts of Gold to SELL are the CBs, Sovereign Wealth Funds and a few Illuminati. They can either Dump gold on the market if they want to see the price go down, or Buy it if they want to see the price go up. Gold Bugs call this “manipulation”, but it’s what any pigman does when they hold a near monopoly position in any commodity. That is how the Game WORKS.

What is most curious here is that DESPITE the fact CBs are BUYING gold, the price is still going DOWN. What that tells me is that Hedge Funds are liquidating Gold positions faster than the CBs can or will buy that gold at the moment. Which only makes sense, because it is the Hedge Funds that are NOT quite TBTF that are in the deepest doo-doo, especially in Europe. Certainly the Ruskie Mafia in Cyprus got hit hard here, despite the fact the better connected escaped out the Back Door in the City of London.

So what is the medium and long term prognosis here for the PMs? Well, since de-leveraging in Eurotrashland still has quite a ways to go here, downward price pressure on Gold is likely to remain pretty strong, and you would have to count on Da Fed and the PBoC to buy it and keep the price propped up. In this respect, Gold Bugs should be GLAD the CBs are manipulating the market, because if the PBoC STOPPED buying, in all likelihood the floor would drop out from under Gold. Like with the Bond Market though, the CBs will try to keep any given asset class from being abandoned en masse by buying it. What level the CBs see as “right” for Gold is hard to say, and depends a lot on political machinations. My guess is a floor around 1350, but subject to change if/when TSHTF in the Nip Bond Market or Italy or Spain go Tits Up. Then you are likely to get wild Volatility and Fluctuations as liquidations are undertaken and the hoi polloi scrambles to dump whatever Toilet Paper they are holding in favor of what shiny paperweights they can locate.

Finally in this mix is general psychology, which is not the same amongst the vast majority of Homo Sapiens as it is amongst Doomers. Doomers see the End Game as IMMINENT, so those who do have some “wealth” are putting it into Possessible PMs if they believe in this asset class as a store of that wealth. Long term they do likely hold more value than Toilet Paper, but how much more is a very open question. For most people here in the FSoA and stronger Eurotrash economies like Krautland, while they may not be happy with their Goobermints they don’t see them as in imminent danger of collapse. Current Boomers and Silents receiving Social Security checks don’t see it likely the check won’t arrive next month, and they are likely correct in that assumption. Overall, the number of people who BOTH see collapse as IMMINENT and HAVE enough money to drop a significant amount of it into PMs as a choice is EXCEEDINGLY small both relative to population size AND relative to the centralized wealth pools controlled by the CBs as proxy for the Illuminati. J6P can’t push around the prices of these asset classes, he doesn’t have a big enough slice of the financial pie with which to do it. So one can only assume that those who do hold the vast majority of Monetary Gold will manipulate the price best they can until the Plug gets Pulled at some other end of the financial spectrum. When that occurs, it’s hard to predict where the CBs will put their support behind, but not sure it will matter either because the system in general will be so out of whack that no commerce will be moving anywhere.

In that longest term outcome for this post, I would agree with the Gold Bug that Gold will hold more value than Fiat does, but probably not by a whole lot and it will be difficult to keep, difficult to exchange and likely taxed to beat the band as well.  Right now, it’s mainly a specualtive medium, a GAMBLE only to be taken if you can afford to lose the bet. I sure would not leverage gold Short or Long now, it can swing as wildly as Bitcoin. Like all the rest of the financial markets it is a CRAPSHOOT.

Gold has some appealing properties which made it work both as Currency and as a Store of Value during the expansionary period of the Money game in the community of Homo Sapiens.  Its chemical properties make it difficult (impossible without Nuclear chemistry) to produce at will, thus you can’t “counterfeit” real gold, though you can of course do metal dilutions that are difficult to detect during typical commerce.  It lasts essentially forever, doesn’t rust, hell it’s even impervious to that most corrosive of environments, sea water. Still TONS of gold sitting at the bottom of Davey Jones Locker in basically the same condition it was when a Spanish freighter was sunk by a French Privateer.

Regardless of those qualities, to function as Currency, Gold had to be widely distributed, which it once was but no longer is.  Because it was perceived as a store of value, it was over many millenia CENTRALIZED into very large pools, which really don’t ever get redistributed, they just wheel them from one cage to another in the basement of the FRBNY. I’ve never run into a Gold Bug who could plausibly explain to me how these huge piles of Gold would ever be broken up and redistributed out to J6P as Coinage to use as currency.

As long as there ARE big centralized Piles of it, whoever controls those piles controls its “going price” on the market, not selling any if they want the price to rise, dumping if they want the price to fall.  It behooves those in control to keep a floor price under gold, but also not to let it rise to stratospheric levels, because then it loses representative value. Put it this way, if Gold were to rise to $10K/oz, 10 1 oz coins could buy a nice Doomstead in the Ozarks. Happy Days for a Gold Bug if that were to occur, but a highly unlikely outcome here.

Nowadays, the PM market is a Casino, mostly well controlled by those who control vast quantities of it, and also control the Mines where it is dug up from under the ground as well.  If you do have a lot of extra spare change and place a Bet on the PM Number on the Roulette Wheel, you’re probably better off than holding Euros, but in the near term not better off than holding Dollars, especially if you are leveraged, which just about all hedge funds are, and Sovereign Wealth funds also for that matter. As a future Currency, Gold holds very little promise, its mostly well sequestered into Safes controlled by others far more powerful, and it’s not ever coming out of those safes for redistribution.  Its value is just PERCEIVED value, not Utility Value.  Unlike a gallon of Gas, it won’t make your SUV go anywhere.  Unlike a patch of Land in the Ozarks, it won’t grow any food for you to eat.

Most of all, unlike Friends, Gold will not stand by your side and help you protect and defend you children and loved ones. Bet on something you can depend on. Bet on your FRIENDS. Bet on COMMUNITY. That is the FUTURE, not Gold and not Money.

The ROOT of all EVIL.

RE

 

The Golden Blind Spot

Off the keyboard of Monsta666

Discuss this article at the Economics Table inside the Diner

It is often said by people who support gold backed currencies that the chief weakness of fiat currencies is it encourages governments and central banks to issue excess amounts of money/credit. While this fact is true it would be a mistake to think this is the main reason why currency devaluation occurs. This is because the issues of overleveraging are primarily problems that stem from the private sector as most money generated in the economy comes from COMMERICAL banking and NOT central banking. In fact depending on sources or the countries in question the amount of money/loans generated as a result of fractional reserve system can be 97% or perhaps even higher if one includes other complex financial instruments such as derivatives in the total money supply.

This excessive money creation can lead to catastrophic results to the national currency if no measures are taken to limit this over expenditure. This over expenditure is present in all monetary systems both fiat and gold based currencies because each system operates with a fractional reserve system. The fiat currency maybe marginally worse because the central banks can encourage even more overleveraging as none of the new money issued by the central bank is bound by gold reserve requirements. This component of money creation only constitutes a small part of total money creation however despite assertions you may hear from Ben Bernanke.

Still, despite this relative small amount of money generated through QE or simple naked money printing this form of money creation can lead to some significant results. As this new money is issued it will enter the commercial banks and due to the process of fractional reserve banking this money can be multiplied creating further inflation in either the real economy or various asset classes such as houses or stocks. In fact this process is called the money multiplier effect in Monetary economics and this is one reason why this practice is promoted by Keynesian economists who wish the governments to issue some money as this printed money will be multiplied by banks by loaning this money out to its customers. Problem is, in this current recession many banks instead of lending have hoarded this money since there are no real returns on investments that can be made from these loans. Instead most of that money is gambled in the biggest casino in the world which is the stock/bond market and since there is quite a lot of excess money floating around this excess cash has the tendency of generating bubbles with overvaluations in stocks such as Facepalm.

But let us go back to the topic at hand which is the issue of currency devaluation. This process has occurred many times in the past even during the eras when countries followed the gold standard which we should note: is a point often forgotten by many people advocating a return to the gold standard. It should be remembered that the US suffered numerous financial crises in the 19th century when it did follow the gold standard, the most notable being the 1873-1879 Long Depression. Indeed this depression was known as the Great Depression until this event was supplanted by the Great Depression of the 1930s. All of which occurred during an era when all the major currencies of the world followed the gold standard.

The causes of this Long Depression are – like the great depression of the 1930s – are still debated among economists but the general problems would appear to share striking similarities. Like the 1930s depression the Long Depression came at a time shortly after a major war, increasing globalisation and most important of all excessive credit creation by the commercial banks. In the case of the Long Depression this was the American Civil War while the Great Depression had World War 1. Such wars meant that the central governments issued an excessive amount of credit to fund the war effort and this excessive spending came despite the fact the gold standard places heavy penalties on countries that do not practice fiscal restraint. This scenario of excessive credit creation coming through war would then spur further credit creation once the main commercial banks got hold off this money. In fact the money created by those banks would be a multiple of the amount of money the government printed. In any case, these wars times should be noted for the fact it is one of the few instances where governments are prepared to risk mortally damaging their currency by money creation. We need to remember they are creating money on two levels: one by direct money printing or QE and then the subsequent process of this money being multiplied by the commercial banks. This behaviour of excessive spending under this circumstance can apply to whatever monetary system is applied be it gold or fiat based currency system. This excess spending and subsequent credit expansion by commercial banks also result in the formation of various bubbles.

To say the Long Depression was caused by excessive war spending would not tell the whole story however. To not mention the next point would be to neglect raising another commonality between the two eras. That is, the immediate period after the civil war was a boom period for the US economy (which again is repeated in the roaring 1920s). This boom in both cases occurred because of an expansion in the money supply. In the case of the 1860s this money expansion came about due to the government and major private companies investing heavily in railroads. Much of those railroads were financed by loans, bonds and subsidies which in many cases were backed by the US government. These cheap loans created overinvestment in the industry and eventually lead to a bubble forming (or overcapacity). As it became clear many of these rail companies could never pay back their loans this caused many banks to fail which eventually culminated with the failure of the major banks of Jay Cooke and Henry Clews which brought the financial sector to its knees. The resulting recession would last six years and growth was below normal until after the 1890s.

Again this period of recession and sluggish growth shares a similar similarity to the Great Depression. So why bring up the point of the Long Depression and Great Depression? I think the point to take from all these events is that despite being on the gold standard (in the case of the 1870s the gold and silver standard) banks and corporations found ways of overleveraging the monetary system and the main method was by employing the system of fractional reserve banking. When those loans could not be paid back it resulted in large scale defaults which almost caused the destruction of the financial system. Now it can be argued that since a fiat currency encourages more spending (as currency is no longer bound by reserves of gold) then the magnitude of the problem will be that much greater so the level of defaults required to bring the system into balance would be greater but then the argument becomes one of a matter of degree.

The main issue I see with the gold standard – despite assertions to the contrary – is it is not immune to reckless spending. Reckless spending can come through poor lending practices and these practices have a particular tendency of loosening during WAR TIMES and BOOM TIMES. In the case of war the risk of financial collapse is acceptable to fight the war while in the case of boom times the perception of risk becomes distorted so market participants take out excessive loans thinking the risk of failure is lower than reality. This human behaviour must be accounted for when suggestions of moving to a gold standard system are ushered.

If one wants to assure there is no risk of financial mismanagement then one needs to get at the root of the problem and that is one of leverage. Every major currency in existence today follows a debt based fiat currency system with many of the commercial banks operating with a fractional reserve system. This system of fractional reserve banking is not well understood by most members of the public but most of the loans/money generated through the system comes about through here. This point is important as it is the leveraging that ultimately causes the instability in the monetary system NOT whether the currency is backed by gold or promises (as is the case in fiat).

To gain a good idea how a fractional reserve works it is best to find out how the system started in the first place. That way we can learn it simply and not be baffled and confused with all the mumbo jumbo that some smarty pants will put in front of us to confuse us. All these terms and convoluted descriptions are just smoke and mirrors to make the public feel intimidated and not ask further questions about the fraud being committed right in front of their eyes. Notice how no one actually teaches how monetary systems actually operate in school? Anyways, I digress and let us focus on the topic at hand.

The fractional reserve system originally came about when early bankers would help store pieces of gold bullion for various customers. To make transfers more convenient the early banks would issue notes which allowed the customer to redeem their gold. This meant people did not have to travel back and forth with gold bars which was a major drag (literally) not to mention quite dangerous. After sometime however the banks realised that customers would only trade these notes instead of exchanging gold directly. In fact those notes became a form of ad-hoc currency and it became apparent that the more notes that were issued the more money would be generated which meant more profit to the banks. So the banks began the path to the dark side by issuing more notes than they held in gold reserves. Thus it was the beginning of the fractional reserve banking and as the name implies, the banks only hold a fraction of the total deposits in reserves.

Once the banks had found that most people did not take out money or gold from their deposits creating excessive notes posed no real risk of them being found out or going bankrupt. However this practice did lead to the issuing of more money which while fraudulent benefited the upper class massively as it allowed them greater means to spend, invest – and most important – lend money to various major public projects. It should be remembered that most major public projects cannot pay for themselves and such projects can only be financed through debt. To see more information on this matter please refer to the three part Large Public Work series.

These extra loans also had the effect of extracting more wealth from its subjects via interest payments from the extra loans generated from this operation. As a result even though this form of fraud became known to the government it was not outlawed. Instead laws were made to limit the amount of risk such practices posed to the overall financial system. From this point onward the financial system developed extra complexity but on a fundamental level they all operate on the same premise. To many this is really a legalised system of fraud and one wonders how the general population would behave if it learnt the truth of the matter and how money really works. It is this fact why all banks are vulnerable to a bank runs because if people run to the banks in mass to collect their deposits the bank would soon become bankrupt due to lack of reserves.

In light of these facts if one wishes for stability then one needs to confront the fractional reserve system. If a person does wishes for total stability then the reserves must equal 100% of the currency available. Any leverage will create some instability and the more leveraged it becomes the greater the resulting instability. It should be noted however that the fractional reserve system – despite its obvious flaws and shortcomings – has one big advantage. This method of generating excess cash has a great effect in delivering growth for the general economy which was a great BOON to an ever expanding industrial economy. In fact if one looks at the term capitalism the main objective of this system is to acquire capital. This can be through actual assets or cash and since fractional reserve banking delivers on this objective one can see why it is so prevalent in modern economic systems. However as noted by many others this growth cannot go on indefinitely and in a contracting economy excessive credit creation can quickly become a bane to society. In fact one can easily say a fractional reserve system would not be fit for purpose for an economy that is continually contracting. In fact it would be catastrophic.

Still, one should not forget that this system must be removed if one wishes for future stability. What needs to be understood however is if one does wish for complete stability with full fractional reserve banking then one must confront several problems most of which are considerable; by moving from a fractional based reserve system to a fully backed reserved system it would mean a large percentage of the total money supply be removed or large amounts of new capital must be acquired. To take the former option of money/credit destruction would mean a massive almost total deflationary event.  In other words, all current assets would lose nearly all their value. In addition since all existing loans will still remain the same in nominal terms then a massive deflationary event will mean the value of those outstanding loans would rise massively in real terms leading to large scale defaults which would create further havoc on an already overstrained system. These defaults, which are likely to be considerable, if not total, would reduce the money supply further still. In short this solution could not provide an acceptable method of returning to a fully backed reserve system.

The other option highlighted in the paragraph above is to increase the amount of capital or reserves in the system. The easiest way of achieving this feat would be through some means of issuing non-debt based money which would basically amount to a form of debt jubilee. This process of money generation would however, if left unrestrained, lead to massive inflation as a large amount of money would be spent on non-essential purchases. Even if laws were put in place to force consumers to pay back all existing debts before the money could be used for other activities it would result in a large scale deflation event as a lot of the existing debt based money is wiped from the system. This solution however would not result in larger scale defaults mentioned earlier as those debts would be expunged from the system.  It should be noted that such a move would directly harm the banks as they would lose nearly all their assets and as such they could be forced into bankruptcy. Furthermore the other biggest losers would be the financial elite who hold most of the world assets. Since these people and organisations have the most influence in this current system it seems fanciful they would implement a plan that damages their interests the most. This solution has numerous proponents most notably economist Steve Keen (see 19:00 of the video).

For this solution to have a lasting effect however it would need to put a full reserve banking system in place after the debt jubilee is issued otherwise the system will fall into the same problems of excessive debt.

If such a system of full reserve banking were developed it would then lead to another problem which is a lack of growth of debt that is required for modern banking to operate. Without debt accumulation it is hard to see how banks could generate sufficient profits to remain viable. If banks do not possess the ability to create money through loans then the only income they could derive would be from service charges from holding deposits. The other possibility would be to use those existing deposits for lending to businesses and corporations who would then pay the banks with interest through means of expansion. However such a system could not operate unless there is an expansion of the money supply by a central bank or by the banking sectors growing at the expense of other industries. In any case such a system would sacrifice much growth and could still face some potential dangers in currency devaluation.

It would seem that while a transition to a more sound system is favourable it cannot realistically occur until there is a large-scale reduction in the existing money supply, loss of capital by some other means or large scale debt jubilees of which the outcome is unlikely to come and even if implemented will lead to large scale bankruptcies and possible supply-chain contagion as result of this.

One also needs to consider the possibility of a society that can be happy with a non-growth economy which would be basically be enforced by applying a full reserve banking system. This question needs to be considered under the light of growing populations and the three desires of greed, power and competitive nature of man. What are the chances some expansionary monetary system will be devised to cater to such basic desires and realities facing man in the future?

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