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Money and Credit Crunches

by techno Sun Aug 19th, 2007 at 07:26:19 AM EST

Anyone who witnessed James Cramer screaming on his MSNBC show that Ben Bernanke should open the discount window, got a brief look at how serious monetary discussions can get.

For most of us, Cramer could have been ranting in Urdu. Monetary discussions are designed to be difficult to understand. But not to fear, understanding money is pretty simple.

Sunday afternoon reading from the diaries ~ whataboutbob

William Greider, in Secrets of the Temple, his magnum opus on the Federal Reserve System, tells his readers that there was once a time when discussions of monetary policy were so common that they could be heard in small town cafes and barber shops. I know for a fact that Greider is correct because I am just old enough to have heard some of those conversations in my youth.

It has been almost 40 years since an old-fashioned prairie Populist first sat me down to explain the workings of money. In those years, I have read every book on monetary policy I could find, watched the Fed religiously, and have written extensively on the subject.

Monetary policy is not an easy subject to follow. There is a saying that "only two people really understand money and they disagree." It may not be that bad--but it is close. Most writers on monetary matters have an axe to grind. Some lapse into convoluted conspiracy theories usually involving a Jewish or Freemasonic plot. Others merely postulate obscurantist apologies for the ultimate wisdom of bankers. But I have found over the years that even though my views have become much more elaborate, the basic lessons of that Populist have gone unchallenged.

Understanding money is a liberating experience. Suddenly, everything makes more sense. The widespread confusion surrounding the latest moves by the world's central bankers means that many who would attempt to understand these economic disasters could profit from those lessons from my youth.

And, it turns out, money is not so very hard to understand.

Rule #1. Money is only information

We have Richard Nixon, surprisingly enough, to thank for ending any confusion on this subject. Money has taken many forms throughout history from cows to gold, and from cigarettes to paper.
When the U.S. finally abandoned the last vestiges of the gold standard in the 70's, many predicted dire consequences. Without a finite substance to 'fix' the value of money such as gold, there would be uncontrolled inflation--the doomsayers warned. And there was an ugly bout of inflation in the 70's. But with the Fed policies of Paul Volker, a recession was triggered that was just as ugly as any panic from the bad old days of the gold standard.

Money is now merely positive and negative charges stored somewhere in computer memory. The physical manifestation of money has changed, but the real nature of providing information has not changed at all.

In fact, since computer chips are the heart of the 'information age,' the issue may be easier to understand now than ever before.

Rule #2. The most interesting information that money conveys is that of value

There are many computer chips on the planet with very interesting information stored on them, but nothing affects people like the information about the size and quality of their bank balance. If the balance is large, houses, cars, sexual fulfillment, fine food and power are available to the individual fortunate enough to find that information attached to his name. If the balance is small, the same individual can find himself eating out of garbage cans and sleeping under a bridge.

Rule #3. Humans determine the value of money

Money has value because it can be exchanged for something else. For most of history, economics was about scarcity. Money defined this reality only by being scarce itself. Real estate is the ultimate example of a scarce good. The amount of land is essentially finite even though a few swamps have been drained and land, such as in Holland, has been reclaimed from the sea. But essentially the 'iron law' of money was pretty simple. Increase the supply of money, the price of real estate inflates.

The ancient world had other examples of scarcity such as attractive women, imported goods such as silks and spices, and human labor. An increased money supply would raise the price of each without changing the overall wealth of the society very much.

The Industrial Revolution changed everything. Wherever production was organized industrially, the economic problem became one of disposing plentiful goods rather than rationing scarce goods. The new reality of industrialization did not abolish the old rules--it merely added complications. While increases in the money supply only brought inflation to the pre-industrial societies, it produced new ventures in industrial societies. But even industrial societies had finite supplies of real estate which meant the old rules still applied in important sectors of the economy. Monetary policy must balance the needs of the economics of scarcity with the incompatible needs of industrialization.

With the coming of the industrial revolution came a fight over money. The new industrialists wanted more money in circulation to supply their needs. The fight, however, was really over something more basic--who was creating.

In pre-industrial societies, the creator of things of worth was assumed to be supernatural. People did not create land or jewels. Wealth was gathered or seized.

But agriculture first proved this assumption to be false. There is more to agriculture than the harvest. Agriculture is about planting and tending as well.

Those who did the work naturally resented those who assumed that growing was only about gathering what God had provided. Even so, farmers supply only a small fraction of the creativity necessary to produce a crop.

As the creative input became a greater fraction of the finished goods, the assumption that wealth is merely gathered became increasingly false.

Take a modern example of a manufactured product such as a microdisc filled with application software. Everything about the product has been processed beyond recognition. The case is plastic which is formed from molecules once found in an oil well. The metal originated in a mine.

Even so, a blank microdisc is only worth a few cents. The rest of the value is contained in the program written on the blank disc. The software writer can legitimately claim that the raw materials necessary to produce his product are less than 1% of the total value of the finished item for sale. If money merely reflects the bounty of nature, it cannot accurately describe the creative value of human input.

For all its complications, the argument about the nature of money in post industrial societies is rather simple:

  1. Money must be created in sufficient quantities to accommodate growth.

  2. Someone must do creative work to give worth to the new supply of money.

All other questions about money are secondary.

Humans have been determining the value of the creations of nature for a very long time. The whole idea of the 'free market' was formed around this very problem. The creations of humans are quite another problem altogether.

If a new product appears on the market, its value is determined by a formula which looks something like

V is the amount of money validated
HN is an assessment of human need whether physical or psychological;
CD is the creative design input which is a combination of learned information plus the intuitive flash;
T is the existing technology;
RI is the resource input from nature;
HE is the physical effort or work supplied by humans; and
E is the energy supplied from nature in the form of fuels.

Because all six elements are critical, many forms of human endeavor do not add to value. For example, the value of the Russian Ruble is based almost completely on the value of their raw materials.

Their manufactured goods, are in the main, essentially worthless because they fail in so many areas. They are not very creative, they do not meet human needs very well, they do not represent much real work, and are manufactured with primitive technology. So even though Russian goods are made with prime natural resources and use large amounts of fuel in the manufacturing process, they fail to create value because they fail so miserably in the other four areas. Interestingly, the manufactured products the Russians DO sell (Kalashnikovs, nuclear power plants, titanium processing) are products where the real investments were made in USSR days.

On the other hand, suppose an industrial manufacturer goes through all six steps and the money supply does not increase to match the added value, a vicious form of deflation follows. Two things happen:

  1. The new product must displace others in the fight for the available currency. Factory-produced cloth displaced the output of weavers. The result was a massive displacement of artisans. In the early stages of industrialization, most advances were of this type because the new product was a cheaper form of the old product. There was little need to educate the customer about his need for cloth. Of course, this would not have created any problems if there were other ways to prosperity for the displaced artisans. Which leads to problem

  2. If a manufacturer introduces a new product which does not displace an old one and the currency supply does not expand, the product will simply fail. The fight for the share of the currency pie is simply too hazardous. Even if prices for everything deflate so that there is room for the new product, there may still be insufficient currency for it. Not only do buyers instinctively close their purses in times of deflation, but the new producer, in fulfilling the six requirements, has incurred fixed costs. There is a minimum selling price below which, a producer simply cannot operate.

Typically, the more sophisticated the product, the higher the fixed costs. Sophisticated goods must either sell very widely to justify the high fixed costs, or they must command a very high selling price. Both requirements are extremely difficult in times of deflation.

Technologically sophisticated goods, then, must have an orderly growth of the money supply, and creative, clever, hard-working, well-educated people to make the new money valuable. Both are absolutely essential.

Rule #4. Those who set the rules for the formation of money determine everything else

By now, this rule should seem obvious. Someone has to create the new money in an orderly fashion. Someone must also determine which bright-eyed inventor or entrepreneur has a project which will ultimately validate money. In most countries, this job goes to the bankers. The process goes something like this:

A producer approaches a bank for an operating loan. He needs the money for a new product.

  1. The banker assesses the creditworthiness of the producer. If he is likely to make something which would validate the new money with the loan and has sufficient collateral should the enterprise fail, the banker will consent to grant a loan.

  2. Under the standard procedures of banking, banks may legally loan out money at multiples of their basic capital. The total capitalization represented by stockholders and depositors normally ranges between 3% and 20%. The asset base of a bank is represented by its loans. The banks are allowed and encouraged to "create" new money. Increasing the amount of money in circulation is often considered banking's primary social function. This is most often done through the checking system. The bank approves the producer's loan, the papers are signed, and new money is entered into the producer's checking account.

  3. The producer spends his "borrowed" money for production equipment, materials, energy, etc.

  4. The producer makes something to be sold at market. Using the money, he repays the loan with interest.

  5. When the banker is repaid, the money continues to circulate only if the banker uses the money to pay himself or his shareholders and the money is spent. The money may also be used to increase the basic capitalization of the bank. In this case, the money which was created when the loan was made is now extinguished--removed from circulation. It does not completely disappear, however. Because this "money" remains on the bank's books as capitalization, it allows the bank to make increasingly larger loans.

Both Producers and Bankers agree this is what happens. Both know that money has been created out of thin air. And while Producers question the fairness of the whole arrangement, they are certainly convinced that this system is superior to the gold-based monetary systems it replaced.

But if money can literally be created and destroyed by keystrokes on a computer, the logical question becomes--when and why does this money become valuable?

The banker's argument is that money gains value through sound fiscal management. By adhering to the capital reserve requirements fixed by the central banks (Step #2) the banker has prudently maintained the value of money by not creating an excessive amount. This argument, incidentally, is the central theme of what has become known as "monetarism."

A sociologist might argue that money becomes valuable when it is spent and the merchant honors the check. (Step #3) However, if too much money has been created, eventually the merchant may not honor the check. As a result, the merchant's faith in the value of the money in the producer's checking account seems to be an important, but secondary phenomenon. The real work of making money valuable lies elsewhere.

The producer argument is much more convincing. The producer point is that it was he who made the money valuable. (Step #4) It was he who performed the magic of turning computer keystrokes into a finished product. It was the producer who paid back the loan which allowed the banker to increase the wealth of the bank. (Step #5) A producer would point out that even the banker agrees with him. The purpose of the banker screening loan applicants, after all, (Step #1) is to determine which producer is capable of turning money into food, clothing, shelter, etc.etc.etc.

Some still argue that wealth comes from the earth because no matter how clever, every producer must have natural resources with which to work. These people have a point. But while all wealth may originate in the earth, what becomes of it is in the hands of the producers. After all, people stepped on diamonds for thousands of years before anyone ever thought of making jewelry and hundreds of years more before anyone thought to make drill bits and phonograph needles of them. Iron ore existed for millennia before anyone made a bridge out of it.

In fact, the argument "all wealth comes from the earth or is a gift from God" is usually made to discredit the role of the producer and provide cloak of legitimacy to the banker.

Rule #5. Interest rates ultimately determine the effective supply of money

Charging interest is usually considered the service fee to the banker for the job of managing money. Under the story-book version of banking, this seems quite reasonable. Traditionally, bankers are considered sober citizens who find money that is not being needed, pays 7% to induce the owner of this money to deposit it in his bank, lends it to someone else who needs the money at 10%, and pockets the difference. And this is the way simple lending procedures in fact operate.

But certain institutions are empowered to create money. In the U.S. it is the Federal Reserve Bank and commercial banks. For them, the real process is as was described above. For these institutions, charging interest is not necessary at all because they are, in fact, receiving effectively 100% interest on newly created money even if the interest rate was zero.

Actually, this is not quite true. If the banker picks a producer who does not validate the new money effectively, the new money becomes inflationary. Because some producer is always screwing up somewhere, any society which increases its money supply will have an underlying rate of inflation. Add to this monopolies which can raise prices no matter what else is happening in the economy, and the finite natural order which will not increase no matter what humans are doing, and minor inflation is a fact of modern societies. The Fed and the commercial banks charge interest most probably out of courtesy to those sister institutions which do not have the power to create money. So no matter what happens, the basic interest rate must be at least equal to the rate of inflation so that lenders at least do not lose ground.

But since lenders are in business to do more than merely not lose ground, they must also take a part of the increase supplied by the producer/borrower. Assuming the producer has followed all the above steps, he will have added to the value in excess of the money spent for simple raw materials and energy. His creative work will have validated the rest. This process when looked at in a large context does not produce inflation but growth. This growth is regularly measured in industrial societies and is measured in the Gross National Product. If accurately measured, G.N.P. growth is simply a measurement of how much new money is being validated.

If the interest rate is inflation plus growth in G.N.P., then the effective rate of interest on newly created money really is 100%. In other words, bankers are taking control of money from the producers as fast, on a society-wide scale, as it is being created and placed into their hands.

Over the years, there has been a huge argument over the subject of usury. In the beginning, usury was defined as any interest payment. For 1500 years, Christianity taught that usury is a sin . Since without interest payments, money-lending would not happen, Christians turned to Jews for the service until John Calvin came along and made moneylending at interest something Protestant Christians could do. Lending created prosperity which, in turn, took the onus off charging simple interest.

This did not, however, stop the argument over usury--which now became the process of charging excessive interest. The question becomes "What is excessive?"

The industrial answer is simple. If the basic rate of interest is higher than inflation plus growth in G.N.P., damage will eventually accrue to industrial societies. Since the goal is growth and producers who are successful in validating new money should and must be rewarded, the point where interest becomes usury is slightly less than the growth in GDP plus inflation. This point, hereinafter referred to as the Natural Usury Point, (NUP) would be 6.5% if inflation were 4% and growth in GDP were 3%. Any figure above NUP will cause deflation and other forms of economic distress. Any figure below this rate will cause general and widespread prosperity.

One other proviso. NUP only applies to simple interest. Compound interest--the process of adding accrued interest to principle--poses another set of problems altogether. If simple interest can be justified, compound interest can never, ever be justified. The reason is simple--compound growth of ANYTHING in a finite biosphere is simply impossible.

When someone wishes to describe the glories of compound interest, the story of Caesar's cent is trotted out. The story varies, but if someone had invested a penny at the time of Caesar a 5% compounded interest, by now that investment would have grown to a size where all the pennies in the world, even if the planet were made of copper, would not represent the figure today. The problem is not that one could not convert the pennies into some less bulky form of money. The problem in that all geometric growth curves eventually reach the stage where they are asymptotic.

The growth curve has become vertical. Interest rates have become essentially infinite. Compound interest has only one real purpose--to bankrupt the borrower. It can never lead to widespread prosperity.

Simple interest brings order to monetary dealings. This is true, if for no other reason than that it keeps the producer on the treadmill. It keeps him honest and provides incentive to be industrious. The sooner money is paid back, the sooner the returns accrue to the investor. A producer has incentive to pay back today because tomorrow there is more to pay back.

Having said this, it should be noted that interest rates above NUP will provide an even more effective treadmill. The problem is, if the treadmill is run too fast, more than the producer is destroyed.

The damage to the economy when interest rates exceed NUP

Since 1979, the prime rate of interest in the U.S. has exceeded NUP by a considerable margin. In fact, the recession/depression of 1991 can be considered a direct outgrowth of excessive interest and this latest financial panic can easily be traced to 17 consecutive interest rate increases. The problem of excessive interest is that more money is being removed from a producer's control than is placed at his disposal.

The honest producer cannot validate money fast enough. When interest rates too high, only a thief can repay the loan. Even if the producer does not steal from another, he will be forced to 'steal' from his employees, the future--his children, the environment, or a combination of all of them.

Excessive interest rates in a highly leveraged society where almost everyone borrows and those who do not, have governments who borrow in their name, cause society-wide damage. Damage is caused in two ways--when interest rates are far above NUP, or, when interest rates are slightly above NUP but are kept that way for an extended period of time

Stage 1 Damage. The first victims of usury are small producers in competitive, credit-sensitive industries. Start-up enterprise must compete in shrinking markets. Most fail.

Stage 2 Damage. Existing companies take shortcuts, defer maintenance, cut back on R&D, etc. Wages drop. Layoffs begin

Stage 3 Damage. Social order is disrupted. Financial institutions start taking unnecessary risks because few producers can pay the returns required. This leaves the fools and charlatans. Layoffs cascade. Governments are stressed trying to cope.

Stage 4 Damage. Whole industries begin to fail. Sections of the country are ruined. Homelessness and crime increase. Prosperity, such as is left, becomes further and further removed from the production of goods.

Stage 5 Damage. Financial institutions begin to fail. Orderly financial transactions are replaced by speculation, greenmail, etc. Sober bankers become gamblers and crooks.

Stage 6 Damage. Governments are bankrupted. Insurance for financial institutions are exhausted. Financial distress becomes widespread.

Actually, when the above factors are taken into account, predicting the latest recession/depression was like the prediction of a sunrise--it was never a problem of if but when.

This is the outcome of a foolish experiment in what became known as monetarism--a pre-industrial example of monetary thinking if there ever was one. Actually, monetarism was only one possible response to the inflations of the 70's. Those inflations had many causes--monopoly power to raise prices most especially in the area of energy, foolish investments in production of no value, and poorly directed increases in the money supply. The problem was made infinitely more difficult because energy prices were set overseas.

Industrial inflation, because it has many causes as well as manifestations, usually needs a multiple counter force to address as nasty an outbreak as happened in the 70's.

There are wage-price controls. But wage-price controls run up against the precious theories of the 'free market' (another relic of pre-industrial thinking brought to us by 'economists' who still believe that hunter-gatherer societies are a valid model for industrial societies.) 'Free market' ideologues hold sway throughout the English-speaking economics profession. These folks would have us believe that because 'free markets' can establish the price of blueberries and fresh fish, they have something to do with the phone bill, the price of oil, or the level of interest rates.

Wage-price controls are only necessary to control inflationary practices of monopolies. As there are only about 10 labor unions and 500 companies with monopoly power, the technical problems of wage-price controls are not very large. The political problem, however, is quite another matter indeed. Those 10 unions and 500 companies have considerable clout. They did not want wage-price controls so we never seriously tried them in spite of Nixon's small experiment.

Oil prices posed an even greater problem. In order to counteract price hikes set overseas, the only available option to fight the inflation so induced was to significantly reduce energy consumption. This would have required a 'moral equivalent of war' to achieve because energy consumption is a function of the design of the industrial infrastructure.

Energy demand, as a consequence, is not very elastic. For example, the fuel required by an automobile can be lowered slightly by driving slower, keeping the engine in tune, or checking the inflation of the tires. Alternatively, people could drive less. But to achieve real energy savings, the fuel-wasting automobile would have to be replaced by one much more energy efficient. To achieve society-wide savings, the whole automobile fleet would have to be replaced. This solution encountered technological, economic, as well as political difficulties.

The same problems were encountered in other areas of energy consumption. It is extremely difficult to make a building more energy-efficient once it is built. Electrical generation is already at the technological limits of efficiency and represents a huge capital investment. A "moral equivalent of war" was actually suggested by Jimmy Carter and he was almost hooted out of Washington for his suggestion.

Raising taxes will also remove money from circulation which would counter inflation as readily as removing the money with usury. Raising interest rates is the shotgun approach. Tax increases represent the superior, targeted, rifle approach. But even to fight inflation, there is never a political groundswell for raising taxes. So this solution to the inflation of the 70's was also rejected.

With all the industrial solutions to inflation eliminated, a resort to the old-time religion of pre-industrial usury became the only real option left. And sure enough, the criminal level of usury given us by Fedmeister Paul Volker drove inflation from the system.

(Actually, the level of usury was not legally criminal because by the early 1980s, a host of states had changed their laws so that Volker's industrial usury was decriminalized. Some states even had to change their constitutions to make legal what had been illegal since the 1930s.)

Why all that legislation was easier than raising taxes, legislating new energy efficiency standards, or creating wage-price controls, speaks volumes about the powerful nature of the banking interests and the old-time religion of monetarism.

The problem with fighting inflation with only monetary deflation is that in industrial societies the cure is worse than the sickness. Inflation is cured by putting the whole country on a going-out-of-business sale. The monetarists were correct--money matters very much. But any idiot can wreck things--even the work of genius which much of the industrial state is.

Volker's version of the old-time religion led to unemployment, an agricultural depression, and a de-industrialization of American society that meant by 1985, we had not only lost the international lead in industrial matters, but had actually become a debtor nation. Corporate debt, personal debt, government debt, are all logical outcomes when banks raise interest rates above the NUP in an industrial society. It is debt that cannot be repaid. It is the debt caused by a philosophy of usury designed to bankrupt the borrower.

This is the ultimate insanity of Volker's experiment. In industrial societies, it is in the interest of bankers that their borrowers prosper. The bank wants the income from enterprise. They have no use at all for an idle factory, a vacant farm, or an empty office building. Bankrupting the borrower only makes sense if a lender wants the collateral. If the collateral is a bar of gold, this makes some sense. But the fundamental rule of industrial banking is, "never kill your customer!"

After Volker, usury may not have been technically criminal. But it was still very stupid. Failure of debtors leads to failure of creditors. It is not a wonder that as above NUP interest rates prevail, banks are in trouble and the whole debt-house of cards is threatening to collapse.

But the obvious manifestations of Volker's insanity may not be the most serious. Thousands of otherwise valid enterprises failed since the 80's or were not even started. Kill infant enterprise and mature enterprise of the future is snuffed out.

The list of foregone enterprise is almost infinite but it includes environmental process and waste management controls, techniques for sustainable agriculture, solar and other renewable energy generation, urban and industrial renewal, and energy-efficient structures.

What we got instead was disaster. Take the sad example of agriculture. Of all the socio-economic advances in history, none rivals owner-operated farms. Family farms--as they are referred to in the U.S.--are so successful because they are self-managing. A farmer who works his own land cares for the resource. He knows what plants grow best, he knows how each field should be worked, he doesn't have to be told to go to work or supervised when he works, and best of all, he tends the land as an investment for his children.

When the usury of the 80's hit American agriculture, hundreds of thousands of farmers, many third and fourth generation on the land, were forced into bankruptcy--only to be replaced by absentee landlords like insurance companies. Sustainable agricultural practices were abandoned in favor of 'mining' the soil with the methods of mega-agribusiness. Soil erosion and chemical pollution skyrocketed.

For what he did to agriculture alone, Volker should be condemned. But this list only begins. The effects of usury can be seen in deforestation and global warming, lawless pollution, and the building of cheap, energy-wasting junk housing throughout the sunbelt in the 1980s which ultimately leads to ozone depletion.

Think of the absurdity of it all for a minute. All the ills listed above, and many others not included, were brought to us by usurers with pre-industrial mentalities who accomplished nothing but the reprogramming of some computer chips. Worshiping pre-industrial ideas is bad enough, but worshiping misprogrammed computer chips utterly redefines the concept of idolatry.

A Way Out!

Recognizing the fundamental problem of an ill-conceived monetary policy as the world careens towards global depression is not enough. Changes must be made or the 90's threaten to make the early years of the 21st Century look like a picnic. The folks in the 30's actually had more options open to them than the U.S. has today. The government was not in debt and so could engage in deficit spending. In those innocent pre-nuclear days, world war could eventually bail them out. No one is foolish enough to believe that warfare is good for the economy anymore. Then the U.S. was a creditor nation and had total control of its economic destiny.

This time, there is no option but to engage in monetary reform. This will take more courage than exhibited by Congress of late. They will have to rise above their PAC mentality which brought low the 'Keating Five.' The U.S. government must finally stand up to the usurers.

Item 'A' on the agenda must be a reimposition of usury laws. Never again should the prime rate exceed NUP. If this cannot be achieved, then the time has come to nationalize the Federal Reserve System and make the governors stand for election.

Nationalization seems such a foreign concept to Americans, but public policy of the import of monetary policy is simply too important to be left in the hands of pre-industrial technological illiterates with a plunderers mentality. Every bank that the taxpayers are forced to 'bail out' in the 90's should become public banks. The argument that public bureaucrats are unsuited to make industrial decisions is utterly specious. Banks have been picking industrial 'winners' and 'losers' for a long time now. For over a decade, they have been making preposterous decisions. Elected officials can do no worse.

Of course, elected officials can have the same mentality exhibited by the monetarist bankers. In fact, most do. The electorate must insist on bankers, public or private, who understand that the industrial revolution happened and further, that they have some understanding of what that means.

Not all interest rates must be limited to the NUP rate. Only the important ones. And only on those loans guaranteed by public agencies such as the FDIC. The list of those activities slated for NUP-rated loans is, in fact, quite short. It includes:

Agriculture--especially loans to owner-operated farms and most especially to young farmers who are committed to sustainable agricultural practices;

Renewable energy generation and energy-efficient technologies;

Environmental or 'green' technologies;

Public infrastructure such as mass transit, sewage systems, and schools;

Start-up manufacturing enterprise that makes pieces for any of the above; and,

Housing--but limited to the primary residence.

It is certain that if public banks began to write loans at NUP rates for serious, legitimate reasons, prosperity, such as has not been seen in the U.S.. since the 60's when NUP rates were public policy, would return with a rush.

The choice is really between a 30's style collapse of the American economy and the next golden era. Are we really going to let a bunch of pre-industrial, techno-illiterate, computer-chip idolaters march this country down the road to ruin? Really?

Did you crosspost this?

I'm going out in a bit, but I wanted to hit on something that you've hinted at here.

Money is an idea, and it's the idea content that has value.

Money can be natural as in gold, seed, or silver, or it can be fiat (paper).

The danger with fiat money is that it has no natural limit.  Where gold is a product of the natural world and supply is limited, so that in order for a country to debase its currency it requires physical action on the coin, in the case of fiat money, it can be debased by simply printing more and more money.  

I really question whether there isn't a need for money to be rooted in something that recognizes that there are natural limits on the size of the economy.  

Like Migeru's proposal for oil based exchange, with oil backing the currency.  Or more broadly, backing currency with energy.  So that renewable energy allows for the growth of wealth, while fossil fuels involved the destruction of wealth.

Long distance transport thus has embedded within it energy value that involves the destruction of wealth if non-renewable.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Fri Aug 17th, 2007 at 08:57:53 PM EST
The danger with fiat money is that it has no natural limit.  Where gold is a product of the natural world and supply is limited, so that in order for a country to debase its currency it requires physical action on the coin, in the case of fiat money, it can be debased by simply printing more and more money.

Of course, the supply of money must have limits.  But those limits should be measured by the amount of human inventiveness, NOT by the supply of ore for a semi-worthless metal like gold.

There are hundreds of GOOD reasons why humanity has (hopefully) left the gold standard in the dim past.  Anyone who would suggest a return to the gold standard has to explain away a LOT of flaws inherent in such a system.  I don't believe it is possible to paper over so many flaws.

As for whether money should be tied in value to oil, I would argue that that is exactly what is happening now.  I would add that money should be valued in energy units such as watts.  This would mean that wind turbines would exist on the same footing as all other forms of energy.

"Remember the I35W bridge--who needs terrorists when there are Republicans"

by techno (reply@elegant-technology.com) on Sat Aug 18th, 2007 at 05:09:19 AM EST
[ Parent ]
You wrote:

Humans have been determining the value of the creations of nature for a very long time. The whole idea of the 'free market' was formed around this very problem. The creations of humans are quite another problem altogether.

If a new product appears on the market, its value is determined by a formula which looks something like



V is the amount of money validated

HN is an assessment of human need whether physical or psychological;

CD is the creative design input which is a combination of learned information plus the intuitive flash;

T is the existing technology;

RI is the resource input from nature;

HE is the physical effort or work supplied by humans; and

E is the energy supplied from nature in the form of fuels.

Because all six elements are critical, many forms of human endeavor do not add to value. For example, the value of the Russian Ruble is based almost completely on the value of their raw materials.

If this is the function by which the supply of money in a society is determined, then first and foremost as you note there is an assessment of human need.  And that would seem to be the location at which we go astray.

If the economy is merely a means to an end, then HN is limited and exists embedded within a social and natural environment. However, the utilitarian bias present in most of modern society tells us that more is always better than less, and that the role of the good society is the unending creation of new wealth.  

Disembedded from its social and natural context, the market logic undermines the social and natural endowments on which it depends. When confronted with social or environmental limitations, the presumption becomes that through our agency we hold within our power the ability to overcome the limitations placed upon us.  Yet, upon closer examination how much of the progress we attribute to human ingenuity derives from the consumption of impounded power, of E in you formula, so that rather than being a testament to our triumph over the natural world, our progress is ultimately shown to be utterely dependent upon it.

And what comes when we have fully expended that impounded energy?

As much as I would love to believe that there exists within human nature an inventiveness necessary to release us from the bonds of nature, I simply can't.

Rather than being captains of our own destiny, we are all adrift on an ocean not of our own creation.  For the liberal, this creates angst because it conflicts with the understanding that all have within them to power to change their fate. And the recognition that we are far less omnipotent and omniscient reduces us from masters of the universe to mere specks of dust.  

Yet, if we cease to struggle and to profess belief that we have agency that exists outide of the structure created for us by nature and man.  Then we might come to see that in the recongition that no man is an island, there is the wealth from knowing that we are all connected.  When we pass from this world, all that is human does not pass with us.  And it is in that continuity that out salvation lies.  In abandoning the sense that we alone matter, and recognizing that we live on in that which we leave for future generations.

And if through we beleve that our ingenuity provides for us what we consume from the stocks of nature, we leave those who come after us a world less rich.

This is my point is saying that there has to be some natural limitation on the currency supply, because the belief that human ingenuity allows us to transcend natural limiation disembeds the operation of the market from the natural and social contexts in which it exists. We come to believe that when coal is exhausted we will fall upon petroleum, then natural gas, the nuclear, ad infnifitum.  Until our asinine belief that we are gods is exposed for the foolishness it is.

The money supply is a means by which the disembedding of the market is facilitated, efforts to reembed the market, must thus place the money supply within the realm of what nature provides.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Sat Aug 18th, 2007 at 11:45:28 AM EST
[ Parent ]
Tying, if that's what I understand you to be proposing, a currency to anything is a bad idea.  It was really stupid when we tied ourselves to gold, and it would be equally foolish to tie ourselves to energy.  Some of the more catastrophic economic events in human history have come at times, and could even be blamed on to a large degree, under the gold standard.  The Great Depression is the example.

The most successful economic periods in human history have come under the post-1933 regime.  Gold has certain natural limits, which is precisely the problem, because its natural limits don't jibe with the economy's natural limits.  In its case, the market isn't responding to the natural flow of supply and demand with regard to money but rather to the natural flow of some God-awful hunk of metal.  The natural limit of the economy is our knowledge and abilities.

The are obvious natural limits in the area of resources, as many have noted, and it's often difficult to imagine how we could hope to change behavior so as to adapt to that reality, but it can, does and will happen (with, of course, varying degrees of pain and strength of results over time).

Our period under the gold standard was also a period in which speculation caused even greater damage than the relatively tame stuff we're dealing with now.  (There's nothing about commodities that lends them greater resilience against speculation.  All goods, services and assets are subject to speculation.)  That's why the Bank of England dropped it.  The Fed did not until FDR took office, and, by then, 25% of the country was out of work, with a significant chunk in danger of, literally, starving to death.  National income fell by a third.  (The result was, of course, still ruinous in Britain, which dropped the standard in '31.)  We've never experienced a period like that under the current regime.  Could it happen?  Yes, but it's far less likely to be the result of our monetary policy today than it was then.  (Our fiscal policy and our wasteful behavior are another story.)

I hate the idea of bailing out Wall Street as much as anyone.  It can -- depending on other factors, of course -- eat away my already-sad purchasing power on everyday goods and services, while propping up goods like housing (sale, not rent, in this case) to the point that I can't afford them.  That said, the current system at least offers us the opportunity to fight the market's ups and downs, in an effort to make aggregate supply and demand balance.

Now can the system be improved upon?  Of course.  We need to, as Jerome and others have pointed out on many, many occasions, take asset inflation into account, and build in the expectation that the central banks will act to fight it just as they will act to fight inflation in any other area.

It, indeed, was once the case that you could hear talk of monetary policy anywhere, just as you can hear talk of the housing market anywhere today.  (You could hear anybody talking about the stock market in the late 1920s, too, and look at how well that worked out.)  That doesn't imply that the Average Joe has a solid grasp of the issue, as our friends in the housing market now realize two years too late.  I suppose I could talk about Einstein or Twain until I'm blue in the face, but that doesn't imply that I understand relativity or literature.

My grandfather used to talk about it quite a bit, but, while he was a brilliant investor (especially for an $8/hr airline mechanic), he didn't have a clue as to how monetary policy should operate.  (And, as a child of the Depression from rural Georgia who wound up retiring fairly well off after learning to invest, he, of all working-class people, should've been able to connect the dots.)  If you talk to the Average Joe about Monetarism, Keynesianism and Austrianism, and what the three have to say on monetary policy, he's going to stare at you as though you're from Mars, having no clue what roles the three have played over the last century.  (Actually, he'll probably ask, "What were those first two?" thinking the third has something to do with the way Austria operates.)

The roles have been critical to our circumstances at different times, and the differences in their respective results have been almost unspeakably massive.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Sat Aug 18th, 2007 at 10:49:38 AM EST
[ Parent ]

I don't want money literally linked to anything.  But when the gold bugs come out of the woodwork, and trust me on this, it is damn difficult to discuss monetary policy without running into them, I like to point out that it makes MUCH more sense to tie monetary value to energy than to gold.

But yes, I agree with you.

"Remember the I35W bridge--who needs terrorists when there are Republicans"

by techno (reply@elegant-technology.com) on Sat Aug 18th, 2007 at 11:23:49 AM EST
[ Parent ]
I have been promoting for some time now

Price dollars in oil, not oil in dollars

an International Energy Clearing Union and a "Value Unit" based upon a "dollar's worth" of energy - in its various manifestations - at the launch date. From which point an "EnergyDollar" would part company from the $.

But the bulk of value in circulation in modern economies - in excess of 70% in the UK - is based upon property - and particularly land - rental values.

Over two thirds of our money in circulation is property-backed but deficit-based credit created by banks etc as mortgages.

I have another instalment of guerilla warfare going on with HiD over on

So they all knew it was a bubble, now?

It's not easy to explain a complete new land/property-based monetary system in this medium, but I'm quite happy to explain and refine these ideas with anyone. You can't change the system by yourself, but it is pretty clear to me (if to no-one else ;-) )that it is in the pooling and sharing of risk and reward in simple - and optimal - new ways that the solution lies.

John Law it was who first outlined, in 1705, a proposal for a land-backed money. I believe that this is possible quite straightforwardly using networked "Community Land Partnerships" to create "Pools" of Land and Property rentals.

During the next two or three months - particularly if I get a week somewhere nice and quiet with my laptop - I intend to set out an outline of how we could create what is a domestically fungible pool of "Land Rental Units" using "Community Land Partnerships".

The final principal form of "Money's Worth" is our time or "Labour".

When a counterparty (whether a bank or anyone else) accepts my credit it is (in the absence of security) essentially backed by my time.

Here I think "Time Dollars" play a role.

These would essentially have a value related to the value of the average human being's time to the community.

This would be related to a rate that every citizen doing work for the Community is entitled to: eg at $10/ hour a "Time Dollar" is worth six minutes of our time.

That does not stop me giving you 500 "Time Dollars" for an hour's worth of your time, if you are (say) a dentist.

All of these forms of Value: Land Rental Units (eg acre/days); Energy (Kilowatt/ Hours) and Labour (Individual/ Hours) have a value in exchange.

Now if we exchange all of these more or less fungible units within a barter network or clearing system, then the minute we allow credit then the result is a monetary system, requiring an abstract "Value Unit" as a measure, and a guarantee, which would come from a mutual "Guarantee society" backed by a "default fund".

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Aug 18th, 2007 at 01:12:18 PM EST
[ Parent ]
what a waste of effort.  dollars, "time dollars", whatever.   They're all the same.  It's all just a way to to store excess until the future or borrow against the future to have something today.

money is work.  Some have to sweat in the fields to make the money.  Others have a spark of brilliance that makes 100000X the value of digging a ditch.  Others just get lucky and get born on top of a pool of oil with enough kin with guns to keep control.

by HiD on Mon Aug 20th, 2007 at 03:38:06 AM EST
[ Parent ]
Money stores nothing: Capital is stored work.

What kind of monetary system do you advocate?

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Aug 20th, 2007 at 03:52:03 PM EST
[ Parent ]
the one we have works fine.

money = capital as long as the money has value to the group using it.  A building or piece of land can be just as worthless in the short run if their is no one interested in using them.  For example, you couldn't give away much of Eastern Germany for a while.  Or housing in places like Detroit where population is dropping.

by HiD on Tue Aug 21st, 2007 at 05:10:30 AM EST
[ Parent ]
the one we have works fine

Well, I guess we will have to agree to disagree on that.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Aug 21st, 2007 at 02:54:41 PM EST
[ Parent ]
For me your proposals are clear ;-)

You can't be me, I'm taken
by Sven Triloqvist on Tue Aug 21st, 2007 at 06:16:43 PM EST
[ Parent ]
Read my response to techno.

I must take issue with the idea that the Great Depression was caused by the undersupply of currency resulting from the gold standard. Remember that overproduction led to full warehouses prior to the Depression.

An oversupply in which the market was allowed to take leave of any notion that it was bound by either natural or human constraints.

And so we had the Dustbowl, and Hoovervilles in Central Park.  Labor, Land, and money are fictitous commodities, they cannot be reduced to serve the needs of the market alone.

Why can't a self-regulating market economy ever be realized in practice? Pure market liberalism requires that people, nature, and finance capital be turned into pure commodities: labor, land, and money. Polanyi's definition of a commodity, though, is anything that is produced explicitly for sale on the market. But land, labor, and money do not fit this definition, as none of them are really produced for the market. Money is a token of purchasing power that exists because of state action. Land is nature, subdivided; it is not produced by people at all. Labor is, in actuality, human activity that is ultimately undertaken for reasons other than pure material gain. Much of economic theory is thus based on a fiction. In contrast to the ideas of the classical economists, land, labor, and money cannot and will not act as real commodities do and thus their allocation can never really be organized purely through the self-regulating market.

Part of Polanyi's argument here is a practical one that relates back to the idea of embedding that we have already discussed. As unrestrained markets impose increasingly severe costs on people and nature - social dislocation, community decline, greater economic insecurity, ecological degradation - society takes steps to protect itself. This is the second aspect of Polanyi's  "double movement" - the first movement is toward market liberalism, the second is the socially protective counter-movement. Workers demand that labor markets be increasingly organized by trade unions, and the state to step in to regulate minimum wages, maximum working hours, and to provide disability and unemployment benefits. Business wants the money supply and the banking system to be regulated by a central bank. Farmers agitate for land use regulations and farm price supports to protect themselves from the ravages of the market.

There are a number of interesting conclusions here. The state is never truly separate from the economy; it must step into these key markets for the "fictitious" commodities in order to promote economic and social stability. Also, the counter-movement for social protection is not the outcome of a simple class struggle between labor and capital; all segments of society participate in it. Finally, and again, contrary to contemporary libertarian thought, this social protection is typically introduced piece-by-piece, and pragmatically, rather than though some grand socialist plan. It is the market liberals, not their political opponents, who are the true utopian planners.

Perhaps even more importantly, Polanyi is also making a moral argument here: Human life (labor) and nature (the environment) have a sacrosanct dimension, an intrinsic worth that is not simply reducible to a market price, and thus can never be fully reconciled with complete subordination to the market.


And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg
by ManfromMiddletown (manfrommiddletown at lycos dot com) on Sat Aug 18th, 2007 at 12:07:51 PM EST
[ Parent ]
I must take issue with the idea that the Great Depression was caused by the undersupply of currency resulting from the gold standard.

It is on this point that we will have to agree to disagree.  I think the link between the reimposition of the Gold Standard in 1924 and the Great Depression is both obvious, and beyond reasonable debate.  (My grandfather would go to his grave cursing Winston Churchill for his role in that decision.)

I guess we will have to agree on something else ;-)

"Remember the I35W bridge--who needs terrorists when there are Republicans"

by techno (reply@elegant-technology.com) on Sat Aug 18th, 2007 at 12:20:45 PM EST
[ Parent ]
Money can be natural as in gold, seed, or silver, or it can be fiat (paper).

For an industrial monetary production economy (where money is required both to exchange labor for subsistence and to command the capacity to produce), the flaw of "natural" moneys are that they have a real value, and therefore the liquidity of the system is subject to fluctuating supplies ... gold rushes, etc.

For fiat money, the foundation of the value for fiat money is the requirement to pay taxes in the fiat currency. In an industrial economy, producers additionally need to obtain command over resources before production, and produce prior to sale, so that producers require credit. In a reserve banking system, banks are required to hold fiat money, and to use fiat money to clear inter-bank payments. This generates a banker demand for fiat money.

Producers must get their hands on money to keep from being closed down for either failure to pay taxes or failure to pay their creditors, and therefore consumers can get products with fiat money, and therefore workers can be hired and natural resources rented or acquired with fiat money.

This leverage of fiat money can only evolve if there is a free-standing value for money, and so historically it is the need to obtain fiat-money to pay taxes that is the kernel around which credit-money developed. This is why, for example, traditional names for money reflect units of weight (lira, pound, dolar) and area of land (yen) ... because the origin of money was in tax-receipts, originally stamped on clay, then on metal for durability, then on paper for greater convenience of production and transport, and finally in electronic form for even greater convenience of production and transport.

The flexibility of a fiat money system also implies a lack of anchor, while a complex decentralized system of production is intrinsically susceptible to cyclical swings in effective demand for the production of private business.

Two anchors that would serve would be a low and stable cash rate for money, and a public job guarantee at a living wage. However, those two anchors in the public interest are at odds with short term vested interests of the finance sector, who wish to see returns on wealth accumulation rise, and therefore an increase in the profit share of income to allow productive enterprises to pay higher interest out of higher gross profits.

Of course, it is impossible for a share to expand indefinitely, so in a period when the short term vested interests of the finance sector are given free reign, the pursuit of that short term vested interest rebounds to undermine their long term interests ... at which point they squeal to be bailed out.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Aug 19th, 2007 at 01:18:25 AM EST
[ Parent ]
"He's got no idea what it's like out there, NO IDEA!"

Wall Street or Ramadi? He's screaming and waving so much that he sounds likea sergeant with a heavily depleted  platoon who has just been ordered on a suicide mission to storm an entrenched enemy in a fortified position without any cover or fire support.

Damn, these people piss me off. No, they actually even make me feel sick. And that doesn't happen very often at all.

"These people [Bear Stearns et al] have been in the business for 25 years, and they're LOSING THEIR JOBS, and these FIRMS ARE GONNA GO OUT OF BUSINESS, NUTS! THEY'RE NUTS!"

I am sure employment can swiftly be found at the nearest US Army recruiting office. The force is hard stretched and paying good money. Well, relatively good.

On your way soldier!

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Sat Aug 18th, 2007 at 12:38:39 AM EST
Cramer is a self-promoting asshole who shouts loudest when things are bad, because that's when he gets his name splashed all over. Nothing else.
by afew (afew(a in a circle)eurotrib_dot_com) on Sat Aug 18th, 2007 at 01:45:45 AM EST
[ Parent ]
I don't watch Cramer except for Youtube clips but...

Did you notice that not long after, the Fed DID open the discount window?

I can assure you, the Fed does NOT listen to me like that. (sigh)

"Remember the I35W bridge--who needs terrorists when there are Republicans"

by techno (reply@elegant-technology.com) on Sat Aug 18th, 2007 at 03:33:11 AM EST
[ Parent ]
I was having a conversation with a friend last night.

I was talking about the "discount window", and the bank run in LA and the possibility that for the first time in 70+ years Americans could see a real bank collapse where people see their money got puff.  Now I undertand that the FDIC insures up to $100,000, but after that you're on your own.  

My friend is from Mexico, and he was telling me about the peso crisis in 1994.  He lost everything.  As much as we like to think that we are immune to this in the developed world, we aren't. The political impact of hundreds of thousands forced from their homes, others who've lost the money they've put in the bank. We aren't prepared for that.

Now the government can step in to provide order, but after what happened with Katrina, I'm not holding my breath.

And when you subject a nation to that sort of economic hardship you intitate Polanyi's double movement.  Society acts to protect itself, and that can come in social democratic form, or that can result in appeals to God and country.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Sat Aug 18th, 2007 at 12:49:48 PM EST
[ Parent ]

the UK is worse.  The govt cover is about L15K at 75% if I remember from the time when BCCI went down.

Money is a social contract.  If the contract fails, those who are ahead get hosed.  Those who are behind get a redo.

by HiD on Mon Aug 20th, 2007 at 03:32:42 AM EST
[ Parent ]
In France it's 70 000 euros of deposit per institution: if you have have multiple accounts at the same institution the total insured is 70 000 euros. If you have 70 000 in bank A and 70 000 in bank B and both fail you get back 140 000 from the insurance.

Details, kind of deposits covered and list of institutions covered by the insurance are here:


Delay for repayment is 2 monthes.

by Laurent GUERBY on Mon Aug 20th, 2007 at 04:07:20 AM EST
[ Parent ]
You've got to be kidding.

The UK only guarantees to 15,000 quid, are you serious?

I can't understand why the British would even put money i the bank.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Mon Aug 20th, 2007 at 09:55:25 AM EST
[ Parent ]
No it's twenty thou per institution, paying out at 90 pence on the pound.


-- #include witty_sig.h

by silburnl on Fri Sep 14th, 2007 at 01:53:13 PM EST
[ Parent ]
Hi, welcome on ET silburnl !

Do you have a reference/URL for this information? I've been looking for it (now that there's a bank run in the UK).

90 pence on the pound looks like a big mistake because it gives incentive to run in all cases!

by Laurent GUERBY on Sat Sep 15th, 2007 at 07:52:26 AM EST
[ Parent ]
No problem Laurent, thanks for the welcome although I've been lurking here for a while.

My shot from the hip was wrong in fact, it's been a while since I looked at this stuff. The protection for bank deposits is actually:

First £2k - 100% covered
next £33k -  90% covered

leaving anything above £35K vulnerable if the bank goes under.

Here's a link to the horse's mouth:

The point is moot however, since the Chancellor announced last night (after it became evident that depositor nervousness was likely to spread to other banks) that for the duration of the current crisis HMG is standing behind Northern Rock for all of their deposits and will stand behind the entirety of deposits for any institution who approaches the Bank of England for lender-of-last-resort funds.

Thus politics trumps moral hazard.


-- #include witty_sig.h

by silburnl on Tue Sep 18th, 2007 at 10:22:55 AM EST
[ Parent ]
Thanks for this diary.

You can't be me, I'm taken
by Sven Triloqvist on Sat Aug 18th, 2007 at 03:49:00 AM EST
Wow. Excellent diary, techno. Thanks!

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia
by whataboutbob on Sat Aug 18th, 2007 at 06:00:09 AM EST

I wish more people realised that ultimately it's only human inventiveness that creates real wealth.

A minor quibble about the concept of value. The purpose of marketing and advertising is to create the illusion of value.

That's why practitioners are so highly paid. The other element of these insanities is that so much inventiveness is being sidelined away from real creativity into the industrial manufacture of illusory desires.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sat Aug 18th, 2007 at 06:04:58 AM EST
Brilliant, in terms of its analysis of "Money as Object" as with

Money as Debt

But let's consider Money as the broader concept that it is. Rather than focusing on Money as an Object, we should IMHO focus on Money - like Property - as a relationship rather than as an Object..

 Rule #1. Money is only information

Information is implicit in Money - and it may constitute "money's worth" in the way that it may have a Value in exchange. But while information is "Valuable" it is not Money.

A monetary system involves static information in databases:
   (a) who "owns" or has rights of use in what (title registries/ balance sheets);
   (b) who has what obligations to whom - (transaction registries and ledgers).

A monetary network, or clearing system is where dynamic information zaps between these databases and updates them.

An instant monetary messaging system is in fact the requirement for this generic monetary "clearing" network.

Rule #2. The most interesting information that money conveys is that of value

A "Value Unit" is implicit in the concept of Money and in a monetary system. But it is an abstraction.

"Money's Worth" like energy, gold, commodities whatever changes hands by reference to it. It is a unit of measure, and no more has Value than (say) an inch, metre, or kilogram. It MEASURES Value.

A monetary system will always involve information in relation to value judgements and the transactions to which they give rise.

Rule #3. Humans determine the value of money

Not quite. They determine the relative Value of different forms of "Money's Worth" (aka "Value") by reference to a Value Unit at the instant of a Value event or "Transaction"

Money itself has no Value - although we treat our current Debt Money IOU "Objects" - which are "anti-Value" - as though they WERE Value.

Rule #4. Those who set the rules for the formation of money determine everything else.

Society essentially determines the protocols bounding a monetary system.

Since our current Money constitutes credit created by Banks then those who have a monopoly over credit creation have a stranglehold over us.

But in fact we may consensually agree to exchange any forms of Value = Money's worth by reference to any Value Unit we choose.

So we could say that as from today the right to occupy 1 sq metre of the UK for one day, or the right to the use of 1 kilowatt for one hour is "worth" one of our current "Debt Money" £'s.

And from this point on, those forms of money's worth - "Land Rental Units" amd "Energy Units" will be exchangeable by reference to each other and to the "£", which would probably begin to decline in value relative to these units.

Rule #5. Interest rates ultimately determine the effective supply of money  

Time Value is inherent in Money, and while Money itself has no "cost" (albeit "debt Money" does), we are all able to make judgements about the relative value of "money's worth" to us NOW as opposed to (say) in 3 months time.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Aug 18th, 2007 at 07:23:10 AM EST
In the new film "Die Hard 4.0" there is an episode with the implication that if, oh dear, the bad guys will erase or alter all income/obligations information of the Wall Street, the civilization will fall back to the stone age. A kind of funny hint, but I may imagine some viewers may take seriously.

If money is information, is it only the amount of money that matters? It seems this money information is based on the counting system based on 1 (as opposed to the binary system based on 2, and the decimal system based on 10). Can we have a more structured "money" as information?

Are the compound interest rates applied broadly today? I thought they are a rule.

Michael Hudson has some articles on evils of compound interest rates. He also critisizes "equilibrium models" accordingly:

The task of economic regulation is reduced to setting an appropriate interest rate to keep all the economy's moving parts in equilibrium. This interest rate is supposed to be controlled by the money supply. An array of measures is selected from the overall credit supply (or what is the same thing, debt securities) to represent "money." This measure then is correlated with changes in goods and service prices, but not with prices for capital assets - bonds, stocks and real estate. Indeed, no adequate statistics presently exist to trace the value of land and other real estate.

The resulting economic models foster an illusion that economies can carry any given volume of debt without having to change their structure, e.g., their pattern of wealth ownership. Self-equilibrating shifts in incomes and prices are assumed to enable a debt overhead of any given size to be paid. This approach reduces the debt problem to one of the degree to which taxes must be raised to carry the national debt, and to which businesses and consumers must cut back their investment and consumption to service their own debts and to pay these taxes.

Excluded from the analysis is the finding that many debts are not repayable except by transferring ownership to creditors. This transfer changes the shape of the economy's legal and political environment, as creditors act as rentiers to subordinate labor and capital to the economy's financial dynamics.

Rent-seeking exploitation and the proverbial free lunch are all but ignored, yet real-world economics is all about obtaining a free lunch. [Such] considerations are deemed to transcend the narrow boundaries of economics. These boundaries have been narrowed precisely so as to limit the recognized "problems" only that limited part of economic life that can be mathematized, and indeed, mathematized without involving any changes in social structure ("the environment").

A particular kind of mathematical methodology thus has come to determine what is selected for study, recognizing only problems that have a single determinate mathematical solution reached by or what systems analysts call negative feedback. [Such] entropic behavior is based on the assumption of a falling marginal utility of income: The more one earns, the less one feels a need to earn more. This is fortunate, because most models also assume diminishing returns to capital, which is assumed to be invested at falling profit rates. Income and wealth thus are portrayed as tapering off, not as soaring and polarizing until a financial collapse point, ecological limit or other kind of crisis is reached.

A model acknowledging that positive feedback occurs when the rich get richer at the expense of the poorer, and when the "real" economy is dominated by an expanding overhead of financial capital, will depict an economic polarization that has an indeterminate number of possible resolutions. The economic problem becomes essentially political in the sense that conflicting trends will intersect, forcing something to give. This is how the real world operates. But to analyze it would drive economists out of their hypothetical entropic universe into an unstable one in which the future is up for grabs. Such a body of study is deemed unscientific (or at least, uneconomic) precisely because it cannot be mathematized without becoming political.

by das monde on Sun Aug 19th, 2007 at 12:40:38 PM EST
[ Parent ]
This is brilliant diary. One needs a lot of time and maybe to print it to digest it point by point. I agree that money is information and right idea, many economists of the past were wrong when they linked it to capital and labor only. Capital and labor are necessary but they are not enough, one has to have brilliant idea and perfect knowledge or intuition whether this or that idea would work. That's meaning of information - something which is unknown to others.
I believe we are going into information age where skills to sift information through, recognition of marketing ploys to create illusory values and so on will be necessary for survival and success.
In this process internet is indespensible, that's why blogs and alternative sources of information and analysis are mushrooming.
by FarEasterner on Sat Aug 18th, 2007 at 12:19:55 PM EST
There is one point that I would discuss, and that is your criticism of Volcker and his method to fight inflation, and more generally of "above NUP" interest rates.

Today's crisis was not created by the interest rate increases, but by the fact that interest rates were too low for too long, and banks failed in their gatekeeper role, because at such low rates, lots of dubious investments seem attractive and get financed. And once that has happened, there is no other solution to solve the crisis (unless you have a better idea) than to cut off funding and let the most dubious entreprises fail. and if you wait too long to do this, you do indeed also bring down entreprises that should never fail byut cannot handle the higher interest rates.

Your idea of protecting certain categories of investments from higher interest rates is certainly worth thinking about, though

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sat Aug 18th, 2007 at 02:26:21 PM EST
Thanks for responding Jerome.  I really posted this for you.

I wonder though about your assertion that today's crises was not caused by interest rate increases--especially when we just had 17 of them in a row in USA.

I also think this is probably a matter of perspective.  When your hero Keynes was inventing SDRs (paper gold) in the 1940s, he suggested that loans to sovereign states should go out at .75%.  I saw loans to Latin America at over 21% in the 80s.  The idea that a 6% home mortgage is low is absurd to any of us who lived through the Great Prosperity.  (There are 100s of GOOD reasons why Christianity once considered usury a more serious crime than murder.)

As for whether low interest rates cause dubious investments, I would argue that the reverse is true, and has always BEEN true.  The reason is simple--when rates are high, only liars and crooks will even bother to apply for a loan.  I thought the reason we had bankers was to screen out dubious loans.  To blame bad loans on low interest rates truly IS a stretch!

"Remember the I35W bridge--who needs terrorists when there are Republicans"

by techno (reply@elegant-technology.com) on Mon Aug 20th, 2007 at 01:27:39 PM EST
[ Parent ]
The interest rate increases are the trigger of the crisis, but the crisis is as big as it is because the interest rate increases reveal (and kill off) all the bad investment decisions made at the time money was cheap.

I'd argue that you get more liars and crooks when interest rates are low, because banks don't get to pay the consequences of such dubious loans (which are easier to repay).

 I thought the reason we had bankers was to screen out dubious loans.

Yes, that's where the responsibility lies, ultimately, in reality - but not necessarily in practice, unfortunately. Bankers don't get evaluated only in function of their ability to sift through loan proposals. Or more to the point, they get evaluated (and remunerated) on the immediate income, but are not made responsible for the corresponding long term risk. That disconnect encourages them to take more risks in good times (and cuts off funding in bad times, as the risk people take over and cut off funding indiscriminately).

I see two solutions:

  • make bankers personally responsible for the repayment of the loans they provide (financially or criminally, or at the very least reputationally);
  • increase marginal tax rates to punitive levels, so that remunerations of bankers stop being so excessive (which comes from making appear today wealth expected in the future, via financial engineering).

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Aug 21st, 2007 at 12:34:30 PM EST
[ Parent ]
The interest rate increases are the trigger of the crisis, but the crisis is as big as it is because the interest rate increases reveal (and kill off) all the bad investment decisions made at the time money was cheap.

Whew!  I think your analysis is flawed here.  For several reasons.

  1. The price of money never got to be very cheap in USA and elsewhere even when there was low interest rates at the fed.  So the idea that the kind of sound investments that low interest rates bring was ever tried simply is not true.  
  2. The cheap money of the post dot.com bubble came after a generation of loan-shark rates of return.  There are people in their forties who consider 12% an unacceptably low rate of return.  There are people who have 15% returns built into their annual budgets--this includes retired schoolteachers and other normal citizens.  Since a well-run company that makes useful goods and pays all its bills will be lucky to return a 4% profit, these people will not even consider a real investment.
  3. A generation of legal loan-sharking has killed off the people who could do legitimate economic development long ago.  Not only are we not creating the systems that will allow us to live sustainably, we cannot even keep our freaking bridges from collapsing.  The current crop of bankers think we must pay them to even do necessary work.  So the necessary workers have been starved out of the ability to build the next generation of technologies.  

If we could have a whole generation of a low-interest, pro real investment environment, and still have an economy that thinks running a hedge fund is a smart thing to do, THEN I might believe the current economic problems were caused by a TEMPORARY and narrowly realized excess of cheap money.  Until that day, however, I will continue to believe that our economy is MOST damaged because loan-sharks are running it.

There are important reason why we have to get this right.  It is bad enough that bankers are loan sharks.  It is MUCH worse that they think their power gives them the exclusive right to make ALL the important economic decisions.  The greatest Fed chairman was a  guy by the name of Mariner Eccles. JK Galbraith called him "the most important Keynesian of them all." And what made him so great, IMHO, was the fact that he understood that banking existed to make the rest of the economy run smoothly.  Compare this to the current crop of arrogant martinets who believe they should order around sovereign governments and industrial giants, and you have a small understanding for why the banking profession once commanded respect.  Historically, bankers who perform a useful social service tend to be loved more than bankers who take the money and run.

"Remember the I35W bridge--who needs terrorists when there are Republicans"

by techno (reply@elegant-technology.com) on Tue Aug 21st, 2007 at 05:43:43 PM EST
[ Parent ]
the only area i question is the idea that farmers are some group we should all respect and protect.  I have a hard time thinking they are a special case.  Many have no clue and suck all the life from the land and then move on.  No to mention they tend to be conservatives which puts them  on the dumbass side of the scale in my book.
by HiD on Mon Aug 20th, 2007 at 03:42:30 AM EST
Got a thought.

If you REALLY think farmers are not important, stop eating until you can rethink your position.

And while it is possible to meet some seriously reactionary farmers, it is also true that the MOST progressive economic positions (ever) were invented by folks who have worked the land (see JK Galbraith or TB Veblen.)

"Remember the I35W bridge--who needs terrorists when there are Republicans"

by techno (reply@elegant-technology.com) on Mon Aug 20th, 2007 at 06:27:06 PM EST
[ Parent ]
The isolation that farmers can feel in our developing world may have something to do with the "conservative idiot" perception you have tacked on.  Bringing farmers and rural people in general up to speed with the last 10-20 years of technological change will greatly impact the social and political world.  This is the story of the next 20 years of politics in the US and the previous 10 years of politics in Europe.
by paving on Thu Sep 13th, 2007 at 08:47:40 PM EST
[ Parent ]
The farmers I know are not at all isolated in any social sense.  They get their television on mini-dishes.  They probably have a broadband connection to the Internet.  Most have science-based university educations.

Moreover, the phenomenon of the engaged farmer has long been true here in Midwest USA.  Both of my grandfathers were farmers.  Both were extremely well-read.  One played cello in a string quartet and two of his children sang in Bach Societies.  The other organized producer cooperatives in four languages.

Farmers are not isolated in some BS academic sense.  They are isolated because they are economically vulnerable.  Ripping off farmers is the oldest game in recorded history.  The lie of the stupid farmer helps the Predators feel better about themselves.

The time has come to stop telling ourselves that because farmers now constitute less than 2% of the population, they are unimportant.  In fact, because agriculture is necessary, those 2% are probably the most critical professionals the society has.

"Remember the I35W bridge--who needs terrorists when there are Republicans"

by techno (reply@elegant-technology.com) on Fri Sep 14th, 2007 at 03:29:36 AM EST
[ Parent ]
There is another point which is that while farmers work extremely hard and long hours in many cases, they DO have a great deal of time to actually THINK.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Fri Sep 14th, 2007 at 06:10:40 AM EST
[ Parent ]
Thanks for writing this.

Can the last politician to go out the revolving door please turn the lights off?
by Carrie (migeru at eurotrib dot com) on Sat Sep 1st, 2007 at 05:36:41 PM EST

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