7 Ways to Stop Wall Street's Con Game

Reposted in full from YES! Magazine, 25 May 2011

'Wikipedia defines a “confidence trick” as “an attempt to defraud a person or group by gaining their confidence. The victim is known as the mark, the trickster is called a confidence man, con man, confidence trickster, or con artist, and any accomplices are known as shills. Confidence men exploit human characteristics such as greed and dishonesty.”

Ever hear a business reporter on the evening business news say, “Today, investors drive up the price of commodities to create a hundred billion in new value,” or some such? Sounds great, almost implying we should offer thanks to these champions of the public good who are risking their fortunes to expand the pool of wealth to enrich us all. The reporter is manipulating the language to set us up as marks in the Wall Street con.

A more honest report might have said, “Today, hedge fund traders speculating with other people’s money walked away with multimillion dollar commissions for inflating the commodities bubble by a hundred billion dollars.” In a more honest world, the report would clearly distinguish between real investors creating real wealth through real investments and speculators creating phantom wealth with financial games. People who bet on the price of pieces of paper would be called “gamblers.” Those who hold the bets and distribute the winnings would be called “bookies.”

Boil it down to the basics and you see that Wall Street is in the business of operating four sophisticated, large-scale confidence games.

▪ Counterfeiting: Through financial bubbles and loan pyramids, it creates facsimiles of official money for private gain unrelated to anything of real value.

▪ Securities fraud: Selling shares in asset bubbles that are maintained solely by the constant inflow of new money is, in effect, a Ponzi scheme.

▪ Reverse insurance fraud: Insurance fraud, by common definition, occurs when the insured deceives the insurer. In reverse insurance fraud, the insurer deceives the insured. In Wall Street practice this involves collecting premiums to cover risks the insurer lacks adequate reserves to cover and then refusing to pay legitimate claims.

▪ Predatory lending: Using a combination of extortion, fraud, deceptive promises, and usury, predatory lenders lure the desperate into perpetual debt at exorbitant interest rates.

Because of Wall Street’s hold on lawmakers, these may all be perfectly legal, but phantom wealth is still phantom wealth, and these are all forms of theft. In three-card monte the dealer shuffles the cards so fast you can’t follow them, while talking even faster. Complex derivatives are a fast shuffle that makes it virtually impossible to follow the connection to any real value.

What makes the Wall Street con so much better for the dealers than a typical street con is that Wall Street dealers bet on their own game using other people’s money and then manipulate the market outcome in their own favor, rewarding themselves with huge bonuses when they win and taking billions in taxpayer bailouts when they lose.

Real financial reform would render unproductive speculation either illegal or unprofitable. Here are a few suggestions:

1. Prohibit selling, insuring, or borrowing against an asset not actually owned by the seller, and issuing any security not backed by a real asset—all common Wall Street practices.
2. Place strict limits on how much a financial institution can borrow in order to buy a property, and establish conservative reserve and capital requirements for institutions in the business of selling insurance of any kind.
3. Regulate bond-rating agencies and impose strict penalties for fraudulent ratings.
4. Impose a small financial-speculation tax of a penny on every $4 spent on the purchase and sale of financial instruments such as stocks, bonds, foreign currencies, and derivatives. This would have no consequential impact on real investors making long-term investments in real businesses and assets. But it would discourage short-term speculation and arbitraging.
5. End the obscure tax loophole that allows hedge fund managers to report their billion-dollar compensation packages as capital gains, taxed at only 15 percent.
6. Assess a 100 percent capital gains surcharge on profit from the sale of assets held less than an hour, 80 percent if held less than a week, and perhaps falling to 50 percent on assets held more than a week but less than six months. This would render most forms of speculation unprofitable, stabilize financial markets, and lengthen the investment horizon without penalizing real investors.
7. Eliminate debt slavery by raising the wages of working people and the taxes of the moneylenders.

Opponents will claim that such regulation and taxes will stifle financial innovation. Good. That is the intention. Wall Street’s financial innovations are mostly ever more sophisticated and deceptive forms of theft. They should be discouraged. Keep the casinos in Vegas. The need to rebuild financial institutions that meet our needs for basic financial services will be the subject of next week’s blog. '

The Peasant Revolt

Image: http://eavoss.files.wordpress.com

Reposted in full from Transition Voice, 24 May 2011

'Has our society become so obsessed with economic growth that people have become a commodity? Two items in my morning newspaper strongly suggest the answer to be an emphatic, shameful YES.

The first is a national story about how smuggling people across the Mexico/US border has become a billion dollar business. The Associated Press story reports on “a clandestine business worth billions a year, people packed tighter than cattle and transported like consumer goods in tractor trailers to the United States.” The United Nations estimates this to be a $6.6 billion people-trafficking business.

Making babies makes money

The second is a local editorial lamenting census reports that fewer Coloradoans are families with children. The rant warns of the “dangers of population decline,” and that “we cannot sustain the economy…when old, non-working Americans – dependent on pensions and government subsidies – outnumber people of working age.” It advises we’re in for “a future of poverty and despair,” if we don’t either get busy making babies or importing children. I kid you not! The headline reads, We Must Produce or Import Children.

These sad, but true pieces of modern Americana from today’s paper reveal that the bean counters have won. Persons are now perceived as little more than a commodity, an asset on the balance sheet to be bought, sold, exported, and imported.

The value of a human life is now too often counted by its contribution to an economy. We’ve been seeing the signs of this for quite some time, but today’s local editorial just begged for a bright spotlight to be shone on its unapologetic stance.

The best laid plans…

If it weren’t potentially so tragic, it’d be pretty funny. The writer actually had the temerity to pen, “a minority cannot provide adequately for a majority, any more than a pyramid can balance upside down.” He’s apparently unashamed that he’s defending a (right side up) pyramid scheme. And he clearly disregards that a pyramid scheme, unlike a diamond, is not forever.

The editorial completely ignores what other headlines this week have revealed: populations are starving, oceans are dying, rivers and aquifers are drying up. But don’t let that stop the grow-at-all-costs mind set. God forbid we interrupt this scheme of Ponzi demography and let the rate of population growth – whether it be global, national or local- decline.

Growth-pushers frequently use the pension and Social Security population Ponzi scheme to defend and encourage population growth. And while they’re correct in identifying one of the difficulties inherent in achieving a sustainable population, their analysis is grossly slanted and incomplete. They blow the problem out of proportion, ignore myriad smart solutions, and jump on the easiest but most deadly solution of adding more players to the bottom of the pyramid.

My local paper’s editorial opinionator might just be an uninformed hack. Or perhaps he’d rather hang on to his readership the easy way – by trucking new subscribers into town when the labor and delivery rooms aren’t meeting their quotas, rather than the more difficult way – writing informed, enlightened, thoughtful pieces more of us will want to read.

It’s hard to say.

Life for life’s sake

For now, I offer an alternative view. People aren’t financial assets. We’re not drones to be exploited in service to corporate profits or government tax coffers. We’re not products to be produced or imported.

Continued population and consumption overshoot will result in very serious resource shortages. This is already happening.

Adjusting to the relatively minor challenges of ending an unsustainable population and economic growth scheme is much preferred to dooming our children to a life of hunger and misery. Unless you’re a soulless growth-pusher counting nothing but dollars, a good life for fewer is better than a crappy life for more.'

Masters in Economics for Transition

Sourced from the new economics foundation, May 2011

'From September 2011, Schumacher College, Dartington will be offer a new MA degree course in "The Economics for Transition: Achieving low carbon, high well-being, resilient economies". This pioneering postgraduate programme has been developed by nef, Schumacher College and the Transition Network, and is offered through the Business School at the University of Plymouth.

The programme is designed to support a new generation of leaders and activists to create an economy fit for the challenges of the 21st century. It will be attractive to people at different stages in their life seeking to make a positive contribution to the economics of transition through enhancing their knowledge; acquiring practical skills for sustainable living, working and ecological citizenship; and sharing experiences with people from all over the world.

Who is the programme for?

The programme is designed to support a new generation of leaders and activists to create an economy fit for the challenges of the 21st century. Schumacher College attracts people from all walks of life from across the globe – from business leaders and entrepreneurs to policy makers and social and environmental activists.

This programme will be attractive to people at different stages in their life seeking to make a positive contribution to the economics of transition through enhancing their knowledge; acquiring practical skills for sustainable living, working and ecological citizenship; and sharing experiences with people from all over the world.

Why a new masters in economics?

As the world struggles to recover from the most severe and synchronized downturn since the Great Depression, the reputation of economists has rarely been lower. For many, economics was a big part of the problem and so cannot be part of any solution.

Never has there been a more important time for a new approach to economics. Over the past two decades, key thinkers and practitioners have been developing alternative ways forward that once were dismissed as radical and marginal, but now are fast moving centre stage.

E.F. Schumacher was one of these foresighted pioneers who in 1973 laid out a new approach to economics that put values and compassion, people and planet at the centre of our economic system. To this day, Schumacher is known as the grandfather of new economics and his work has inspired a whole generation of leading thinkers, practising economists and environmental and social activists who have been growing the shoots of the new economy ever since. As we enter the decade of climate change, now is the time to make visible these achievements, learn from what works and in practice and co-create the great transition towards low carbon, high well-being, resilient economies

Challenges facing society that this Masters programme will address are:

• The triple crunch of climate change, financial crises and peak oil

• The crises in ecosystem health and social well-being across the globe

• The inter-connected nature of these crises and how they are systemically linked with the global economic model

• Growing disillusionment with current economic approaches and solutions

• How to transform these challenges into opportunities for change

Studying with leading thinkers, activists and practitioners

The MA in Economics for Transition is a collaboration between Schumacher College, the nef (the new economics foundation), the Transition Network and the Business School at the University of Plymouth. This provides a unique opportunity to study with leading thinkers, activists and practitioners in the new economy from a range of different perspectives.

Teachers include faculty from Schumacher College (Julie Richardson, Stephan Harding, Satish Kumar, and Philip Frances); nef (the new economics foundation) (including Andrew Simms, David Boyle and nef staff and associates), the Transition Network (including Naresh Giogrande, Sophy Banks and Rob Hopkins) and the University of Plymouth (including David Wheeler, Derek Shepherd, Atul Mishra and Lynda Rodwell).

Visiting teachers will be drawn from Schumacher College associates. In recent years, this has included Tim Jackson, Gunter Pauli, Wolfgang Sachs, Jonathon Porritt, Ed Mayo, Nic Marks, Vandana Shiva, Catherine Cameron, Janine Benyus, Ken Webster, Richard Douthwaite, Bunker Roy and many other key thinkers and activists. We will also be inviting new influential teachers such as Eve Mitleton Kelly who is Head of the Complexity Programme at the London School of Economics.

Course programme

• Module One: The Ecological Paradigm (20 credits)

• Module Two: The Emergence of the New Economy (20 credits)

• Module Three: The New Economy in Practice (20 credits)

• Elective Courses (20 credits each)
The short course options for 2011/12 will be finalised in the summer of 2011. Indicative titles for short courses include:
Creating a Transition Initiative (20 credits)
Sustainable Models of Enterprise (20 credits)
Ecological Leadership and Facilitation (20 credits)

Dissertation (80 credits)'

Anxiety Keeps the Super-Rich Safe from Middle-Class Rage

‎'Looking in the wrong direction' is what gets us fighting over what is left and how it allocated among a range of real needs - from disability services, to people seeking asylum/refuge, to ensuring pensioners do not live hand-to-mouth, to having enough doctors and nurses - instead of collectively working on demanding a less extreme pooling of society's wealth at the top.

Reposted in full from The Guardian, 18 May 2011

'Why aren't we more angry? Why isn't blood running, metaphorically at least, in the streets? Evidence of how the rich prosper while everyone else struggles with inflation, public spending cuts and static wages arrives almost daily. The Institute for Fiscal Studies reports that last year incomes among the top 1% grew at the fastest rate in a decade. According to the Sunday Times Rich List, the top 1,000 are £60.2bn better off this year than in 2010, bringing their collective wealth close to the record pre-recession levels.

Now comes a report this week from the High Pay Commission, set up by the Labour pressure group Compass. It reveals that FTSE 100 chief executives are on average paid £4.2m annually, or 145 times the median wage – and on current trends will be paid £8m, or 214 times the median, by 2020. In the financial sector, even the CEO can seem modestly rewarded: this year, the top-paid banker at Barclays will get £14m, nearly four times the chief executive's earnings and 1,128 times more than the lowest-paid employee receives.

Meanwhile, once inflation is taken into account, most people's incomes are set to fall, after 15 years of virtual stagnation. Between 1996-7 and 2007-8, the earnings of someone in the middle of the income distribution rose (1997 prices) from £16,000 to £17,100 – barely £100, or less than 0.7% a year. Even the increase for those quite near the top of the income scale, better off than 90% of their fellow citizens, was unspectacular. Their inflation-discounted pay crept up from £36,700 to £41,500, or less than £450 (1.2%) a year. The top 0.1% scooped the jackpot. They got a £19,000 pay rise every year, taking their incomes to £538,600, a gain of 67% over 11 years. The commission gives no figures for the top 0.01%, but we can be confident they did even better and dramatically so.

That is the most important point about what has happened to incomes in Britain and America during the neoliberal era: the very rich are soaring ahead, leaving behind not only manual workers – now a diminishing minority – but also the middle-class masses, including doctors, teachers, academics, solicitors, architects, Whitehall civil servants and, indeed, many CEOs who don't run FTSE 100 companies, to say nothing of the marketing, purchasing, personnel, sales and production executives below them. That is why, over the past decade, some of the most anguished cries about high incomes and inequality have appeared in the Telegraph and Mail.

The commission describes levels of top pay as an instance of "market failure" because most arguments used to defend it just don't stack up. For example, despite claims that pay levels are dictated by global competition, the majority of FTSE 100 CEOs are British, promoted from within their companies. Only one CEO has been poached in the past five years – by a British rival. But top pay also suggests political failure, particularly on the left. To put it crudely, why can't leftwing parties harness middle-class anger against the super-rich? Surveys show a substantial majority of the electorate agree that differences in income are too large and that ordinary people don't get a fair share. Only one in eight disagree. Why is this so difficult to translate into a political programme that could command mass support?

One reason why the working classes so often disappointed the left was that, having little daily contact with the rich and little knowledge of how they lived, they simply didn't think about inequality much, or regard the wealthy as direct competitors for resources. As the sociologist Garry Runciman observed: "Envy is a difficult emotion to sustain across a broad social distance." Nearly 50 years ago he found manual workers were less likely than non-manual workers to think other people were "noticeably better off". Even now most Britons underestimate the rewards of bankers and executives. Top pay has reached such levels that, rather like interstellar distances, what the figures mean is hard to grasp.

But the gap between the richest 1% or 2% and everybody else in the top 20% or 30% is now so great and growing so rapidly that, one might reasonably think, it should change the terms of political trade. The income distance may be huge but the social distance is not. Those in the top 2% and the next 28% have often been to the same schools and universities. More important, they compete for scarce resources: places in fee-charging schools, houses in the best areas, high-end personal services. The super-rich have provoked raging inflation in the prices of these goods. Many of the not-so-rich were born into the professional classes and high expectations. Now, to their surprise, they find themselves struggling. In income distribution, their interests are closer to those of the mass of the population than to people they once saw as their peers.

They are not, however, imminently likely to join a crusade for equality. This generation of the middle classes has internalised the values of individualist aspiration, as zealously propagated by Tony Blair as by Margaret Thatcher. It does not look to the application of social justice to improve its lot. It expects to rely on its own efforts to get ahead and, crucially, to maintain its position.

As psychologists will tell you, fear of loss is more powerful than the prospect of gain. The struggling middle classes look down more anxiously than they look up, particularly in recession and sluggish recovery. Polls show they dislike high income inequalities but are lukewarm about redistribution. They worry that they are unlikely to benefit and may even lose from it; and worse still, those below them will be pulled up sufficiently to threaten their status. This is exactly the mindset in the US, where individualist values are more deeply embedded. Americans accepted tax cuts for the rich with equanimity. Better to let the rich keep their money, they calculated, than to have it benefit economic and social inferiors.

As Runciman observed, "most people's lives are governed more by the resentment of narrow inequalities, the cultivation of modest ambitions and the preservation of small differentials" than by the larger picture of social justice. That applies as much to the professional as to the working classes.

But as the super-rich stretch further ahead, appropriating, with the assistance of a Conservative-led government, ever increasing proportions of national resources, Ed Miliband and Labour have the opportunity to build a new cross-class consensus for a more equal society. "The squeezed middle" may be a concept that lacks both precision and passion, but at least it shows Miliband is thinking along the right lines.'

We're Not Broke, Just Twisted: Extreme Wealth Inequality in America

SHARE. You bastards.

Sourced from YouTube, 18 May 2011

World Economics Association Launched

Sourced from World Economics Association, 18 May 2011

'The World Economic Association (WEA) was launched on May 16, 2011. It fills a gap in the international community of economists - the absence of a truly international, inclusive, pluralist, professional association. The American Economic Association and UK's Royal Economic Society provide broad associations mainly for their country's economists. The WEA will do the same for the world's community of economists, while promoting a pluralism of approaches to economic analysis.

To this end, the WEA will initially publish three quarterly journals and host online conferences. Online subscriptions are free to members (a fee will be charged for print copies). The anticipated size of the WEA's membership means that its journals will have the largest readerships of any in the world.

Manifesto

The World Economics Association (WEA) seeks to increase the relevance, breath and depth of economic thought. Its key qualities are worldwide membership and governance, and inclusiveness with respect to: (a) the variety of theoretical perspectives; (b) the range of human activities and issues which fall within the broad domain of economics; and (c) the study of the world’s diverse economies.

The Association’s activities will centre on the development, promotion and diffusion of economic research and knowledge and on illuminating their social character. To achieve these aims the Association constitutes itself as a new form of worldwide, democratic, and pluralist organization with the following commitments:

1. To plurality. The Association will encourage the free exploration of economic reality from any perspective that adds to the sum of our understanding. To this end it advocates plurality of thought, method and philosophy.
2. To competence. The Association accepts the public perception that competence levels in segments of the economics profession were found wanting by recent events. So as to better serve society in the future, the Association will encourage critical thought, development of new ideas, empirically based rigor and higher standards of scholarship.
3. To reality and relevance. The Association will promote economics’ engagement with the real world so as to confront, explain, and make tractable economic phenomena. In this context it will also encourage economics to give active consideration to its history, its methodology, its philosophy and its ethics.
4. To diversity. Both the membership and governance of the Association are specifically constituted in order to embrace all forms of diversity within its membership.
5. To openness. The Association intends to ensure that all its processes of publication, discussion, meeting and association are transparent and open to input from all its members. To this end the WEA will constitute itself on the internet and use digital technologies wherever possible, including online conferencing and virtual publication.
6. To outreach. The Association recognizes the valuable contributions to economic thought that are made by researchers and thinkers outside the main body of economics. The WEA will encourage such people to become members and add their insights to our collective learning.
7. To ethical conduct. The Association will establish a committee to draw up a code of ethics.
8. To global democracy. The Association will be democratically structured so as not to allow its domination by one country or one continent.

The association believes that these commitments, when held in common by its members, will increase the relevance, breadth and depth of economic thought, so that in the future the economics profession and associated professions will be better equipped to serve humankind.'

Three Types of Economic Interaction

Reposted in full from Symbionomics, 11 May 2011

'Economic interactions can be boiled down to three core patterns. I will make no attempt to take an ethical stance on any of them, though their ethical implications are obvious. Let me also say that this post is a gross over-simplification. However, sometimes, over-simplifications can be valuable tools for helping us see where opportunities for innovation lie. That is my intention here.

Pattern 1: You’ll do that

Otherwise known as brute force. Basically the point is to get someone else to do something that benefits you by threatening violence. Examples include slavery, serfdom, empire building, and extortion. People who engage in this behavior calculate, consciously or otherwise, that the *other* is so different from them that the trust needed for reciprocal trade is impossible. Since even the most rudimentary trades are based on unconscious cultural assumptions, one can see why the threat of violence might appear an easier way of getting value from people. However, violence requires the perpetrator to expend considerable resources in the process. While in the short term, the resources expended may seem worth it, this strategy is, overall, a relatively low-yield investment. History has shown again and again that societies that are built on this kind of economic interaction ultimately wind up self-destructing.

Pattern 2: I’ll do this IF you’ll do that

Otherwise known as trading. As people began to develop a basic trust in the *other*, they learned that they could expend considerably fewer resources to get things of value by engaging in reciprocal exchange. Once, long ago, this process was done with direct trade (asparagus for shirts). About five thousand years ago, we learned to substitute information tokens for actual goods, and money was born. Using this method of economic interaction requires that we share enough context with the “other” to trust that they won’t take what they want by force or flake on their end of the deal. Strong legal institutions have helped establish this kind of trust. Today this is the primary way we interact with society at large. But even with today’s light speed monetary transactions, the core remains about parting with something of value to get something of value.

I don’t want to talk this pattern down too much as it is a huge improvement from the “You’ll do that” way of doing things. However, there is still much inefficiency in a reciprocal economy. For instance, economic interaction doesn’t happen without agreeing on what each party will part with. And such blocks routinely prevent what would be valuable interactions. Also, this zero-sum logic usually results in people looking to get the most from others for the least of their own.

Pattern 3: I’ll do this

Otherwise known as gifting. Examples include tribal cultures, small villages, and what’s left of that today, families. When people share enough context and identity that the wellbeing of the other is seen as part of the wellbeing of the self, then gift economies become the most efficient way of interacting. Gone are any of the inefficiencies of force, or of haggling out a deal. When people are on the same team working for the same goal, reciprocity becomes irrelevant. How many times do you see basketball players striking deals on the court: “I’ll pass you the ball now, but you have to promise to pass it to me next time.” When people share common goals, reciprocity just gets in the way. This isn’t to say that some people on the team don’t pull more weight than others. In fact, when contributions are severely mismatched, other kinds of inefficiencies crop up. However, on a team everyone tends to see what everyone else contributes, so the process is highly self-regulating.

I believe this kind of economic interaction represents the future of the global economy. We must recognize our shared identity on this planet, both in terms of the impact we are having on the broader environment, and in terms of the impact we are having on each other. We must recognize ourselves as team humanity, and develop the information systems needed to make this third mode of economic interaction the primary driving force in the economy.'

The Magic Box of Money Creation

Sourced from Critical Mass podcasts, 8 May 2011

Mike Freedman, currently producing the documentary film, Critical Mass, talks with Ben Curtis and Ben Dyson from Positive Money UK to talk about the way money is created, how it affects everything from politics to the environment, what's wrong with the current system and what we can do to fix it.

15 Things They Don't Tell You About Money

Dire Straits were right!

Sourced from Positive Money, 29 April 2011

'Inspired by Ha Joon Chang’s 23 Things They Didn’t Tell You About Capitalism (2010) where you learn for example that the Nobel Prize for Economics is not really a Nobel Prize: it is awarded by the Swedish Central Bank.

1. Governments in full sovereign control of their currencies can create sufficient money to ensure full employment and to finance all their activities. There is no limit to money creation and to say that ‘there is no money left’ is as absurd as it is untrue.

2. Governments with sovereign power do not need to borrow either from private financial institutions or the IMF. That they borrow and then have to ‘appease financial markets’ is a self-imposed constraint, rather like tying your shoelaces together and claiming that you can’t walk (see Warren Mosler below).

3. Governments do not control the money supply but instead have chosen to subcontract the provision of the public money supply to private banks.

4. Governments voluntarily forego the substantial public revenue of money creation called seigniorage. In the UK this amounts to a subsidy to private banks of the order of £100 bn a year

5. Money is not a ‘ thing’ but a legal relationship, a creation of the State. It is a token (these days electronic) system which establishes claims over resources.

6. Money is not wealth. Wealth is land, natural resources and the products of human labour. Money is only a claim on wealth.

7. Real wealth comes from the production of socially useful goods and services and investment in infrastructure and skills. Property or share price speculation and the promotion of pyramid schemes (the process called ‘financial liberalisation’ or ‘deregulation’) are predatory and extractive activities which do not create wealth.

8. Banks are offspring of the State. They have a virtual monopoly of money creation and the legal privileges and protections of corporate personhood and limited liability. They pretend to be independent and self reliant but like spoilt teenagers, at the first sign of trouble, they run home crying and demanding unlimited handouts.

9. Banks do not lend anything. They create money as credit out of nothing and charge interest on something which costs nothing to produce. Credit creates an additional debt overhead in the form of interest which adds to costs in the economy but, as no additional money is issued to cover it, there is never enough money in circulation to enable debt to be repaid, causing bankruptcies, recessions and unemployment.

10. Bank credit does not go into productive investment but into asset price speculation and ‘loans’ to other banks. When commentators refer to the banking crisis they are referring to the ongoing collapse of this classic pyramid or Ponzi scheme.

11. Banks expand and contract the money supply creating booms and asset price bubbles which collapse into recessions. This is called ‘the business cycle’ but there is nothing inevitable about it.

12. There must always be a deficit in the private or public sectors for the money system to function – someone somewhere has always to be spending more than they are earning.

13. There are only two ways that money can enter the economy: credit issued by private banks or government spending. If credit dries up, only government can make good the shortfall or else there is a recession.

14. If you think that you have ‘money in the bank’, think again. Bank accounts are only accounting entries representing the bank’s promise to pay, not real money.

15. Expanding the money supply by government-issued money is not inflationary except in conditions of full employment. Unlike bank credit, there is nothing intrinsically inflationary about government-issued money. Money issuance can always be controlled by taxation.'

The Beginners Guide to Carbon (Rogue) Trading

Sourced from The Ecologist, 3 May 2011

'The Environmental Investigation Agency's animated film highlighting how the global trade in carbon credits is open to abuse and exploitation...

As the debate over carbon trading intensifies, the real life eco-spooks have released this unique video to highlight the dangers of the current 'carbon rush'. For more info: www.eia-international.org'

Not For Profit World

My friend and colleague Donnie Maclurcan gave this talk in November 2010, and offered the following challenge - by 2050, could we evolve a not-for-profit world, where every business has as its primary objective, the fulfilment of social needs?

Sourced from Tedx Youth Brisbane

TED is a nonprofit organization devoted to Ideas Worth Spreading. Started as a four-day conference in California 25 years ago, TED has grown to support those world-changing ideas with multiple initiatives. The annual TED Conference invites the world's leading thinkers and doers to speak for 18 minutes. Their talks are then made available, free, at TED.com.

In the spirit of ideas worth spreading, TEDx is a program of local, self-organized events that bring people together to share a TED-like experience. At a TEDx event, TEDTalks video and live speakers combine to spark deep discussion and connection in a small group. These local, self-organized events are branded TEDx, where x = independently organized TED event. The TED Conference provides general guidance for the TEDx program, but individual TEDx events are self-organized. (Subject to certain rules and regulations)

Money and the Steady State Economy

Money created out of thin air? Commodity money? Token Money? Fiat Money? Herman Daly explains how our 'funny money' system evolved - '...if our present system, seems “screwy” to you, it should...'

Reposted in full from The Daly News, 26 April 2010

'Historically money has evolved through three phases: (1) commodity money (eg. gold); (2) token money (certificates tied to gold); and (3) fiat money (certificates not tied to gold).

1. Gold has a real cost of mining and value as a commodity in addition to its exchange value as money. Gold’s money value and commodity value tend to equality. If gold as commodity is worth more than gold as money then coins are melted into bullion and sold as commodity until the commodity price falls to equality with the monetary value again. The money supply is thus determined by geology and mining technology, not by government policy or the lending and borrowing by private banks. This keeps irresponsible politicians’ and bankers’ hands off the money supply, but at the cost of a lot of real resources and environmental destruction necessary to mine gold, and of tying the money supply not to economic conditions, but to extraneous facts of geology and mining technology.

Historically the gold standard also had the advantage of providing an international money. Trade deficits were settled by paying gold; surpluses by receiving gold. But since gold was also national money, the money supply in the deficit country went down, and in the surplus country went up. Consequently the price level and employment declined in the deficit country (stimulating exports and discouraging imports) and rose in the surplus country (discouraging exports and stimulating imports), tending to restore balanced trade. Trade imbalances were self-correcting, and if we remember that gold, the balancing item, was itself a commodity, we might even say imbalances were nonexistent. But of course the associated increases and decreases in the national price levels and employment were disruptive.

2. Token money would function pretty much like the gold standard if there were a one-to-one relation between gold and tokens issued. But with token money came fractional reserve banking. Goldsmiths used to loan gold to people, but gold is heavy stuff and awkward to carry around. Token money was created when a goldsmith gave a borrower a document entitling the bearer to a stated quantity of gold. If the goldsmith were widely trusted, the token would circulate with the same value as the gold it represented.

As goldsmiths evolved into banks they began to make loans by creating tokens (demand deposits) in the name of the borrower in excess of the gold they held in reserve. This practice, profitable to banks, was legalized. Statistically it works as long as most depositors do not demand their gold at the same time—a run on the bank. Bank failures in the United States due to such panics led to insuring deposits by the Federal Deposit Insurance Corporation (FDIC). But insurance also has a moral hazard aspect of reducing the vigilance of depositors and stockholders in reviewing risky loans by the bank. Fractional reserves allow the banking system to multiply the money tokens (demand deposits that function as money) far beyond the amount of gold “backing.”

3. Fiat money came when we dropped any pretense of gold “backing,” and paper tokens were declared to be money by government fiat. Currency is printed by the government at negligible cost of production, unlike gold. As the issuer of fiat money the government makes a profit (called seigniorage) from the difference between the commodity value of the token (nil) and its monetary value ($1, $5, …$100 …depending on the denomination of the paper note). Everyone has to give up a dollar’s worth of goods or services to get a dollar—except for the issuer of the money who gives up practically nothing for a full dollar’s worth of wealth.

Nowadays the fractional reserve banking system counts fiat currency instead of gold as reserves against its lending. The demand deposit money created by the private banking sector is a large multiple of the amount of fiat money issued by the government. Who earns the seigniorage on the newly created demand deposits? The private banks in the first instance, but some is competed away to customers in the form of higher interest rates on savings deposits, lower service charges, etc. It is difficult to say just what happens to seigniorage on demand deposits, but clearly that on fiat currency goes to the government. (With commodity money seigniorage is zero because commodity value equals monetary value—except when the mint purposely debased gold coins). Under our present system, money is currency plus demand deposits. Currency is created out of paper by the government, and no interest is charged for it; demand deposits are created by banks out of nothing (up to a large limit set by small reserve requirements) and interest is charged for it. For example, when you take out a mortgage to buy a house, you are not borrowing someone else’s money deposited at the bank. The bank is in fact loaning you money that did not exist before it created a new deposit in your name. When you repay the debt, it in effect destroys the money the bank initially loaned into existence. But over the next 30 years, you will pay back several times what the bank initially loaned you. Although demand deposits are constantly being created and destroyed, at any given time over 90% of our money supply is in the form of demand deposits.

If phase 3, our present system, seems “screwy” to you, it should. Why should money, a public utility (serving the public as medium of exchange, store of value, and unit of account), be largely the by-product of private lending and borrowing? Is that much of an improvement over being a by-product of private gold mining? Why should the public pay interest to the private banking sector to provide a medium of exchange that the government can provide at no cost? Why should not seigniorage, unavoidable in a fiat money system, go entirely to the government (the commonwealth) rather than in large part to the private sector?

Is there not a better way? Yes, there is. We need not go back to the gold standard. Keep fiat money, but move from fractional reserve banking to a system of 100% reserve requirements. The change need not be drastic – we could gradually raise the reserve requirement to 100%. This would put control of the money supply and all seigniorage in hands of the government rather than private banks, which would no longer be able to live the alchemist’s dream of creating money out of nothing and lending it at interest.

All quasi-bank financial institutions should be brought under this rule, regulated as commercial banks subject to 100% reserve requirements. Credit cards would become debit cards. Banks would earn their profit by financial intermediation only — i.e. lending savers’ money for them (charging a loan rate higher than the rate paid to savings account depositors) and charging for checking, safekeeping, and other services. With 100% reserves every dollar loaned to a borrower would be a dollar previously saved by a depositor, re-establishing the classical balance between investment and abstinence. The government would pay some of its expenses by issuing more non interest-bearing fiat money in order to make up for the eliminated bank-created, interest-bearing money.

However, it can only do this up to a strict limit imposed by inflation. If the government issues more money than the public voluntarily wants to hold, the public will trade it for goods, bidding the price level up. As soon as the price index begins to rise the government must print less, tax more, or withdraw some of the previously issued currency from circulation. Thus a policy of maintaining a constant price index would govern the internal value of the dollar (providing a trustworthy store of value and constant unit of account). In effect the fiat money would receive a real backing—not gold, but the basket of commodities in the price index. The external value of the dollar could be left to freely fluctuating exchange rates. These policies are not new—they go back to Frederick Soddy in1926, and to similar proposals by Frank Knight and Irving Fisher, the leading American economists of the 1920s. The fact that bankers and their friends in government and academia have willfully ignored these ideas for 90 years does not constitute a refutation of them, but rather is a tribute to the power of vested interests over the common good.

How would the 100% reserve system serve the steady state economy?

First, as just mentioned it would restrict borrowing for new investment to existing savings, greatly reducing speculative growth ventures—for example the leveraging of stock purchases with huge amounts of borrowed money would be severely limited.

Second, the fact that money no longer has to grow to pay back the principal plus the interest required by the loan responsible for the money’s very existence lowers the general pressure to grow. Money becomes neutral with respect to growth rather than biasing the system toward growth.

Third, the financial sector will no longer be able to capture such a large share of the nation’s wealth, leaving more available for meeting the needs of the poor. A steady state economy is not viable if it means a steady state of poverty for any significant proportion of the population.

Fourth, the money supply would no longer expand during a boom, when banks like to loan lots of money, and contract during a recession, when banks try to collect outstanding debts, thereby reinforcing the cyclical tendency of the economy. Reducing the risk of recession reduces the need to accumulate more to get us through the bad times.

Fifth, with 100% reserves there is no danger of a run on the bank leading to failure, and the FDIC could be abolished, along with its consequent moral hazard.

Sixth, the explicit policy of a constant price index would reduce fears of inflation and the resultant quest to accumulate more as a protection against inflation.

Seventh, a regime of fluctuating exchange rates automatically balances international trade accounts, eliminating big international surpluses and deficits. US consumption growth would be reduced without its deficit; Chinese production growth would be reduced without its surplus. By making balance-of-payments lending unnecessary, fluctuating exchange rates would greatly shrink the role of the IMF and its “conditionalities.” It also introduces more short-term risk and uncertainty into both international trade and investment. Many economists would see this as a disadvantage, but steady state economics favors a greater degree of national production for national consumption, and fluctuating rates would offer a bit of protection in the form of adding an extra element of cost (exchange rate risk) to international transactions. Like the Tobin tax it “throws a bit of sand into the gears” and reduces global commerce and interdependence to a more manageable level.

To dismiss such sound policies as “extreme” in the face of the demonstrated fraudulence of our current financial system is quite absurd. The idea is not to nationalize banks, but to nationalize money, which is a natural public utility in the first place. This monetary system makes sense independently of one’s views on the steady state economy. But it fits better in a steady state economy than in a growth economy.'

Good Debt, Bad Debt

David Korten provides another clear, no-nonsense explanation of debt and money...

Reposted in full from YES! Magazine, 8 February 2011

'It appears that we are a nation addicted to debt. In 2009, U.S. public and private debt totaled $57 trillion. Of this total, $42.5 trillion is private household/business/financial sector debt and $14.7 trillion is federal/state/local government debt. Of the private debt, $13.5 trillion is household debt, accounting for 122.5 percent of annual disposable income. Of the total U.S. debt, $14 trillion is owed to foreigners. Current U.S. GDP is $14.3 trillion.

So is this a problem?

Most of the money in circulation is created as credit when a bank issues a loan. By the nature of this system, no debt means no money. Now that would be a really big problem in an economy that cannot function without money.

More important than the size of the debt is the question of whether it is good debt or bad debt. So what’s the difference?

Let’s start with good debt. The underlying logic of a debt-based money system rests on the assumption that the money banks create by issuing loans is invested in ways that expand society’s productive capacity and thereby the available pool of real goods and services.

The problem facing the United States is that most of our outstanding debt is bad debt—it isn't backed by real assets.

It further assumes that the benefits produced are shared equitably among all who contribute. The savers and investors who defer their consumption to build the bank’s capital reserves receive a fair share as interest. The bank employees receive a fair share as salary and benefits. The governments that provide the legal, social, and physical infrastructure required to do business receive a fair share as taxes.

The problem facing the United States is that most of our outstanding debt is bad debt. It was issued to fund consumption andphantom wealth speculation and in aggregate cannot be repaid, because it is not backed by real assets.

This didn’t just happen. It is the result of bad public policies and can be corrected only by better policy choices. Let’s take a look at four examples.

Gambling Debt: Borrowing at interest to gamble on asset bubbles and loan pyramids can inflate financial asset statements, but produces nothing of real value and the assets can deflate in a heartbeat, leaving the loans unsecured and unpayable. This is a direct consequence of the financial deregulation that allowed Wall Street players to take control of the money and banking system and reorient it from financing investment in the real-wealth economy to financing speculation in the bubble economy.

Private Consumer Debt: Borrowing at interest to support current consumption beyond one’s income is a dead end. At issue here are policies relating to trade, unions, wages, employment, public services, and taxes that suppress the incomes of working people relative to the cost of living—while inflating the incomes of the investing class. This forces the majority of households to borrow from the investing class to cover basic consumption expenses.

Public Consumer Debt: Much of the current debate about debt centers on public debt. Borrowing by governments to invest in things like education, research, infrastructure, and even temporary economic stimulus directed to creating jobs in the real economy builds the nation’s future productive capacity and is logical and sensible. Borrowing to fund war,tax breaks for the rich, and current government operations is neither. Tragically, most of our public borrowing has been for the latter.

Arguments focused on the size of the U.S. public debt will get us no place, unless we address the failed economic theories and policies that have mired us in all four of the major varieties of bad debt.

Foreign Debt: Perhaps the most dangerous of all bad debt is that owed to foreign countries to pay for current consumption beyond what we produce for ourselves domestically. Our foreign debt is largely a result of unsound trade policies that lead to outsourcing jobs in manufacturing, research, and technology and increase our dependence on imports of manufactured goods, agricultural products, and services. These policies also play a major role in driving down domestic wages and forcing households to borrow against their credit cards and home equity to meet basic consumption needs. They place our children in a position of potentially permanent debt slavery to the children of other nations—a very bad idea indeed.

Arguments focused on the size of the U.S. public debt will get us no place, unless we address the failed economic theories and policies that have mired us in all four of the major varieties of bad debt. To get out of this mess, we need policies that favor productive investment over speculation, living wages and quality public services over consumer debt, public investment in education, research and infrastructure over war and tax breaks for the rich, and domestic production over outsourcing and imports.'