Fakirnomics or Don’t Shoot! or The Permanent Credit Economy and the Point of No Return

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George Osborne Needs You To Borrow Billions To Make His Plans Work

The Huffington Post UK  | By Asa Bennett tp://www.huffingtonpost.co.uk/2014/12/05/george-osborne-debt-obr_n_6274264.html?utm_hp_ref=uk

Revealed: how the wealth gap holds back economic growth

OECD report rejects trickle-down economics, noting ‘sizeable and statistically negative impact’ of income inequality

http://www.theguardian.com/business/2014/dec/09/revealed-wealth-gap-oecd-report

 

If a believable mainstream justification for Quantitive Easing is possible, it must centre on the restructuring of national economies in the aftermath of the Financial Crisis.

Both the Bank of International Settlements and the International Monetary Fund have called on national governments to use the window of opportunity provided by QE to carry out this restructuring. Indeed, they have expressly stated on more than one occasion that QE is only really justifiable if this restructuring happens.

But attempts at restructuring have met with at best mixed success; not least because it is very hard to get a concrete idea of that this supposed restructuring would actually mean. How can we know if restructuring has successfully taken place? Well this question at least does have a clear answer that everyone can agree on: there will be renewed growth in the economy.

By this measurement the most successful examples of economic restructuring are Britain and America. Unlike Europe and Japan, which have been balancing on the edge of recession for the past six years, Britain and America have experienced some level of growth. So if we understand what has changed in Britain and America we will have a pretty good idea of what restructuring actually is.

Have banks and financial institutions in Britain and America fundamentally changed their structure or the way they operate?

No.

There has been some regulatory tinkering round the edges of speculative banking operations but the core activity of manufacturing derivatives is largely untouched, even bonuses have not been substantially affected.

Does the financial sector play a smaller role in the economy now?

No.

Financial services continue to play an ever -growing role in the economies of Britain and America, there has been no real resurgence in manufacturing or traditional industries. These economies continue to be increasingly unbalanced in historical terms.

The growth we have seen in the domestic financial economy of Britain and America has centered on asset growth in the form of stocks and bonds, new derivatives and profits from privatised sectors like education, war, prison provision etc.

For ordinary people in the old fashioned economy there has been asset value growth in housing. This growth in the financial and legacy economies is financed though credit, not through wage growth. Mass immigration and an intensifying attack on trades unions and workplace rights means that wage growth is effectively impossible under the Monetarist regime.

In other words there is an ever increasing reliance on money itself as a vehicle for creating value, not only for the financial elite but for society as a whole. Rather than reducing the financial sector in favour of the real economy, the real economy is being made ever more like the financial sector. This is what restructuring has turned out to mean.

Contrary to the rhetoric of the Neo Liberal project, the mass scale extension of credit is effectively creating a fully planned economy. But instead of governments, it is private credit agencies that increasingly decide what resources are allocated where. The financial and political elite are moving towards comprehensive planning without the political problem of having to admit that the free market is a mirage. This will be quite some trick if they can pull it off.

This is the Permanent Credit Economy. Where credit is not an optional decision, but a permanent necessity of economic life.

But there is a cost to the use of credit as the brain and the heart of the economy. As more and more people integrate more and more credit into all their economic activity, the ever increasing burden of interest payments diminish earning power at an even faster rate than immigration and deregulation does.

Wages have to be allocated to paying off the interest on student loans, mortgages, car loans, credit card and other unsecured debt . This money taken out of the commodity economy is one major cause of the deflation we are now seeing across the developed world. People simply don’t have as much money to spend on commodities as they used to have. In other words there is less and less discretionary spending; you have less and less choice where your money goes.

Increases in credit push up prices on student loans, mortgages, cars, and credit card debt. The more credit that is available the more can be charged for the things that are bought on credit. Were it not for the financialised restructuring of developed economies, the I Phone would cost no more than $200…

But even more insidious than the ratchet effects of interest and credit, is the control and planning effect of credit I refer to above. What you buy is increasingly determined by credit agencies. You are able to get credit for any purchase to the extent that the purchase has a commensurate value and to the extent that you are able to service the payments on that purchase. You can’t borrow $2000 to buy an old car that is only determined by the lender to be worth $1000. This is the flipside of the end of discretionary purchases, even if you are allowed to have the money (credit), you are not allowed to spend it as you wish.

Economies all across the developed world are now growing or not growing entirely to the extent that financial institutions are successful in getting people to take up the offer of credit. There has been some take up of credit for housing in Britain, the market has been goosed by government subsidy. This housing asset recovery is taking place in parts of America also. (San Francisco for example).

On the other hand the failure to take up credit is reflected in the gloomy headlines with regard to the economies of Europe and Japan. In Europe there is at best stagnation and more often contraction in housing credit. Japan is notorious for its domestic populations tendency to save and avoid credit. Shinzo Abe has resorted to shock and awe tactics to firebomb the savings of the Japanese public and force them into the speculative credit marketplace.

A recent article in the Huffington Post made explicit that George Osborne is counting on a further massive increase in secured and unsecured debt as the means to ‘grow’ the British economy.

The HP tells us that:

‘the Office for Budget Responsibility, …forecast that Britons will need to add £360bn over the five years to its levels of unsecured lending, which includes credit card debt, payday loans, and bank overdrafts’.

The £360bn figure represents a £41bn increase on the OBR’s forecasts just nine months ago and would take households’ unsecured lending, as a share of total household incomes, to a record 55%  by 2020. This would be well above the pre-financial crisis unsecured debt ratio of 44%.

And:

APPG member Willie Bain, member of the Commons business committee, told HuffPostUK:

“The chancellor promised in 2011 that the government would lead an export-led recovery, yet this week the share of growth coming from net trade was predicted to fall further in each of the next five years. As the Bank of England said recently, recovery needs to be based on policies which boost wage growth, raise productivity and create more higher skilled jobs. Growth based on soaring levels of personal debt is no recovery at all on living standards for millions of working people in Britain.”

 

Hand in hand with the extension of credit comes the shrinking of the real economy. When the real economy shrinks, the state that relies on the real economy is forced to shrink too:

This comes after the Institute for Fiscal Studies warned that Osborne has “colossal cuts” left to make in order to meet his deficit reduction plans that would leave the size of the state “changed beyond recognition”.

Despite ministers’ indications that the bulk of the austerity agenda is over, the economic thinktank said that just £35 billion of the cuts in spending by Whitehall departments have already happened, with £55 billion yet to come.

You cannot have a viable consumer society without a welfare state. The efficiencies and security that comes from knowing that education, health and housing are backstopped by the state means that people can afford to spend on consumer goods. Without this state guarantee, people are forced to take up private insurance to cover necessities. This is risk that has been transferred from collective provision to the individual.

This is money that no longer goes into the commodity economy which shrinks as a result. This shrinking in turn causes more redundancies and less income and lower tax receipts. Which shrinks the state, which further shrinks the economy, and the process starts all over again ratcheting ever tighter.

As reported in the Guardian:

[the data collected from the thinktank’s 34 rich country members] suggests it is inequality at the bottom of the distribution that hampers growth.”

Rising inequality is estimated to have knocked more than 10 percentage points off growth in Mexico and New Zealand, nearly nine points in the UK, Finland and Norway, and between six and seven points in the United States, Italy and Sweden.

The ‘old’ economy serviced by government issued is shrinking. The ‘new’ economy serviced by democratised money goes from strength to strength.

Indian fakirs are famous for holding an arm aloft for years and years at a time until it finally begins to shrink and wither away. It is a demonstration of extraordinary willpower. The population of the developed world has stood before the Monetarists with  hands in the air for six years now. They are withering away. Soon we will be past the point of no return.

WHO ARE THE MONETARISTS ? OR THE MEN WHO STARE AT GOATS

 

goats

 

I can usefully examine the analogy of the three men and their goat(s) a little further.

 

One man has twin goats (exactly the same as each other) to sell. The other two men have money; One of the buyers has fifty coins and the other has forty nine.

 

The seller sells the first goat for fifty coins which is the maximum available bid, but he also wants to sell the other goat. However, the second buyer only has forty nine coins, therefore the price will be forty nine coins -that is all it can be although it is exactly the same as the first goat and should by any logic therefore be the same price

What to do?

 

If buyers and sellers allow the price to remain at forty nine coins, then goats have fallen in value despite the fact that the two goats for sale were exactly the same in every way and should be the same price. But more importantly, at a new sale price of 49 coins, 50 coins now equals a goat plus one coin- the seller has made an extra two percent profit from his first sale, just by virtue of owning money!

 

So where did this unearned profit come from?

 

From the value of the first goat. It was worth 50 coins and now it is worth 49 coins- it has lost 2% in value. Every time a goat is sold at a cheaper price the value of ALL goats falls by that amount and that value is transferred from goats to money. And prices will always fall where money supply is restricted.

 

What would the consequences of this be on a larger scale?

 

Imagine a goat seller with ten animals to sell. He decides to do it through an auction. (The animals are all identical by the way- genetic clones!) So he calls ten local farmers together and calls for bids. It so happens that each of the farmers has one more coin than the next so the first has 50, the second 49 the third 48 and so on. Here is a table of the results….

 

eeeeeee

The first column A shows the goats if they were sold at a fixed price of 50 coins.

 

The second column B shows the actual available bids. The first goat went for 50 coins, the second goat went for the second highest available bid (49 coins) an so on..until the price reached 41 coins.

 

The third column C, shows the total individual loss each purchaser suffered at a final price of 41 coins. If you paid 50 coins, at the end of the auction your goat was worth 41 coins and you lost 9 coins in value. If you paid 49 coins, at the end of the auction your goat was with 41 coins and you lost 8 coins in value and so on.

 

If you look at column D you will see that the seller on the other hand made money on each deal. He received fifty coins for the first goat which only turned out to be worth 41 coins so he made an excess of 9 coins and so on…

 

If we look at the row marked ‘Total’ at the bottom of the table we can see the cumulative effects of all this.

 

In column A total we see that if the seller had sold all his goats at a fixed price of 50 coins he would have received a total of 500 coins.

 

In column B total we see that in fact he received a total of 455 coins, an apparent loss of 45 coins.

 

In column C we see that the total losses to the purchasers as a result of the falling price was 45 coins also.

 

But in column D total we see something very odd. We see that the seller actually made a total GAIN of 45 coins as a result of the falling price. When he has sold all his goats he has enough money to buy 11 goats at the latest price and still has 4 coins over!!

 

In fact there has been a transfer of 45 coins in value from the buyers of goats to the seller of goats as a result of the 10 transactions that have taken place. The seller has made approx 11% profit as a result of just ten transactions.

 

Every time a commodity is sold at a progressively cheaper price the value of ALL similar commodities falls by that amount and that value is transferred from commodities to money. And prices will always fall where money supply is restricted.

 

Imagine this on a scale of millions of sellers and purchasers….

 

This is what Monetarism is by definition, a restriction on the supply of money….

 

It seems incredible doesn’t it? Perhaps you are thinking I must be wrong, there would be evidence if this were actually happening on a massive scale.

 

Look at the housing market. All over America there are cash buyers of houses. Cash buyers are propping up the housing market. Just like the goat seller, these buyers have ‘earned’ enough spare cash to buy another house! Just like the goat seller they are cashing in on the unearned increase in value of their cash. Unearned increases in value that are a direct consequence of the monetarist religion of restricting the supply of money.

 

In fact we are fast approaching an asset value IMPLOSION – chaotic deflation on an unprecedented scale.

 

Wages have again recently fallen in Britain and price inflation has fallen as well. It is important that you grasp the significance of this; the prices of commodities are starting to chase wages downwards. This is Black Hole deflation just as destructive as runaway inflation.

 

Is there any way to avoid this Black Hole? Lets go back to our auction. What would happen if we created another 45 coins and distributed them so that every buyer could afford a goat at 50 coins? The buyer would get his asking price of 50 coins per goat. And they are all exactly the same so this must be right. Every buyer would get a goat.

 

But wouldn’t creating this money result in inflation? The money supply would expand by:

 

45/500 or 9%

 

This would equate to a nominal drop in value of the money available to approx 92% of its previous value. Not a real drop in value mind you; you still get your perfectly healthy goat!

But just for the sake of it lets work through the effects.

 

reedtable

 

This table shows a comparison of the amount of money owned before and after the ‘loss’ due to the creation of 45 extra coins. Every owner experiences some loss, but the loss is less, the less you originally owned.

 

bluetable

This table shows the ‘loss’ after it has been adjusted to show the effect of the new 45 coins being distributed among the ten farmers. In all but the case of the richest farmer the ‘loss’ is mitigated by the distribution of the coins. For a majority of the farmers there is a net gain.

greentable

This table shows the actual loss that results from coin creation in comparison to the loss that occurs from deflation and falling prices. In every case the loss from coin creation is less than would occur from deflation. Even the farmer who gains the least from coin creation cuts his losses in half.

 

So everyone is a winner then (or at least not a loser) well, sort of.. the real revelation is in the fortunes of the original seller of goats.

In the deflationary scenario he ended up able to afford another goat with four coins to spare- effectively an 11 % increase. That is all gone under the coin creation scenario. Now he has 500 coins, just as he should have. If he wants to buy a goat the price is 50 coins, same as it is for everyone else. Just as it should be.

Every time a commodity is sold at a progressively cheaper price the value of ALL similar commodities falls by that amount and that value is transferred from commodities to money. And prices will always fall where money supply is restricted.

 Imagine this on a scale of millions of sellers and purchasers….

 

This is what Monetarism is by definition, a restriction on the supply of money….

 

 

 

 

 

 

 

 

Quis custodiet ipsos custodes?

 

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If only I had known, I should have become a watchmaker.”

Albert Einstein

 

There is a famous quote that half of the money spent on advertising is well spent and the other half is wasted. The problem is that nobody knows which half is which.  The same thing can be said of Karl Marx.Half of what he wrote was true- the trick has been to figure out which half.

One of the really good, really perceptive ideas that Karl Marx crystallised was that in the modern world, material objects are the expression of social reality. In other words instead of a formally stated hierarchy in the form of law and custom we have an implicit hierarchy embedded in the material form of the society we see around us.

This is a truly profound insight.

The flip side of this insight is the realisation that technology is culturally specific. Since the concrete objects we see around us are the realisation of social reality they must express the society and the culture that gives birth to that social reality.Technology and culture are much more closely linked than you might be led to believe. Cultural artefacts can be more clearly understood as a form of technology.

Which brings us to money (surprise, surprise!)

One of the most difficult problems in explaining Crackernomics and how money is developing is to get people to understand that money is a dynamic, fluid technology. Not a static fixed expression of value.

This technology can be uncovered and examined in detail.

In The Great Money Train Hijack I suggested that you can understand money as a train ticket, that is to say a permission to ride on the rail system within the parameters of the contract embodied in the ticket. A money note is a permission to participate in the economy within the terms of a contract. The parameters of the contract determine the value of the ticket/currency note at any given time.

At its simplest level this means that a ticket on a notoriously inefficient rail system prone to breakdown and likely to deliver you to your destination late, is worth less than a ticket on an efficient system that is comfortable and punctual. This is a good working definition of inflation. The later a train will be, the less a ticket to ride on that train is worth… Inflation is an indication of the efficiency of the money train network.

I can focus in on this interactive, dynamic aspect of money more accurately by using the analogy of money (a coin), as a watch. Modern currency and modern watches were invented and popularised at around the same time and this is not a co-incidence; they are both fundamental parts of the social mechanism that allow the functioning of modern societies.

As any curious boy will tell you, a watch can be prised open and its workings exposed for examination. I am presently working on a new short film entitled ‘The Structure of Money’ which will do just that. But for the moment let us just focus on the surface, the watch face as it were.

The first thing you notice about a watch face is that it is constantly changing, providing information about a common abstract known as time. A coin performs exactly the same technological function. It provides and stores changing information about a common abstract known as value.

There is no more absolute value than there is an absolute time. They are both social constructs, that gain their social power exactly to the extent that they are held in common by the societies that adhere to them. It is only 4 o’clock because we agree it is. A 1 euro coin only has a specific value because we agree it does.

A watch changes its description of the time constantly. That is why it is useful. But the important thing to understand is that although the time constantly changes on the watch your relationship to the watch itself does not change. You do not disagree with your watch just because it shows that you are late for an appointment! You modify your behaviour accordingly. You take a taxi instead of the bus. If you simply moved the hands on your watch twenty minutes into the past would it mean that you were no longer late? Of course not. You would still be late and you would also be a fool.

The same is true of money. The value of a pound coin at any one time is a reflection of its commonly held value. And like the time, that value is constantly changing. It is always ‘getting’ later and money is always ‘losing’ value.

This reveals clearly the stupidity of those who argue for ‘sound money’ which is supposed to be money that never changes in value. This is the same as arguing that you should set your watch to twelve o clock and never wind it up so that you can always know what time it is without having to look!

The next important insight from this analogy is to understand that value is not embodied in a coin anymore than time is embodied in a watch. Time is not divided up between each individual time piece and value is not divided up between each and every note and coin. If you gathered every watch together and put them in a pile, would you have gathered all the time there was in one place? Nonsense.

And if you make a thousand more watches, is time diluted in some way? Of course not. But the more watches there are, the more people have access to information about the commonly held idea of time. More people can interact in a more complex way

Who could be against the idea of the maximum number of people having access to time? Who could be against the maximum number of people having the most efficient information possible about the common social idea of time?

Here is a simple example of the benefits of the maximum possible knowledge of value

e.g. 1

There are three people on a desert island, one of whom has a goat.

One of the other two people finds a coin on the beach and successfully buys the goat from its owner. The ‘value’ of the goat is one coin. It can’t be anything else.

e.g.2

Same three people, same one has a goat. But now both of the other two find a coin on the beach. What is the value of the goat? The value cannot be determined by price since there is only one price; (one coin) but two examples of it (two buyers). If the goat is sold it must be on some other criteria than the most money offered.

e.g.3

Now say that the one buyer finds 50 coins on the beach while his competitor finds 49 coins. When the goat is sold its value (the differential between available money) is described down to 2%. And if it were 500 coins vs. 490 coins the value of the goat is described down to 0.2% and so on.

In other words, the more money there is in circulation, the more accurate the value placed on any given commodity will be. In exactly the same way that the more watches there are in circulation the more punctual a society will be.

Who could be against that? Let us take our example a stage further.

e.g.4

Suppose the first man has two goats to sell. One goat has three legs. As in the beginning, there is only one coin in circulation. The price of a goat with three legs and the price of a goat with four legs is the same. There is no ‘price mechanism’ since no price variation is possible.

e.g.5

Say both purchasers have one coin each. Still no price mechanism.

e.g.6

Only when there are enough coins in circulation for there to be a twenty five percent differential in price (four legs vs. three legs), would there be anything like enough money to take account of the real value of the goats.

e.g.7

And what if the three legged goat miraculously grew another leg to make up for his perceived deficiency? The two goats are now more or less the same. Does that mean that now there is less meaningful difference (information) that we can safely diminish the money supply?

Hardly.

The information that a particular goat can grow another leg to replace one that is lost is surely likely to form a vital part of any further negotiations on price !. There is now very much more information than there was before so there needs to be very much more money to express that historical information.

Knowledge and information about the economy and its history are always expanding. Therefore the money supply will always have to correspondingly expand to take account of this fact. As knowledge and information about human history have expanded so the methods to record them have expanded.

So I ask the question again:

Given that money is an expression of information and that the availability of money is an expression of the availability of information who could be against having the greatest possible dispersal of money?

Who wants to restrict the flow and the amount of money and why?

Who are the Monetarists?

 

 

 

 

 

 

 

The Sin of Wages: Shock! Horror! (not..) Paymageddon!

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index

 

In the latest astounding Shock! Horror! Revelation (see’ Things We Know..’ below)- to hit the economy, discretionary spending and the consumer society took another big hit today when we found out that wages had actually started absolutely falling in Britain.

 

No longer are wages simply failing to keep up with price inflation- we now have outright deflation in wages.

As a consequence the media is quick to inform the public that interest rate rises are unlikely for the rest of the year. Of course this is no surprise to anyone who has been following the restructuring of the economy along MONETARIST lines. Pressure on wages has been caused by:

 

The Rise Of Self Unemployment

 

Self unemployment is like self employment except you don’t have anything meaningful to do. Or any money…This is the privatisation of unemployment just like the privatisation of jails, health care, the military and of course, the issuance of money. Self unemployment is the latest wrinkle in the development of the Secret Economy, a key objective of Monetarism and the Democratisation of Money.

 

Behind the Secret Economy is the realisation that it is no longer possible politically to defend the disparity of wealth and income that is exploding in the developed economies. So the new priority is to conceal it. This has been achieved by an massive expansion of self unemployment in Britain and America – a hidden army of people working in insecure, low paid jobs with no benefits, no security and most importantly of all, no scrutiny.

 

The Participation Economy

 

The Secret Economy is the flipside of the Participation Economy.

In the Participation Economy you can no longer choose whether to take part in specific economic activity or not. Unemployment benefit creates an economic backstop that allows people some leeway to decide whether they want to participate in the labour market at a given wage rate and conditions of employment. Destruction of unemployment benefit means that the majority of people have to take part in the wage economy at any rate. In other words there is no lower boundary below which wages cannot fall. It is this that explains the ‘shock’ fall in wages.

 

This failure of the lower boundary in wages is felt at the discretionary end of the family budget. It is still possible for a reasonable proportion of the population to pay for necessities, but for a larger and larger cohort of the working population there is less money for discretionary purchases. This is the Death of the Consumer Society I have referred to before.

 

This process is compounded by low interest rates. Low interest rates pressure the national currency to drop in value, making imports that much more expensive. Since people have already cut back on ‘luxury’ discretionary items, the fall in currency value is felt in increasing prices for the raw materials the economy imports.

 

So we have:

 

Imported commodities falling in price- they have to fall in price because people can no longer afford them. If they don’t fall in price they are simply no longer imported. (This is supply chain failure such as seen in Greece with pharmaceuticals. I predicted this five years ago)

This is deflationary

 

Wages falling because more and more people are being dragged into the Participation Economy

This is deflationary.

 

Credit going down in price because of low central bank rates.

This is deflationary

 

Imported raw materials going up in price because the national currencies are falling in value

This is inflationary.

 

Now here is the $64 000 dollar question:

 

Why doesn’t this inflation and deflation net out?

 

In other words why don’t we have a consensus on whether we are experiencing inflation or deflation?

 

In theory we should simply be able to subtract the amount of deflation from the amount of inflation to arrive at a net figure. If there is more deflation than inflation we should have net deflation and if more inflation than deflation we should have net inflation. Economists should be at least be able to agree on this figure even if they can’t agree what to do about it.

 

Instead we have a situation where central bank advisory committees and individual pundits argue over the direction the economy is heading in. Why can’t they come to a common view?

 

Because we have an oil and water economy. Society is separating out into multiple constituent groups that experience inflation and deflation completely separately. You already know this. The official inflation figures clearly bear no relation to inflation as you experience it in the day to day. The most popular explanation for this is that the figures are ‘rigged’ in order to hide the political truth of what is happening to everyone outside the elite.

 

But this is like accusing a blind man of pretending not to be able to see.

 

The blindness is genuine.

 

I have previously explained how introducing privately issued Democratised Money destroys the information feedback loop that allows monetary authorities to regulate the economy. Simply put, once you allow more than one institution the power to issue money, you can NEVER AGAIN know how money is actually circulating (the Shadow Economy). You can never again accurately calculate inflation- even if you want to.

 

We are oil and water because we are using at least two different currencies.

Some of us have access to derivatives – democratised money

Some of us only have access to state money.

So we experience inflation and deflation according to the currencies we hold and to the extent we hold those currencies.

 

But don’t make the mistake of thinking that the economy is being run solely for the benefit of democratised money. The economy is being run in order to achieve a balance between democratised money and state money. At least for the moment.

 

The Secret Economy- Eyes Wide Shut

 

So in the new Secret Economy whenever some new piece of ‘ surprise’ bad news appears, the official expression of the establishment will be one of …well ‘Shock and Awe’ I suppose. And when they are not busy looking surprised it will be..

 

Eyes Wide Shut.

Ps

UK inflation fall to 1.6% lessens likelihood of interest rate rise

CPI fall surprises forecasters who expected smaller dip as clothes discounting and drops in alcohol prices and bank charges fuel decrease

 

 

 

 

Madness In His Method Or Known Unknowns and Unknown Knowns and Unknown Unknowns and… etc… etc..or “The old normal not the new normal not likely to be the new normal,” he said. The nicest thing about not planning is that failure comes as a complete surprise, …

http://www.telegraph.co.uk/finance/personalfinance/interest-rates/10929882/Mark-Carney-new-normal-will-see-rates-go-to-2.5pc-and-stay-there.html

 

http://www.theguardian.com/business/2014/jun/29/uk-interest-rates-bank-of-england-charlie-bean

 

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/10952024/FCA-Dozens-of-banks-spring-to-life-after-red-tape-cut.html

 

http://www.wsws.org/en/articles/2014/07/07/pers-j07.html

 

http://www.theguardian.com/business/2014/jul/08/uk-manufacturing-surprise-drop-jolts-economic-recovery

 

http://www.telegraph.co.uk/finance/financialcrisis/10960563/Portugal-banking-crisis-sends-tremors-through-Europe.html

 

‘Reports that say there’s — that something hasn’t happened are always interesting to me, because as we know, there are known knowns; there are things that we know that we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns, the ones we don’t know we don’t know’.

 

Donald Rumsfeld famously fashioned his wonderfully surrealist philosophy of American intelligence in 2002. In specifics he was referring to weapons of mass destruction. Fundamental to his (cough) reasoning was that the fact of Iraqi WMD, which was a given that could not be contradicted.

 

Planning was simply a matter of organising events so that they never could contradict this given, even when it was obvious that there was no prospect of weapons ever being found. After a decade of resulting chaos, slaughter and suffering in Iraq it can be said that in contradistinction to the well known aphorism: There is madness in his method.

 

Methodical madness is an appropriate way to sum up what is going on in Crackernomics.

 

The Known Knowns-That Is What We Know We Know.

 

We know that Bank of England base rate is going to be two and a half percent. How do we know this ?- because George Carney says it is 1

 

Carney tells us we should know that

 

“The old normal is not the new normal. It is not likely to be the new normal,”

 

The “vulnerable position” of family finances means any increases will be “more limited and more gradual than in the past”.

 

‘Things have changed. Households have a lot of debt. The Government is consolidating its financial position. Europe is weak. The pound is strong.

 

Apart from a disconcerting similarity to the ‘war is peace ‘ catechism in 1984 this is unremarkable. But then Carney says this:

 

‘The financial system has been fundamentally changed – it has to carry a lot more capital,‘ it has to carry a lot more liquidity insurance and it will pass on those costs to borrowers’

Keep that last bit in mind. It simply doesn’t make sense-does it? Surely permanently increased costs for the banks should mean rates higher than the previous long term average-not lower? What could be the explanation for this apparent contradiction?

We’ll come back to this.

 

Another thing we know that we know is that less is never more when it comes to banks and banking:

 

In the Telegraph:

In an attempt to make the banking market more competitive, the Government has given the FCA and PRA new powers after a perceived failure of their predecessor, the Financial Services Authority (FSA), to encourage new entrants’.

‘Whereas just five new banks were given the green light in the year to April – roughly the average over the previous seven years – 25 applicants met the regulators to discuss entering the banking market, the FCA and PRA said in a review of barriers to entry for banks’.3

 So we need more institutions that can potentially fail to choose from. Which is a bit like keeping a house fire going until the firefighters can arrive to put it out…

After the ‘known knowns’ there are the:

 

Known Unknowns Or Things We Know We Don’t Know

 

We don’t know why the USA economy shrunk in the first quarter- could be something to do with the weather( Isn’t this usually an English excuse?)

 

We don’t know why British manufacturing showed a surprise drop in output5

 

The Bank of International Settlements is telling everybody that it knows that the Wall Street party must end but it doesn’t know what is going to happen4

 

We also know that banking in Europe is in a perilous condition6 There is a constant low level rumble of banking failure stories, particularly on the periphery of Europe. It seems inevitable that one of them is going to get out of hand.

Which brings us to:

The Unknown Known

 

‘Psychoanalytic philosopher Slavoj Žižek extrapolates from (these) three categories a fourth, the unknown known, that which we intentionally refuse to acknowledge that we know’….

‘Abu Ghraib scandal shows that the main dangers lie in the “unknown knowns” – the disavowed beliefs, suppositions and obscene practices we pretend not to know about, even though they form the background of our public values.”

http://en.wikipedia.org/wiki/There_are_known_knowns

What links all the economic stories I have referred to is the element of ‘surprise’- a ‘surprise’ fall in output, a ‘surprise’ run on the bank. Everything seems to be a surprise. Like the ‘surprise’ lack of WMD and the ‘surprise’ decent of Iraq into chaos. The ‘surprise’ heart attack on the way to your daily visit to Dunkin Donuts. Why is there no general attempt to link cause and effect in the mainstream media?

 

There seems to be an unwritten agreement in the mainstream media to express general bafflement when disconcerting stories come up. They simply don’t make sense do they? Not if interest rates are going to be 2 ½ %. And interest rates ARE going to be 2 ½ %. So these stories probably don’t mean anything…

 

Which brings us finally to

 Unknown Unknowns or more accurately The Great Unknown

 

The size and nature of the shadow economy is the greatest unknown of all. And this is deliberate. The Democratisation of Money is the privatisation of information, (Secret Economy). This seems hardly believable, but it is happening. The democratisation of money is linked directly to the figure of two and a half percent itself.

 

I can usefully return to the metaphor of a bookie. When you bet on a horse race you are not actually betting on which horse will come first. You are actually betting on whether the bookie will pay out or not. That is what a bet is- a number of people put money in a specific pot and generally a smaller number of people take money back out, triggered by a specific event. The ‘odds’ that you are given reflect this risk of being paid out. The smaller the book for any given race, the smaller the odds (potential payout) that can offered by the bookie. If only two people bet on a race and the total amount of their bets is $14, the bookie can’t offer odds of 100/1 on one or another horse. He would simply go bankrupt in short order.

 

The same is true of money. The central bank interest rate is the odds on money being exchangeable for value at any given time. The odds are directly related to the total size of the book- the economy.

The two and half percent interest rate and increased capital (state money) requirements go hand in hand. They are a reflection of the fact that the state money book has shrunk. That a significant proportion of the economy is now in the hands of derivatives.

 

Just like nation states, financial institutions that create and trade in privately issued money- democratised money, are required to hold foreign currency as a hedge. In other words forced to hold an increased amount of dollars or pounds to offset the risk of holding derivatives. This increased requirement to hold state money currency is called macro prudential policy.

 

It is not banks and financial institutions that are being squeezed by the new rules. It is the state money component of their assets that is being squeezed. State money is being squeezed by MONETARIST politicians. The state money book is smaller so the odds (interest rate) it can offer is smaller. What state money there is, will now permanently be used in part as a guarantee for privately issued money derivatives. That is how interest rates can be lower despite bank costs being higher.

So what proportion of the economy is in the hands of derivatives?

The long term average for interest rates in the post war period was around 5%. Previously I have suggested in line with a number of other commentators that the new normal for interest rates would be somewhere around 3-3 ½ %. Now Carney says 2 ½ %.

Which means the proportion of the economy which will be allocated to privately issued money- derivatives, is going to be bigger than I thought. Given the difference between 5% and 2 ½% it indicates that HALF the economy will be allocated to democratised money.

Which is a lot of democratised money.

Know what I mean?

PS

Waitrose sales in shock fall as 2013 summer hard to beat

http://www.theguardian.com/business/2014/jul/11/waitrose-sales-fall-2013-hot-weather

The Sin Of Wages Part 2

In part one I described how parties  trading in individual currencies would need to rely on a record of credit worthiness in the form of a credit history. This would provide evidence of ability to pay but NOT a guarantee of payment. This is because an individual currency would be SOVEREIGN as all currencies are.

Monetary sovereignty means precisely only paying your debts if you want to. This is the definition of sovereignity. Any other definition is a fraud.

To issue money collectively it would be necessary to have a wealth creating authority backing up the currency. In modern capitalist states this role is fulfilled by government.

The risk factor in using any currency is expressed as a differential in price and ultimately as an exchange rate. For those who only have the value of their work to sell the exchange rate amounts to a hidden tax on labour every time you use any currency.
There would be no hidden tax in a personal currency- You cannot tax yourself!

Collective money issued by a group rather than an individual pools the individual risk factors involved in using in that currency. Someone who is dealing with a national currency no longer has to concern himself with the individuals ability to pay but a nations ability to pay.  If a person holds a national note in his hand he proves his earning capacity ‘up front’ by virtue of possessing the note.

The value of a currency increases as the credits it obtains and trades in are successfully paid off. This results in a virtuous circle. This increase in value is expressed as a discount value and a use value. Everyone who uses a currency benefits from these discounts (collective purchase of credit).

Benefits are maximised the more people use a currency. These benefits offset the hidden taxation inherent within use of that currency. Any outside body that issues money within an economy necessarily has a negative effect on this process. Credit does this.

With these necessary monetary conditions in mind we can have a look at derivatives and whether they fulfil the conditions necessary to be considered as money. I argue that derivatives are privately issued money. In order to make this money tradable and valuable, the creators of derivatives manufactured a ‘nation’ and an ‘economy’ to go with it!

Any currency needs a credit history  
Derivatives manufactured such a history based on the earning power of mortgage holders. In some sense the mortgages themselves were only incidental to the information that was gathered in the process of issuing the mortgages. It was the information about wealth creating power that financial institutions were trading in not the mortgage values.

Any currency needs a wealth creating authority
Democratised money derivatives are supported by a troika of:
Monetarist government
Credit Agencies and
Mortgage companies

(A Mystery Explained

You might have wondered why Monetarist stooges Clinton and Bush chose to support the massive extension of mortgages for the poor. This is usually explained as having something to do with the desire to extend opportunity and home ownership etc. Given the relentless attacks of Monetarists on the poor, especially non-white poor, in the aftermath of the Credit Crunch this hardly seems plausible.  However, once you understand the massive increase in mortgages as an opportunity to add another tax to the poor and to strip away the discount benefits that state money brought, you can see why Monetarists like Clinton and Bush were very much in favour of it.)

Any currency pools the individual credit histories of those that use it and therefore pools the risk involved in trading in it

This is the defining characteristic of derivatives as money. Financial institutions took the earning capacity of sub prime lenders and high value lenders and pooled them together creating a hybrid credit risk. The credit rating agencies gave this pooled risk AAA status. Effectively the high value low risk mortgage payers carried the poor sub prime mortgage payers. This is exactly what happens in a national currency.

Any currency is a hidden tax on individual labour power

Democratised money derivatives derived such a tax as this from pooling sub prime mortgages. Unfortunately these taxes on labour on top of the other hidden taxes embodied in the mortgage agreements were too high for sub prime borrowers to support. It was this that led to the Credit Crunch.

The use value and exchange value of any currency increases as debts are paid off

Which is precisely why traders realised derivatives were worthless to the extent that the credit agreements( debts) would not be paid off. This realisation that the credit would not be paid back directly undermined the use value and discount value of derivatives. This was a result of the fact that democratised money derivatives were so new. Given more time they could stabilise and prove out the amount of wealth that they could generate. Unfortunately time ran out when interbank lending rates meant that the exchange rate between state issued money and privately issued democratised money became too great. And this explains QE in Monetarist terms; as a means of buying time for democratised money derivatives to prove themselves. When it is felt that derivatives have successfully rooted themselves as privately issued money, QE will fully end.

The Wages Of Sin/The Sin Of Wages- Be Sure Your Sins Will Find You Out Part 1

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Cash- One Piece @ a Time

Here at the United States of Everywhere I have argued that we are transitioning into an economic system where private institutions are able to issue their own money. I have argued that this Democratisation of Money will increase in scope and depth until it has transformed property rights and the fundamentals of Capitalism, as we have known them. It will be an enlightening thought experiment to imagine a world where this process is taken to its logical conclusion- a world where everyone issues and uses their own individual currency.

 

In this world everybody would be trading, (that is exchanging whatever they had to offer for goods and services), on entirely individual terms. Since most people only have their individual labour to sell, this would mean people exchanging work for goods and services completely outside any collective social context. This would be a neo Liberal dream. This would by Ayn Rand’s idea of Heaven.

Of course it would never be possible for everyone to actually issue his or her own currency would it? You probably have a vague feeling that such an economic system would be far too complicated and open to fraud. Except of course that if you think about it for all intents and purposes fraud would be impossible because all the mechanisms that make fraud possible would be absent…

 

Ok that might be too far to go in one leap; lets take a step back for a moment. What would living by your very own currency mean in the simplest instance?

Since this is Ayn Rands dream I will put one of her ‘characters’ to some use as an illustration. John Galt is our protagonist with the GALTHALER as a personal currency to trade with. Now John Galt will buy and sell stuff based on… the value of John Galt, or more precisely the value of Johns ability to create wealth. This value is formalised in the individual currency that John issues. It is important to note that this, or any other currency is NOT A GUARANTEE THAT THE ISSUER WILL PAY DEBTS. It is a formal description of the ability to pay debts SHOULD THE ISSUER SO CHOOSE.

 

This is what the Federal Reserve, the Bank of England and every central bank does. Capitalist central banks are formally independent- they have no wealth creating value of their own (or at least they didn’t used to have…) But backing central banks like these is the force and authority of the respective governments that created them. Modern governmental authority based on Germanic Land Democracy is precisely the authority to create wealth.

 

Back to our prospective trading partner deciding whether or not to deal with John. This partner will need some criteria on which to do so. In the remote past there were considerations of culture, family, religion etc that all operated as bona fides for any prospective trade partner. But in a modern culture that isn’t going to work, at least in the practical short term, so we are going to need something else. That something else would be the business history of the person we are dealing with.

 

Is this starting to ring any bells yet? Let me elaborate:

  • The business history of John Galt is not just a collection of anecdotes about what this or that person did or did not do. It is a record of whether they kept to the terms of previous contractual arrangements they entered into.
  • It is also a record of what commitments they have presently that might prevent them fulfilling any future contract
  • In essence, it is a record of whether it likely to be profitable to do business with them as compared to the risk of doing business with them.
  • As you might have already guessed, it is essentially a credit history,

 

If John Galt wants to exchange his GALTAHLER for a weeks groceries from the corner shop, he would effectively be asking the shopkeeper for CREDIT; this is exactly what happens in international trade between sovereign nations. John and the shop owner are acting as sovereign entities. After the transaction in our example the shopkeeper has a debit on his book for the value of a weeks groceries but he has the GALTHALER to redeem against John Galts labour at a future date (or alternatively to exchange with anyone that will take them).

 

Is the note that the shopkeeper received from John Galt the same as a credit note? No, because a credit note is denominated in another, usually a national currency. There is no sovereign freedom implied in a credit note.

 

Clearly there is risk for the shopkeeper in this agreement and that risk implies a premium. That premium is the additional incentive the shop owner requires to be incentivised to do business with John. It is the effective exchange rate between GALTHALER and SHOPPOUNDS (the shopkeepers own currency).

 

If John Galt has a bad credit history, the corner shop will either refuse to do business with him, (not accept GALTHALER in payment), or will charge John extra over an above the cost of the groceries in SHOPOUNDS to make it worth the shopkeepers while to take the risk.. The difference, or ratio of difference is the exchange rate between GALTHALER and SHOPPOUNDS.

 

It is important to remember that since this is a credit agreement, its value changes over time, in the same way that a credit agreement is serviced by making payments over time. The value of these payments is a function of time and a function of risk. To simplify, the longer a borrower makes the payments on time, the less risky (and therefore more valuable), those payments are.

 

We have clarified the relationship between trade, currency, credit and risk. In the light of this we can look at state money again

 

First of all the term state money is somewhat misleading. Modern capitalist economies don’t have a currency issued by the government. That would be a COMMON CURRENCY, which we are given to understand that would cause all kinds of problems..(And so it would, but not for us!) We have a currency issued and controlled by private entities under the supervision of the state.

 

But that is not to say that state money does not have real benefits. I have explained how issuing and dealing with your personalised currency would require an additional premium to be paid. State issued money pools the individual risks that each individual has and at the same time collateralises their collective wealth creating ability. It is this pooling of risk that precisely defines money in relation to credit. This in turn allows the development of collective capital, which accrues to the value of state money.

 

Put simply in the same way that collective bargaining allows a group discount on buying goods and services, collective – national buying allows a group discount to be obtained on credit. But not just on nation to nation trade; on every single transaction within a nation state.

 

Where does this discount go? It goes to the user of a state currency individually. But more importantly some of it goes to the currency itself. The currency appreciates in value. This is a virtuous circle. The more the currency appreciates in value the more useful it is to an individual to use it. And when the individual uses it more, it appreciates in value. VOILA!

 

Once you understand this, you start to appreciate that every specific credit agreement effectively steals a portion of this collective wealth. Every time a financial institution signs a credit agreement with a person in Alabama they are effectively stealing a portion of the value of a dollar spent in New York. This is private institutions given the legal right to tax the labour of the nation!

 

‘But no nation would willingly agree to this!’ I hear you cry.

 

And you are right, no nation ever would. So the nation will never be collectively approached with this iniquitous proposition.

 

INSTEAD THEY WILL SIGN THE NATION UP FOR THIS TAXATION, ONE PERSON AT A TIME THROUGH CREDIT AGREEMENTS!

Economic Freedom and its Enemies or Loving the Alien

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 ‘Help me Milton…’

 

“If everyone demanded peace instead of another television set, then there’d be peace.”

― John Lennon

 

 

The period immediately after WWII saw the introduction of modern consumerism in western European economies.

 

Consumerism as a political force was closely tied to the Cold War. Consumerism was a totem of the idea that in the ‘West’ ordinary people are free politically and economically and that these freedoms are interrelated and interdependent.

 

Consumerism was founded on the idea of disposable income, which in turn was founded on the idea of discretionary expenditure. Discretionary expenditure is money you spend as and where you choose. What was innovative about post war policy in the west was the idea of creating mass discretionary expenditure and corresponding mass economic’ freedom’.

 

In order to build a consumer society it was necessary that the economic system was capable of producing enough disposal income for ordinary people so they would have something to spend. This gave rise to the concept of a living wage; it was the accepted norm that one man could earn enough to keep a family. Where this did not happen the state would take up the slack. It is important to realise that this was NOT the idea of the economy providing each person with enough to live on but the idea of having enough on top of necessities to buy stuff just because you wanted to. Discretionary spending defined the idea of western economic freedom in the post war period.

 

The three main areas where western states stepped in to ensure provision of necessities adequate enough to support a consumer society were Education, Health and Housing. But it was NEVER the intention of western states to provide the most egalitarian education. or the best availablehealthcare. or the highest possible quality public housing. At no time did western states provide more of these necessities than was just enough to support a consumer society. This support for consumerism defined the limit of what elites were willing to support in post war welfare provision.

 

For an elite under sustained domestic and international moral and political attack, what made the costs of consumerism worthwhile was that it supported the political message that the enemies of freedom were ‘out there’ and that the defence of individual freedom should be facing outwards to deal with this.

 

The ideological message of consumerism was that :

The enemies of freedom are alien (to our ‘way of life’).

The alien enemies of freedom were pro coercive state (while we are pro ‘welfare’ state).

The enemies of freedom were extremist, (and willing to sacrifice ‘freedom’ in favour of equality or justice whereas we have the best of both worlds)

 

The importance of these concepts to the rehabilitation of  Capitalism in the post war period can’t be overstated. In essence, consumerism was/is a fusion of nationalism, rhetoric of economic democracy and a limited amount of material progress. This ‘facing outward’ strategy was completely successful for western elites and has shaped the entire conception of economic freedom ever since.

 

Since the end of the Cold War, ‘democratic’ discretionary expenditure has come under repeated attack culminating in the ‘Credit Crunch’ period that has seen double digit (roughly) falls in the spending power of the vast majority of ordinary consumers across the western world. In Mediterranean economies this fall has been magnified by a large factor. A fall in spending power tends to be expressed disproportionately in the purchase of discretionary items. After all, you are less likely to buy another pair of training shoes if you have a large, outstanding electricity bill. This explains in large part the hotly debated deflation seen in developed economies. There is deflation. It is deflation in discretionary purchases and it reflects the effective end of the mass consumer society.

 

This deflationary effect has been magnified by the abdication of the Monetarist state from necessity provision. This withdrawal from provision of healthcare, education and housing has been justified by the Credit Crunch and the need to restructure welfare expenditure. The effects of the state no longer taking responsibility for housing, education and health are becoming increasingly clear. University tuition fees and housing mortgage cost now comprise a large and ever increasing part of the budget of newly forming households. The forthcoming rollout of medicine privatisation will intensify this effect. Expenditure like this requires credit for most people. The requirement for credit to provide necessities as opposed to desires or investments produces a Permanent Credit Economy.

 

Perhaps  this is really just the old argument about state vs. private provision of services? Perhaps it is simply a matter of people re-ordering priorities- a few less trips to the cinema, no holiday this year. In other words is it possible that the Monetarist state abdication for provision of necessities will have no fundamental, negative effect on the economic well-being of the majority of people?

 

The answer is no. It is easy to see this if we consider the risks involved. Private provision of housing, medicine and education all entail an element of private risk- or put more accurately, monetisation of risk.  If I buy a house, invest in education, or decide on a private health policy with various deductibles etc. I am undertaking private, personal risk. The house may go down in value. The degree I get may be worth less than the cost of obtaining it. The health insurance I have may not cover a serious illness or accident. This much is obvious.

 

But underpinning this risk/insurance model is a credit model that is harder to see at first glance. It is this credit that allows the monetisation of risk. If you buy education, housing, or medicine you do so on credit. In other words you don’t pay for these things outright; you can’t afford to

 

Anyone who obtains credit pays a premium for that credit. This premium reflects the risk inherent in the agreement. The risk that the borrower will default; the risk that the loan will not be as productive as another agreement. This premium is the interest rate. The interest rate is the means by which the risk is monetised; it is the means by which wealth can be extracted from the risk. But more important than the financial loss to the borrower is the more subtle loss of freedom; the freedom of the borrower is curtailed by the credit agreement. You do not have a money history but you DO have a credit history. And it follows you around.

 

However, the most important loss of freedom occurs on the level of society as a whole. If a group of people is effectively self insured through the public provision of goods (as in state provision of health, education and housing), then no credit monetisation of risk is possible and no extraction of wealth is possible. Further, no imposition of outside agreements is possible. The people who self insure are SOVEREIGN; that is to say self enclosed, beholden to no one.

 

This is more than just collective sharing of risk. This is sovereignty. Sovereignty is by definition a self-sealed system that no outsider can break into. Sovereignty is the key to economic freedom. In fact, it is the only real economic freedom there can ever be. All other talk of economic ‘freedom’ is simply political rhetoric.

 

Once you understand the full power of public ‘sovereignty’ as an ‘alien’ economic and political force, you understand the horror that capitalist elites felt at the realisation they were infected with it.  At the end of WWII, just as China was passing into Communist control and away from western influence, so health and education at home was being taken over by another foreign power! The sovereign plebs!

 

Like a cancerous tumour, this alien sovereignty was growing inside the bowels of the weakened capitalist system. And just like the cinematic victims of the Alien ‘face hugger’, elites were forced to supply the parasite with blood and oxygen or die! Only in this context can we truly understand the endless western Cold War emphasis on witch hunting the ‘alien’ and the ‘enemy at home’ . In effect, for sixty years western elites have been shrieking in pain and terror like Lieutenant Ripley in ‘Alien’:

 

‘Get it out! get it out!’

 

Western elites see the end of state provision of health, education and housing as a great healing. They see the end of the consumer society as a great boon. No more economic sovereignty for the plebs. They will learn again their true place in the scheme of things. The tumour of public sovereignty has taken forty years of painful surgery and Monetarist radio therapy and still it is not all been removed.
But we are getting there.

 

For we aliens however, the end of sovereignity is the end of the consumer society. For aliens like us it is the end of whatever economic freedom we had. We can look forward to a future in a glass bottle in the laboratories of the Weyland Corporation.

 

I hope you know who the real enemies of YOUR economic freedom are now.
 

 

 

Understanding the New Planned Economy

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I know you have heard the phrase ‘Planned Economy’ many times before, probably as a term of political abuse. ‘Planned economy’ as propaganda conjures up images of unaccountable faceless bureaucrats in anonymous offices malignly controlling the way ordinary people live their lives.

Most well known in this context would be the Five Year Plans which were implemented after the Slav takeover of the Russian state in 1917.

Communism and the Five Year Plan is associated in ‘western’ politics with wealth redistribution from rich to poor, deciding what can or cannot be made and most iconically deciding what consumer goodies will be available on the shelves.

Whether you agree with these policies or not, the point is that they are are planning objectives, rather than planning itself. In contradistinction to the Five Year Plan of the Russian Revolution, it is entirely possible to implement a planned for redistribution of wealth from poor to rich. This is what has been happening in the western economies for the last decade or so. But it is a more complex and subtle process than previous government supervised transfer of wealth.

MARXISM – MORALITY = MONETARISM

The basic idea of planning is far from alien to western capitalist economies. What do you think all those people in government offices are doing all day long? Government spending is usually a little less than half the total economy in the average advanced capitalist nation. What the government does affects everything. Given this state of affairs would you seriously want or expect the Government not to have a plan of some kind?

 And those who would would like to see the size and influence of the state shrink have to admit that since the Credit Crunch any idea of the permanently smaller state is something of a long shot. Since 2008 there has been a permanent ’emergency’ regime of the lowest interest rates and forward guidance from central banks to make sure no nasty surprises pop up. Even if this control were to be dialed back, we would still be living in a control economy- after all you can’t reclaim your virginity once you have lost it…

But the truth is that it was not 2008 that brought this state of affairs about but the economic crises of the 1970’s four decades before. After systematic capitalist collapse, right wing thinkers conceded that it was untenable to support a Free Market any longer on any terms. As Karl Marx had predicted, capitalist economies had become increasingly reliant on their respective states to bail them out of the effects of periodic crises, resulting in a state of permanent crisis management.

Milton Friedman conceded this argument with the creation of Monetarism. Monetarism argued that from then on the state would have to permanently intervene to control the amount of money in the economy, instead of only intervening when there was an overt crisis. Permanent management and intervention was the end of so called free markets. Monetarism was only intellectually innovative in that it openly advocated a state run economy for the benefit of a minority.

 After Monetarism there could be no more economic solutions in the way they had been understood up to that point, because there was no independent economy in which to implement them. Everything would now be under control of the Monetarist state, including all political and intellectual activity. There are no mainstream political parties in the Saxon world that are not Monetarist parties. There are no mainstream economists that are not Monetarist economists.

Since the Western world had swapped a permanent economic problem for a permanent political one, it follows that it would have to define a permanent political solution. The possibility for this lay in the political definition of centralised planning

It is possible for Monetarists to argue that they are not really against a system of planning per se but rather against a centralised ‘politicised’ system of planning. (Commissars telling us what to do.) So Monetarism champions a specific decentralised system of planning. And that system is Planning Through Credit.

The groundwork for this planned credit economy began in the period immediately after the second Germanic war. As I have explained elsewhere, widespread support for western (Germanic), civilisation such as it is, was devastated by the spectacle of the death camps and the atomic bomb.

By the 1950’s this was reflected in the fact that most of the worlds territory was controlled by ideologies that openly repudiated capitalism (and Germanic culture!), in whole or in large part. Even in those areas capitalism was nominally the economic system it had become more of a political totem than an economic reality. Economies were still mobilised for the war effort. The idea that they could magically revert to a pre-war mode the moment peace was declared is obviously nonsense.

The ‘consumer society’ was ushered in to build support for a supposedly rehabilitated Germanic system. This was to be a cult of discretionary spending, where ordinary people were to enjoy the fruits of economic freedom to spend as opposed to an alien, ‘planned’ economy. Ironically, underpinning this post war ‘freedom to spend’ was the most comprehensive system of control there had ever been in the advanced economies. State supply of education and health underpinned the entire consumer society.

Now the period of discretionary spending; of ‘economic freedom’ for the mass of people, is coming to a close. This process is reaching its climax in end of the consumer society.

Because You’re worth it?

Over the past couple of decades the introduction of a Permanent Credit Economy has replaced the consumer society in the Anglo Saxon economies. This has occurred through a vast expansion of loans for higher education and for housing. A permanent credit economy is one where credit is required to provide not just discretionary commodities but the necessities of life.

It is important to understand that this permanent credit economy is not simply a matter of actual earning power. By way of illustration, customers are often required to produce a credit card as a ‘deposit’ for hotels or hiring a car etc. By doing this the customer agrees to an ongoing financial relationship over and above the actual hiring relationship. The relationship is more complex than a simple one time agreement to undertake a transaction as in cash payment.

Entering into ongoing relationships of this nature has a number of consequences both for individuals and for economies in general.

For individuals, the extent and size of loans required to purchase a house or an ‘advanced’ education has exploded. This increasing need for credit has been a fundamental plank of governmental policy in advanced economies for more than a couple of decades. The necessity for loans for housing and education is justified by the idea of personal investment, in the sense of investing in yourself and your family as a ongoing enterprise.(see ongoing financial arrangements)

The political project of making sure that the idea of ‘personal investment’ sticks, means it is necessary to create the conditions where this investment will pay off. In effect, it has become a political necessity to make houses more expensive and jobs more scarce to justify the time and effort necessary to get them. As a consequence it is becoming harder for the average citizen to move from one housing bracket to another and from one employment bracket to another. More accurately, orderly progression up the income and housing scale more is more difficult.

Think about the familiar routes from the bottom of society to fame and fortune – start a dot com company, win the lottery, become a financial trader, they all have in common that there is no orderly progression to the top. The mythology of modern wealth in the mass media actually celebrates this fact! There is increasingly less of a logical, orderly route to becoming rich, powerful and influential in society. We live in a planned economy defined and dominated and justified by the worship of chance. We are living in a hierarchy of chance.

General consequences of the permanent credit economy

The general consequences of of permanent credit economy can be seen most clearly in credit gearing.Money obtained as credit is worth less to the borrower than real money since you have to pay the principle and the interest on top. If you were to buy a washing machine worth £100 over a year with 10% interest then you would in fact, pay £110. If the participants an economy were to buy all the things they wanted and needed, (as in the Permanent Credit Economy) on credit what would the effect of this be?

A good analogy would be trying to start a car in third gear or a start off a bike on a hill. Since the Permanent Credit Economy is a planned economy it is by definition designed to be resistant to outside change (the brand name for this is ‘resilience’). This ‘resilience’ has the same effect that inertia does on the car in third gear or the bike on a hill. It requires that much extra effort just to get an initial start.

But this effect is then magnified by extra costs of credit, since a portion of what is paid for this or that service or commodity is siphoned off to pay interest, administration costs and credit insurance. This means that the direct effect of a transaction is diminished.

It is the difference between a strong jet of water from a hose or a fine spray. In a cash deal money and information is transferred directly from buyer to seller. The buyer gets the most efficient price (there is often a cash discount). The seller gets the money information- knows how much the buyer is willing to pay, in other words has the best information to decide whether to continue making the commodity). This is the equivalent of a forceful jet of water.

In a credit transaction the seller does not know how much the buyer is willing to pay- that information is now hidden within the ‘credit matrix’ which determines how much the buyer is willing to lend. In truth the seller does not even really know if he has sold the goods since they are now collateral for a loan and effectively in an intermediate state of ownership.This is the same as a fine spray of water that does not have the force of a jet.

The net effect of this is to weaken the force of the information that is transmitted and received in market transactions. The market becomes increasingly blind and deaf to its own information flows. This is a fundamental cause of the sluggish recovery, or lack of it, that has dogged so many economies.

 The recent discussion of ‘secular stagnation’ suggests that western economies are in for a prolonged period of slow growth and recovery from the Credit Crunch. The permanent credit economy explains why this is inevitable, since the majority of spending that will reinstate the economy will come from credit it will be subject exactly to ‘starting the car in third gear’ problems.

Conclusion: Selling the Soul of Capitalism

If capitalism had a soul it is inevitable that it would sell it.

The central idea behind capitalism, it’s soul, is supposed to be that anyone can become rich and correspondingly anyone can become poor. This risk factor is a benefit to the existing poor and a dis-benefit to the existing rich. The system is supposed to be fluid and opened to change. If however, the economy is planned and not open to change (‘resilient’/’sustainable’), this benefit to the poor goes. This is essence of the wealth transfer from poor to rich I mentioned at the beginning- Capitalism is closing the door behind itself. Capitalists don’t want anything to do with risk anymore.

As societies we can look forward to policy tailored to keeping things on an even keel and persuading the population of the dangers of anything like dynamic growth or change.

 As individuals we can look forward to increasingly being corralled within any particular social economic group with only the solace of the odd media celebrity who seemingly pops out of nowhere to become the latest billionaire to distract us from our lot in life.

John Lennon famously remarked that life is what happens when you are making other plans.

In this world, planning is what happens to you when you are trying to make a life…

Are You Talking to Me?

 

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Why Bitcoin Really Does Represent the Democratization of Money
by Aaron van Wirdum on March 18, 2014 9

http://bitcoinmagazine.com/10724/bitcoin-really-represent-democratization-money/

In a recent bitcoinmagazine.com article referring to ‘the creation of Bitcoin and the like as the Democratization (sic) of Money’, Aaron van Wirdum attempts to address what he somewhat obliquely describes as:

‘…various explanations supporting this characterization.’

because, he says:

‘at least one of these interpretations have caused some to doubt whether Bitcoin does in fact still represent the democratization of money, or whether it has perhaps become susceptible to less democratic forces throughout the years since its inception. ‘

I suppose it must be an occupational hazard for an altcoin pumper to lean towards being cryptic! Still, it seems a little over the top to mount an argument against a ‘characterisation’ when you are not even willing to say what precisely this ‘characterisation’ is or where it comes from….

Since I was the first to use and define the phrase ‘The Democratisation of Money’ in relation to the production of altcoins and other forms of privately issued money, I can only presume this piece was written to address some of the points I started to raise in ‘The United States of Everywhere – The Home of Democratised Money’ blog four years ago and in my book ‘Crackernomics -The Democratisation of Money.’

I said in Crackernomics that the point in time would come when the advocates of privately issued money would be forced to openly (or not so openly), address key issues, first with regard to the definition of what money actually is and then the definition of ‘democracy’ and ‘democratisation’ itself.

The Democratisation of Money as I originally described it four years ago, is the process by which Anglo Saxon state institutions and financial organisations have worked to introduce privately issued money. It cites privately issued money as the cause of the Credit Crunch and the preferred Monetarist means of the financial breakdown’s resolution.

The democratisation of money is anchored in Monetarism. Impetus is given to the creation of privately issued money by the state abandoning its maintenance of the monetary commons.

Most importantly The Democratisation of Money points out that Bitcoin and Derivatives are two sides of the same coin. Bitcoin is the radical face of democratised money and derivatives its corporate face.

The Democratisation of Money analysis does not take the ‘radical’ perspective of seeing things from the point of view of altcoins and their producers. Quite the opposite; it argues that anything that does not address the wider economic and political context in which privately issued currency has come to exist is Crackernomics – which in the case of altcoins can only amount to an advert for, or a consumer review of, this or that particular coin.

Now that we are clear what the real definition of Democratisation of Money is, we can return to van Wirdum’s take on the relationship between ownership, democracy and capitalism in respect of Bitcoin.

Defining democracy in relation to Bitcoin, van Wirdum tells us.

‘it is helpful ( to who?), to recognize….two types of democracy, as distinguished by political theorists such as Cambridge professor John Dunn,….often attributed to Bitcoin,’

What are these two types of democracy identified by this distinguished Cambridge professor?

‘The first main form of democracy…..is ultimately a technical procedure, rather than a political value…….the formation of government through the ritual of elections.’

van Wirdum suggests this form of political democracy compares to:

‘Satoshi’s proposal for a proof-of-work system,’

which is analogous to a:

‘“one-CPU-one-vote” mechanism.’

You will probably know that the original Bitcoin sales pitch boasted that anyone who had a computer could ‘mine’ Bitcoin, a major attraction of the new digital currency. Bitcoin was not supposed to be a game for just the rich we were told. Unfortunately for the hopeful ‘miners’:

‘this democratic feature did not really hold up.’

Because only those who can afford large specialist computer systems, (the means of production of Bitcoin if you will), can mine the remaining Bitcoins. Anyone with an ordinary computer has long since been forced out of the game.

But not to worry because:

“one-CPU-one-vote” mechanism should hardly be regarded as a fundamental ideal bolstering Bitcoin in the first place.’

Bitcoin was ‘democratic’ in the sense that everyone could get a piece of the action, in theory. Only in reality, it turned out that only everyone who could afford it could get a piece of the action. So much for this version of democracy and by the way:

‘this characterization of “democracy” as “majority vote” is a quite limited interpretation of democracy’

anyway!

Since it turns out that ‘one man one vote’ and ‘majority rule’ etc are not really important parts of democracy, van Wirdum suggests we move onto:

‘the most important of the two (types of democracy), …the ideology of democracy, ..(which)….consists of various Enlightenment ideals.’

And these ideological enlightenment ideals would be?

Equality, popular sovereignty and self governance

Equality is defined by van Wirdum as:

‘equal rights under the law, freedom of speech and property rights.’

In this respect Bitcoin is superior to standard state money because:

‘no one person has more influence over the protocol than anybody else, nor can anyone bend its rules to his or her own advantage.’

To make it absolutely clear:

‘Not even the inventor, Satoshi Nakamoto, or huge stakeholders, such as the Winklevoss twins, are able to change the Bitcoin-code without reaching a consensus among users.’

Well that certainly sounds very reassuring on the surface. But on reflection what does this really guarantee the user of Bitcoin that state currency does not?

Currency markets are manipulated to create desired outcomes every day without affecting the basic ‘protocols’ of individual national currencies. That is why rich and powerful people are always very keen to promote what they call ‘free’ markets- because ‘free’ markets are the means to circumvent political control and exercise unfettered economic power. Currency manipulators don’t want the power to change the design of the five pound note or the way it is printed – what do they care so long as they have control of the markets the notes are traded in?

van Wirdum goes on to offer further bits of nonsense like:

‘arbitrary confiscations of wealth – as seen in Cyprus – are simply out of the question as long as bitcoins are stored securely.’

-the same is true of paper money- if you hide it under your mattress!

However, on a more disturbing note he suggests that the freedom to anonymously donate to a political organisation (through Bitcoin) is:

‘a pure and therefore very equal form of free speech if you will.’

This is explicitly the argument that was made in ‘ Citizens United v. Federal Election Commission’ the USA law that formally recognises corporations as people with the ‘rights’ to this kind free speech that actual people have. As a consequence the USA has secretive organisations funded by billionaires dominating whatever political discourse still remains..

Second on van Wirdum’s list of enlightenment ideologies is Popular Sovereignty defined by van Wirdum as:

‘ ..the legitimization of the rule of law by the consent of the governed.’

Contrary to what is implied by van Wirdum, this is ‘popularity’ in the sense of popular (Pop) music. ‘Pop’ music is not popular music because it is made by the population, it is music most often listened to by the the population. It is popular in the way it is consumed, not the way it is produced. The same thing is true of popular sovereignty. It is not power popularly exercised by the public, it is domination popularly accepted by the public:

‘And regardless of the legitimacy or desirability of this contract regarding present-day nation-states, central banks run their operations with questionable consent at best.’

‘they (are) purposely removed from the democratic political process’

This removal of the control of money from the democratic political process is a fundamental condition for the Democratisation of Money. Democratic politics justified the traditional monopoly of control that the state exercised of the issuance of money. It was therefore necessary to undermine the democratic state and its monopoly on money issuance to justify private money issuance.

This happened because there are no longer any ‘free’ markets outside of right-wing rhetoric. Since the state controls the economy, control of the state is control of everything. Based on this realisation Monetarists created ‘independent’ central banks across the western world. (That is independent from any truly oppositional political party that might get elected by accident).

The Monetarists have created an Independent Democratic Republic of Financial Institutions and Banks that no longer recognises the legitimacy of a nation state monopoly on issuing money.

This independence from political control was symbolised by the revocation of the Glass-Steagall Act in the USA, widely accepted as the legal doorway opened to the mass production of Derivatives- corporate democratised money.

And what of Bitcoin?

Bitcoin, on the far opposite side of the spectrum, quite literally exists because of the consent of its users; if they did not consent on the rules of the protocol they would not use it in the first place.

No more than the drug trade exists by virtue of the consent of junkies. The drug trade benefits pushers and they promote it. The need for drugs is a need of the desperate, in the same way that the need for your own currency is the need of desperate victims of corporate democratised money and Monetarism.

We come to the last and greatest gift of enlightenment ideology to civillisation: Self Governance which is:

‘the most important political value underpinning modern Western democracy’

Given its fundamental importance to modern western democracy it seems reasonable to ask where this principle has ever actually been practiced? This point is obliquely recognised by van Wirdum himself:

‘With Bitcoin, we now for the first time don’t need to delegate a small group of people to govern the rest, but we can instead transfer this power to universally verifiable open source code, written by and for the people. This is a truly revolutionary form of self-government.’

If ‘self governance’ is truly so fundamental to western democracy why would its introduction through Bitcoin be so ‘revoloutionary’?

Preferring not to dwell on contradictions like these van Virdum plows on:

‘the organizational structure of open source programming is, by far, the best way for common people to organize themselves ever invented.’

because, he tells us, people are:

‘free to contribute to the rules – the code – of the system,’

This is really like saying that members of the public are free to go out into the streets and work for nothing picking up litter for the good of the community. Sounds like a great idea, so how come nobody does it?

And after all this we finally come to the crux of the matter:

‘some of the smartest economists alive today have argued that ….money should be carefully managed by experts in order (to) (sic) stabilize the value, for instance, or to guarantee economic prosperity. According to these economists, if the people are supposed to have any say in this regard, it should be a very indirect influence at most.’

Well this observation at least is unarguable- So what should we do about it?

As I explained above Capitalism has reached the stage where it is completely dependent upon state support and regulation. This means that no ECONOMIC strategy is possible for managing capitalism in the future-only a POLITICAL one. If this is true then the altcoin movement is a political movement not an economic one. If this is true then it is subject to political forces and not economic ones. That the altcoin movement attempts to define itself in economic terms is simply a political strategy.

What are the consequences of this political strategy? It takes the victims of Monetarism and corporate democratised money (derivatives), away from the source of real power. It takes them away from the place where they can have a real affect on the powerful. In effect it concedes the hijacking of the state by Monetarist interests and suggests that the dispossessed should leave and try to start up a new system somewhere else. Does anyone seriously believe that these powerful interests will allow the altcoiners to develop an alternative system free from their control? It is the Monetarists who began the Democratised Money experiment in the eighties and nineties with the creation of Derivatives! The world we see before us today all of it, is a Monetarist project.

With a final flourish of his ‘radical’ credentials van Wirdum tells us that:

‘up until the 1800′s, the term “democracy” was actually a fringe word, only perpetuated by the “insouciant and incorrigible dissidents,” as John Dunn put it: “Those who chose to do so placed themselves far beyond the borders of political life, at the outer fringes of the intellectual lives of virtually all of their contemporaries.”

Whether the idea of ‘modern’,’ western’, democracy began life as the rhetoric of fringe radicals or not, ever since it was adopted by the elites of the Germanic Cult of Capitalism it has been used as a justification to steal, murder, subvert and oppress countless billions across the world. Not least among these victims of ‘modern, western, democracy’ have been the German/Anglo Saxon plebs who supported the ‘revoloution’ and who have since found themselves packed like animals into cities, reduced to selling their very selves to survive. And their children made to applaud the ‘freedom’ and ‘democracy’ that put them there as sheep and cattle grunting and hooting in praise of the butchers knife. And all in return for a chance to put a little cross next to the name of the master of their choice.

Two hundred years ago anyone with a shred of intelligence knew that the radicals and visionaries of ‘democratic capitalism’ that promised so much and delivered so little would either be in madhouses or palaces by the time everyone else realised the truth about what they offered..

As van Wirdum says:

‘Sounds remarkably familiar, doesn’t it?’

Yes it does.