Welsh Labour AM Mark Drakeford has given his backing to a “land value tax”.

The Cardiff West AM’s championing of the tax comes as the Silk Commission investigates giving the Assembly new fiscal powers.

In an article for the Institute of Welsh Affairs, Mr Drakeford argues land should “should belong to the people” and this would be a progressive tax.

The TaxPayers’ Alliance yesterday warned that the tax was unfair and denied that it was progressive.

He writes: “In Wales – the part of the United Kingdom with the longest tradition of radicalism – we have no difficulty in understanding the notion that land is a resource we share in common, a true ‘common wealth’. As a result of being fixed and fundamental, it should belong to the people.

“Those who have the privilege of ownership should pay something back for that privilege, through a Land Value Tax. Once this is understood and agreed, the serious work of detailed investigation of its pros and cons and its practical implementation here in Wales can begin.”

Mr Drakeford argues that a land value tax has advantages over council tax, stating: “Of course, it would be an alternative to existing forms of taxation, not an addition to them. At its most radical, a land value tax would allow for the abolition of council tax, business rates and stamp duty land tax.

“Instead it would introduce a levy on the annual rental value of every site in Wales including all residential, commercial and farming land, as well as privately owned estates.

“A major virtue of the change would be that land value tax is a progressive tax. On the other hand, council tax is regressive because it imposes a lower burden on the rich than the poor – and also a lower burden on rich places than poor places. The land value tax reverses that proposition.”

Mr Drakeford said the London Underground Jubilee Line extension from Green Park to Stratford is estimated to have raised property values by £10bn.

He writes: “If only a small part of this windfall had been taxed, it would have paid for the extension very easily.”

However, Robert Oxley, campaign manager of the TaxPayers’ Alliance, said: “The land value tax might look like a simplification of the tax system but it’s neither fair nor progressive.”

By Philip Pilkington, a journalist and writer living in Dublin, Ireland.
Cross posted in Naked Capitalism

In 2008 profits in the US economy crashed out. But they soon bounced back. This bounce was largely due to the profits being reaped in the financial sector – which sickened many given that 2008 was in large measure caused by the financial sector. This always struck me as odd – not to mention unsustainable. If the ‘real’ economy is in the doldrums you can be sure that, in the medium to long run, the business class will go down with it.

In what follows I will draw on Chris Cook’s post on this site the other day to argue that, if he is correct (and I think he may be), judgment day is just around the corner for the profiteers. Soon they will have to learn that you cannot financial engineer your way to profitability forever, especially when the rest of the economy is withering. Who knows, this may even inspire what has come to be called the 1% to focus their attention on the problems that have arisen in the global economy in recent months – for they have been truly burying their heads in the sand for the past three years.

But first, let us look at this incredible post-2008 resurgence of profitability.

From Profit Bust to Profit Boom

When the world financial markets crashed out in 2008 profits hit the wall. Yet, they did not hit it quite as hard as one might expect. As the below graph shows profits did not even reach the levels they did during the 1983 recession as a percentage of GDP.

I think that the reasons for this have largely to do with the manner in which wealth has come to be distributed in the US. As the below chart shows a far greater proportion of national income now goes to profits than was the case in 1983 when labour compensation was at an all time high.

If we take this into account we can then appreciate that the hit that profits took in 2008 was quite substantial.

But then we saw a major kick back in profitability. Have a look at that first chart again. As a percentage of GDP profits soon nearly reached their pre-crash levels. Yes, a lower rate of GDP growth probably had an effect on this, but even if we simply look at the nominal level of corporate profits (below) we will see that they surpassed their previous height in 2008 despite the crisis.

We can safely say that, while unemployment soared and people found themselves completely drowning in debt, profitability essentially made a comeback. Many publications that were not known for their left-wing or redistributive credentials, noted this phenomenon. In 2010 The Economist magazine wrote:

One of the many oddities of the current joyless economic recovery is that this traditional enthusiasm is strikingly lacking. Corporate America has bounced back impressively. The quarterly results season that is now nearly over has revealed that profits are back within a whisker of the all-time highs achieved before the downturn in late 2008. By some calculations, the rate of recovery of profits from their trough is the strongest since the end of the Great Depression.

An oddity indeed. One can palpably sense in such pieces a suspicion that this bounce back in profitability might be too good to be true. Certainly, it does seem so. And when we look at the source of this new profitability our suspicions only mount. All this profitability was coming, as hinted at in the intro, from the financial sector. Just look at the graph below.

It was financial profits that made a roaring comeback, not profitability more generally. That graph only charts up until 2009, but if we look at the more recent data it correlates. Below is a graph charting the percentage of total domestic profits that is accounted for by financial sector profits.

The Wall Street Journal economics blog summarised the situation well:

Top-line, or pretax, operating profits economywide hit a record high at the end of 2010. All of the gain was in the financial sector…

Since [the crash in 2008], the sector has come roaring back. The GDP report shows finance profits jumped to $426.5 billion. While profits haven’t returned to their high levels of 2006, the gain in finance profits last quarter more than offset a drop in profits posted by nonfinancial domestic industries. (My emphasis)

This was simply carrying on a trend we’ve been seeing in the US economy – and probably much of the Anglo-Saxon economies – for some time now. Look at the below chart that shows how the different business sectors contribute to profitability.

That graph, of course, shows the rise of the bubble economy of the 1990s and the 2000s like no other. It also leads one to suspect that the resurgence of profitability after 2008 was, to some extent at least, due to the inflating of yet another bubble.

Instinctively many of us feel this. It seems so obvious. The economy is doing horribly and yet, for all their complaining, Wall Street does not seem to be doing so badly. Frankly, that stinks; not just morally, but logically and economically. The financial community are supposed to channel funds into productive activity, thereby turning a profit while increasing investment and economic growth. If they’re not doing that and they’re still making money – well, chances are that they’re blowing more bubbles.

The article run on this site the other day by Chris Cook may point in what direction this remarkable resurgence in profits came from. Let us briefly run through Cook’s argument before we go any further.

Big Oil, Big Finance, Big Trouble!

Chris Cook argues that financial investors have fled into commodities and inflated a bubble which they are using to keep their margins up. While one is tempted to reach for the gun shouting “speculation!” one should be more careful. According to Cook, this is not the cynical, greed-fuelled speculation that led to the pre-2008 housing bubble. No, this something altogether different. This is a bubble mainly based on fear. But such makes it no less ominous.

First a run through of the structure of the modern oil market as Cook portrays it.

Basically what has occurred in the oil markets in the past few years is that oil has begun to be traded as an inflation hedge. Investors trade dollars for oil to ensure that, in the event that the value of the dollar is eroded by inflation, they possess something that holds its value. It’s a bit like the strategy of the gold bug. Fearing inflation they give away their dollars that they think to be declining in value for something ‘tangible’ that they believe will hold its value or appreciate.

On top of this Cook tells us how Big Oil and Big Finance have locked arms in this regard. Each has something the other wants: Big Finance has access to dollar loans that can be used to ensure that, should oil decline in value, Big Oil has ample amounts of dollar liquidity lying around. Meanwhile, Big Oil has plenty of barrels of crude lying around that can be exchanged for dollars, thus allowing Big Finance to hedge against any inflation that may take place.

Such an institutional arrangement has given rise to a highly opaque and unstable market that few can see into. Indeed, no one really knows just how much oil is being ‘held’ as an inflation hedge by Big Finance. These stockpiles have even gained themselves an ominous name within the industry (recently christened by Izabella Kaminska over at FT Alphaville who has been doing some of the best work on this): Dark Inventory.

Looking at recent market trends Cook raises concerns that we could be seeing the beginnings of the end of a bubble that began to inflate in the oil market after the crash of the previous bubble in 2008. This bubble, Cook argues, was inflated due to inflation fears after the QE programs undertaken by the Federal Reserve and the Bank of England. With the markets awash with dollar and sterling liquidity, banks and investors piled into commodities to escape what they saw to be a looming inflation.

In recent months Cook focuses on the move of the market from a position of ‘contango’ to a position of ‘backwardation’ – which he sees as evidence of a bubble deflating. While some investors read in this that the short-run demand for oil has risen, Cook points out that with the global recession grinding along there is no fundamental reason that this should be occurring. Instead Cook sees in this move a sign that the long-run demand for oil is falling as the current bubble begins to burst.

Cook thinks that the price collapse is going to be very painful – falling possibly as low as $45-$55 a barrel. In response to this OPEC will try to ramp up prices by cutting production and, most importantly for our purposes, a financial crisis of sorts will occur as inflation hedged investors see their net worth cut to pieces.

If this is as Cook says – if this is a bubble of fear and it bursts – the financial sector is going to see a huge wiping out of the profits they have been reaping from it. We have no way of knowing how much profitability is tied up in these dodgy markets – but my thinking is: a lot.

And Then… Depression?

One could speculate for hours on what happens to the economy next. Certainly lower oil prices will mean higher effective demand for other goods and services. On the other hand, the rich will undoubtedly be licking their wounds in the case of such a collapse and will retract spending (think: the ‘capitalist consumption’ part of the Kalecki profit equation). Pension funds and the like will also likely see red ink ooze from their balance sheets.

However, there is something else to consider – something alluded to at the start of this piece. For the first time the rich may see no tangible way to regain their lost income. In short, they may not see any other potential bubbles to inflate.

In the past few decades the real economy has become increasingly financialised. And so, as shown in the first half of this piece, nonfinancial companies have been able to maintain their profitability through their financial arms despite the real economy of production, distribution and consumption stagnating. If financial profits fall off a cliff they’ll have little left to hold onto. They’ll be in the ditch with their financial buddies.

Certainly this could push our elites to take real action and expand fiscal policy and with it the real economy. We all know Big Finance’s lobbying power and if they began to really see their profitability tied up with the real economy we might see our ignorant and shameful governments getting off their asses and actually doing something about our economic problems.

So, perhaps this will be a positive development in the long run. But in the short run this will be anything but. With their profitability squeezed, businesses are likely to turn on their workers and attempt to cut their wages and living standards. At this point we could well see a true depression taking shape in which businesses cut workers and wages to increase profitability, all the while profitability continues to fall as the unemployed and underpaid buy less and less stuff.

What can I say? I hope I’m wrong. I really do.

…We, and many others, expect the banks of all the major OECD economies to collapse over the next few months. This will drag the UK, Eurozone and US down. In other words, and to be absolutely clear:the Eurozone and the world will be dragged down by the banks, not vice versa.

Politicians, advised by deranged and culpable economists, will hasten, and intensify this global private banking collapse by accelerating austerity. It is those policies that will prolong and deepen the global economic crisis.

So prospects are bleak. Unless and until, that is, politicians in the UK and Eurozone get real, and face reality. It is time now to stop blaming the victims – public sector workers, pensioners, single mothers, the frail and vulnerable – for a global financial crisis designed by bankers, technocrats, economists and politicians.

It’s time now to address the solution: first, subordination of the private banking sector to the interests of society; and second, policies for employment. Only jobs can now generate the income needed to revive the economy, to pay down private debts, and to stabilise the global economy. “Look after employment” said Keynes, “and the budget will look after itself.”  (link to article)

….So for 30 years or more, the European governments, in particular the Eurozone member states have been deliberately deflating their economies in search of their dream of monetary union.

The consequences are now dire and to continue this vandalism, the Euro elites are now attacking the democratic basis of the governmental system. They have deliberately ignored the preferences of the people in the individual nations and when a head of state has looked like deviating from the Troika-mantra they have been replaced by a non-elected technocrat with pro-Euro, pro-ECB, pro-IMF sympathies.

As John Grahl says:

… if the monetary union does survive, in the form now planned by EU leaders, then the cure could turn out to be worse than the disease.

He is referring to the so-called “fiscal union” which he says “does not involve a genuine co-ordination of macroeconomic policies or significant transfers of tax revenues”. He correctly views it as an “authoritarian structure that would subject the weaker states to permanent and extremely intrusive surveillance, formally by the commission and the ECB, in reality by Germany and the stronger northern European states”.

The very states that relied on the so-called profligate peripheral Euro states for the miserly employment growth they generated between 1999 and 2007. Without Greece and Spain and the rest of the now vilified PIIGS spending the non-PIIGS would have looked very ordinary indeed in terms of their economic aggregates.

While Germany is being held out as the example for all to follow, John Grahl notes that:

One alarming aspect of German views of the current “reforms” is a fascination with numerical limits – on public spending, on public borrowing and so on. In many ways these are analogous to the Friedmanite notion of numerical limits on the money stock and, just like money supply rules, they will prove to be either ineffective or dysfunctional. Public debt is not a control variable available to policymakers; it represents a relationship between the public sector and the unstable, unpredictable, private sector which does not admit of mechanical arithmetic constraints.

Yes, the obsession with ratios. It is correct to point out that these ratios are not “control variables”. As I have noted in the past, budget balances, for example (and hence shifts in public debt) are driven by the state of the business cycle. The major fluctuations in economic activity occur due to the variability of private gross capital formation (investment).

Strong private spending growth leads to smaller budget deficits (relative to GDP), other things equal. A rising public debt ratio is typically a sign that private spending is weak.

The only problem is that in a fiat monetary system where the currency is issued by the elected national government and allowed to float freely on international markets, these ratios are largely irrelevant to the conduct of government.

But in the Eurozone they are not as a result of the flawed design that the Euro elites introduced from the outset. As John Grahl notes it would have been a totally different situation right now if the Eurozone was built with a federal-level fiscal institution that was charged with the “genuine co-ordination of macroeconomic policies or significant transfers of tax revenues”.

The elites refused to include that essential capacity because they were ideologically opposed to the use of fiscal policy and sought to impose the rigid Stability and Growth Pact rules on all member states.

Not only were these rules impossible to keep within (because budget balances are not control variables) but they biased the region to a low growth future even before the crisis.

The only strong employment growth – as we have seen – were in areas and sectors – that could not sustain that impetus.

The first major negative aggregate demand shock was like a breathe of wind against a house of cards.

Conclusion

To repeat – the first 10 years of the Eurozone were not as glowing as the official rhetoric might have led you to believe. Sure enough there was some strong employment growth regions and sectors but the composition of that employment growth was never sustainable.

The redistribution of employment towards construction in Ireland and Spain was unsustainable.

The reliance on growth in the peripheral states which helped Germany run strong current account surpluses was unsustainable.

In general, the Eurozone was failing from day one.

 

Lately, I find myself having a recurring conversation. The people and the places change but the basic premise stays the same. I meet friends whom I haven’t seen in some time, I ask them how they are, what they’ve been up to. They shrug. “Nothing” they say. They are either unemployed or working in an area divorced from that of their training, part-time in a bar perhaps. These are people from a wide variety of backgrounds; qualified carpenters and electricians, science and engineering graduates, graphic designers and academics. When I tell them I am working I suffer from a vague sense of embarrassment, as if I somehow cheated and escaped the recession that we are all embroiled in. I know in reality this is not the case. I am also caught up in the noxious landscape of austerity. I may not be as victimised as some others but I am not immune. I am the 99%…..

He compares the current neoliberal economic mindset to restricting early software architecture created by chance that establish lock-in…

The computer scientist Jaron Lanier in his book You Are Not a Gadget describes a process he terms ‘lock-in’.  Lock-in describes what happens when particular programmes, despite their limitations, become the standard, and because it proves impractical to change or dispose of all the software and hardware that has been developed using this programming, the technology remains stagnated through its basic underlying architecture.  Lanier uses the example of MIDI, a programme that represents musical notes.  When developed in the 1980s, MIDI offered a very crude way to represent music digitally – it could represent the rather static expressions of a keyboard but not the transient expressions of a saxophone for example.  What perhaps started as a first step towards digital musical expression became widely used and, thus, became locked-in.  Thirty years after its inception then, MIDI remains the standard scheme to represent music in software, to the ultimate detriment of musical expression.  This occurs, Lanier suggests, because while it is easy to build small programmes from scratch, it is extraordinarily difficult to change existing larger programmes.

I think that lock-in offers a good metaphor for role of the state in terms of the current crisis.  For the past thirty years, nation states have been programmed into a mode of neoliberal thinking.  This mode of thinking is now to a large extent locked-in.  We can see this in the response of nation states to the financial crisis.  This crisis was brought about by an excess of neoliberalism – an all too optimistic faith in markets and the retraction of state oversight and regulation – but the solutions being proposed use the same neoliberal architecture as their foundation.  Like MIDI does to the musical note, these solutions diminish democracy so as to make it compatible with the limitations of the neoliberal programme.  Moreover, nation states do not stand in isolation, but are routed into global political and financial systems.  Thus, the ‘big’ programme gets bigger.

If the neoliberal project is the cumbersome ‘big’ programme, Occupy is the ‘small’ programme.  For the participants, it is a joy no doubt to watch it grow and flourish.  But the greater challenge for the group is to influence the architecture of the ‘big’ programme.  This is no small feat.  There is a lot at stake in the status-quo.  This is partly, as Marxists rightly suggest, because powerful interests exert political influence in order to retain or enhance their position in the system.  But it is also, I think partly down to a lack of political imagination.  The system stays the same because our leaders can’t imagine what it would be like to create something different.  There is a broad consensus calling for reform, but the programme is so big and so many interests are involved that these reforms become more and more inconsequential and we are left with lock-in.  Leaders are interested in fixing the bugs in the programme, not changing the underlying architecture.  (link to full article)

 

…..

But its universality goes against the story that he so masterfully set out in his introduction where two kinds of money/credit evolved together – the first, a form of barter where real things are exchanged, the second, a simple tally or record of a promise that is backed by unreal things such as trust, reputation and indubitably, threats.  This second kind of money is that described and promoted by modern money theorists (MMT) – government money backed only by the requirement to use it to pay taxes.  There are very many positive reasons for this kind of money to persist, not least as it carries with it a sense of social contract that allows for debt forgiveness when the economy or political climate requires it. Energy units are likely to be just as  unforgiving as gold or Germans with an overdeveloped work ethic. 

Here are his longer term predictions…

Economy 3.0
The direct, instantaneous connections of the Internet make possible direct people-based (peer-to-peer) credit relationships between individuals and direct asset-based (peer-to-asset) credit relationships between individuals and productive assets.

On the face of it, it could be expected that such dis-intermediation – which I term Napsterization, after the music file sharing phenomenon – would be resisted by banks as credit intermediaries. But in fact, the opposite is true.

Inflation hedging – In parallel with the credit innovation that eventually led to the point of Peak Credit and the collapse of the banking system, there has been a parallel series of innovations in legal vehicles for investment in productive assets, involving trust law and partnership law, rather than company law.

From 1995 onwards, beginning with the Goldman Sachs Commodity Index fund, a breed of funds was created that took on commodity risk – initially through holding long-term positions in the futures markets – with a view to “hedging inflation” and a decline in the value of commodities relative to the dollar.

From 2005 to 2008, these funds grew rapidly and began to inflate commodity market prices as producers began to lease – through sale and repurchase agreements – commodities to the funds in return for a loan in dollars. The outcome was to enable oil producers to literally monetize oil stored in the ground, in tanks or in pipelines, and the flow of dollars into funds led to the bubble and collapse in oil prices in 2008.

The Federal Reserve Bank addressed the collapse of Lehman Brothers by reducing dollar interest rates to zero and by creating dollars that were used to buy Treasury Bills – so-called quantitative easing.

At this point, through 2009, the flow of inflation-hedging dollars became a flood as banks queued to launch new funds and to set up the necessary support and trading operations. Commodity and equity prices became completely detached from the underlying reality of physical production and consumption, and of flows of profits and dividends, as funds took ownership – through purchases or leases – of commodities and equities purely as an alternative to holding dollars.

Dis-intermediation – Since the credit market is essentially dead, or at least on life support, the reason banks flocked to sell funds to clients is that market risk is not with the banks but with investors. Banks need relatively little capital to be service providers to the funds, and are able to make substantial profits in very short-term trading on behalf of the funds.

The banks have knowledge in respect of the ownership of market inventory which is not known to other market participants. These are the merchants who buy and sell physical commodities, and speculative financial traders such as hedge funds or even risk-taking individual investors, who attempt to make transaction profit. Through such information asymmetry, and the use of new trading tools such as high-frequency trading which provide often dubious liquidity, high profits may be made on minimal capital.

The adjacent possible – The point is that, as capital became scarce after October 2008, banks evolved their business model to the adjacent possible of marketing and operating new quasi-equity instruments. They transitioned from an intermediary role to a service provider role because it was and is profitable to do so.

But these instruments, and the presence in the markets of investors who aim to avoid loss rather than make profits, have now led to what are essentially two tier and false markets.

In my home turf of the oil market, all the signs are that in the absence of massive new flows of quantitative easing dollars from the Federal Reserve, and/or substantial cuts in oil production, especially from members of the Organization of the Petroleum Exporting Countries, there will be a collapse in oil market prices in the first quarter of 2012. Indeed, some market participants have already taken option positions in the oil market in anticipation (or in fear) of a fall in the oil price as low as $45 per barrel in 2012.

The coming collapse in commodity prices will lead to the next great regulatory scandal of mis-selling, when the risk-averse investors who bought these funds from the banks make massive market losses to which they never realized they were exposed.

At that point the way will be open to go Back to the Future – to the next adjacent possible – which is direct people-based credit and direct asset-based credit.

P & I clubs – People-based credit is not the direct peer-to-peer interest-bearing credit provided by companies such as Zopa. Instead, trade credit is extended directly from trade sellers to trade buyers, within the kind of mutual risk-sharing agreements that have existed for thousands of years. To this day, mutual “P & I club” insurance of shipping and other risks still takes place in the City of London, and these protection and indemnity mutual clubs have been managed by the same service provider for 135 years.

In a mutual “credit clearing” system within a P & I cub risk-sharing agreement – or guarantee society – buyers and sellers would pay no interest on credit but would pay for the use of the system, and would also pay a guarantee charge or provision into a pool in common ownership to guard against defaults.

21st century stock
Issues of stock appropriate for the 21st century will enable direct credit creation not only for short term/high risk development financing but also when productive assets are complete, for long term/low risk funding.

Owners of productive assets simply create and issue undated credits/units that are redeemable in payment for the use of the asset. For example $1.00′s worth of rental revenues pre-sold for 80 cents will give an absolute return of 25%, but the rate of return depends – literally – upon the rate at which units of stock may be returned to the issuer and redeemed against use.

Instead of debt fragmented by date and rate of interest, there will simply be single classes of stock, and even if financial investors do not buy stock for investment, users of productive assets such as occupiers will always buy stock at a price less than face value in order to redeem it against use.

The fact that the issuance of stock is as possible for assets in public ownership as it is in respect of assets in private ownership opens up simple but radical new options for public financing and funding.

Open capital – Stock may in fact be seen as currency sold forward at a wholesale discount, and I think of such undated credit as open capital, to distinguish it from closed and proprietary forms of debt and equity finance capital.

My vision of a 21st century “Open Capitalism” is of new forms of stock based upon land rentals which will come to be what are essentially networked land-based national currencies created literally from the ground up.

Other forms of stock, some locally acceptable, others internationally, will be based upon the intrinsic value of energy, such as stock redeemable in payment for carbon fuels; electricity, and even heat.

These currencies will change hands “peer to peer” against goods and services with the backing of a mutual guarantee based upon the capacity of individuals to provide such goods and services.

Finally, the reference point or pricing benchmark against which transactions will be made will logically be an absolute amount of energy, and the global economy will go onto an “Energy Standard” for exchange, thereby enabling the transition to a low-carbon economy.

Chris Cook is a former director of the International Petroleum Exchange. He is now a strategic market consultant, entrepreneur and commentator.

(Copyright 2011 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)

1 2 Back

Economy 3.0
The direct, instantaneous connections of the Internet make possible direct people-based (peer-to-peer) credit relationships between individuals and direct asset-based (peer-to-asset) credit relationships between individuals and productive assets.

On the face of it, it could be expected that such dis-intermediation – which I term Napsterization, after the music file sharing phenomenon – would be resisted by banks as credit intermediaries. But in fact, the opposite is true.

Inflation hedging – In parallel with the credit innovation that eventually led to the point of Peak Credit and the collapse of the banking system, there has been a parallel series of innovations in legal vehicles for investment in productive assets, involving trust law and partnership law, rather than company law.

From 1995 onwards, beginning with the Goldman Sachs Commodity Index fund, a breed of funds was created that took on commodity risk – initially through holding long-term positions in the futures markets – with a view to “hedging inflation” and a decline in the value of commodities relative to the dollar.

From 2005 to 2008, these funds grew rapidly and began to inflate commodity market prices as producers began to lease – through sale and repurchase agreements – commodities to the funds in return for a loan in dollars. The outcome was to enable oil producers to literally monetize oil stored in the ground, in tanks or in pipelines, and the flow of dollars into funds led to the bubble and collapse in oil prices in 2008.

The Federal Reserve Bank addressed the collapse of Lehman Brothers by reducing dollar interest rates to zero and by creating dollars that were used to buy Treasury Bills – so-called quantitative easing.

At this point, through 2009, the flow of inflation-hedging dollars became a flood as banks queued to launch new funds and to set up the necessary support and trading operations. Commodity and equity prices became completely detached from the underlying reality of physical production and consumption, and of flows of profits and dividends, as funds took ownership – through purchases or leases – of commodities and equities purely as an alternative to holding dollars.

Dis-intermediation – Since the credit market is essentially dead, or at least on life support, the reason banks flocked to sell funds to clients is that market risk is not with the banks but with investors. Banks need relatively little capital to be service providers to the funds, and are able to make substantial profits in very short-term trading on behalf of the funds.

The banks have knowledge in respect of the ownership of market inventory which is not known to other market participants. These are the merchants who buy and sell physical commodities, and speculative financial traders such as hedge funds or even risk-taking individual investors, who attempt to make transaction profit. Through such information asymmetry, and the use of new trading tools such as high-frequency trading which provide often dubious liquidity, high profits may be made on minimal capital.

The adjacent possible – The point is that, as capital became scarce after October 2008, banks evolved their business model to the adjacent possible of marketing and operating new quasi-equity instruments. They transitioned from an intermediary role to a service provider role because it was and is profitable to do so.

But these instruments, and the presence in the markets of investors who aim to avoid loss rather than make profits, have now led to what are essentially two tier and false markets.

In my home turf of the oil market, all the signs are that in the absence of massive new flows of quantitative easing dollars from the Federal Reserve, and/or substantial cuts in oil production, especially from members of the Organization of the Petroleum Exporting Countries, there will be a collapse in oil market prices in the first quarter of 2012. Indeed, some market participants have already taken option positions in the oil market in anticipation (or in fear) of a fall in the oil price as low as $45 per barrel in 2012.

The coming collapse in commodity prices will lead to the next great regulatory scandal of mis-selling, when the risk-averse investors who bought these funds from the banks make massive market losses to which they never realized they were exposed.

At that point the way will be open to go Back to the Future – to the next adjacent possible – which is direct people-based credit and direct asset-based credit.

P & I clubs – People-based credit is not the direct peer-to-peer interest-bearing credit provided by companies such as Zopa. Instead, trade credit is extended directly from trade sellers to trade buyers, within the kind of mutual risk-sharing agreements that have existed for thousands of years. To this day, mutual “P & I club” insurance of shipping and other risks still takes place in the City of London, and these protection and indemnity mutual clubs have been managed by the same service provider for 135 years.

In a mutual “credit clearing” system within a P & I cub risk-sharing agreement – or guarantee society – buyers and sellers would pay no interest on credit but would pay for the use of the system, and would also pay a guarantee charge or provision into a pool in common ownership to guard against defaults.

21st century stock
Issues of stock appropriate for the 21st century will enable direct credit creation not only for short term/high risk development financing but also when productive assets are complete, for long term/low risk funding.

Owners of productive assets simply create and issue undated credits/units that are redeemable in payment for the use of the asset. For example $1.00′s worth of rental revenues pre-sold for 80 cents will give an absolute return of 25%, but the rate of return depends – literally – upon the rate at which units of stock may be returned to the issuer and redeemed against use.

Instead of debt fragmented by date and rate of interest, there will simply be single classes of stock, and even if financial investors do not buy stock for investment, users of productive assets such as occupiers will always buy stock at a price less than face value in order to redeem it against use.

The fact that the issuance of stock is as possible for assets in public ownership as it is in respect of assets in private ownership opens up simple but radical new options for public financing and funding.

Open capital – Stock may in fact be seen as currency sold forward at a wholesale discount, and I think of such undated credit as open capital, to distinguish it from closed and proprietary forms of debt and equity finance capital.

My vision of a 21st century “Open Capitalism” is of new forms of stock based upon land rentals which will come to be what are essentially networked land-based national currencies created literally from the ground up.

Other forms of stock, some locally acceptable, others internationally, will be based upon the intrinsic value of energy, such as stock redeemable in payment for carbon fuels; electricity, and even heat.

These currencies will change hands “peer to peer” against goods and services with the backing of a mutual guarantee based upon the capacity of individuals to provide such goods and services.

Finally, the reference point or pricing benchmark against which transactions will be made will logically be an absolute amount of energy, and the global economy will go onto an “Energy Standard” for exchange, thereby enabling the transition to a low-carbon economy.

Chris Cook is a former director of the International Petroleum Exchange. He is now a strategic market consultant, entrepreneur and commentator.

(Copyright 2011 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)

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Economy 3.0
The direct, instantaneous connections of the Internet make possible direct people-based (peer-to-peer) credit relationships between individuals and direct asset-based (peer-to-asset) credit relationships between individuals and productive assets.

On the face of it, it could be expected that such dis-intermediation – which I term Napsterization, after the music file sharing phenomenon – would be resisted by banks as credit intermediaries. But in fact, the opposite is true.

Inflation hedging – In parallel with the credit innovation that eventually led to the point of Peak Credit and the collapse of the banking system, there has been a parallel series of innovations in legal vehicles for investment in productive assets, involving trust law and partnership law, rather than company law.

From 1995 onwards, beginning with the Goldman Sachs Commodity Index fund, a breed of funds was created that took on commodity risk – initially through holding long-term positions in the futures markets – with a view to “hedging inflation” and a decline in the value of commodities relative to the dollar.

From 2005 to 2008, these funds grew rapidly and began to inflate commodity market prices as producers began to lease – through sale and repurchase agreements – commodities to the funds in return for a loan in dollars. The outcome was to enable oil producers to literally monetize oil stored in the ground, in tanks or in pipelines, and the flow of dollars into funds led to the bubble and collapse in oil prices in 2008.

The Federal Reserve Bank addressed the collapse of Lehman Brothers by reducing dollar interest rates to zero and by creating dollars that were used to buy Treasury Bills – so-called quantitative easing.

At this point, through 2009, the flow of inflation-hedging dollars became a flood as banks queued to launch new funds and to set up the necessary support and trading operations. Commodity and equity prices became completely detached from the underlying reality of physical production and consumption, and of flows of profits and dividends, as funds took ownership – through purchases or leases – of commodities and equities purely as an alternative to holding dollars.

Dis-intermediation – Since the credit market is essentially dead, or at least on life support, the reason banks flocked to sell funds to clients is that market risk is not with the banks but with investors. Banks need relatively little capital to be service providers to the funds, and are able to make substantial profits in very short-term trading on behalf of the funds.

The banks have knowledge in respect of the ownership of market inventory which is not known to other market participants. These are the merchants who buy and sell physical commodities, and speculative financial traders such as hedge funds or even risk-taking individual investors, who attempt to make transaction profit. Through such information asymmetry, and the use of new trading tools such as high-frequency trading which provide often dubious liquidity, high profits may be made on minimal capital.

The adjacent possible – The point is that, as capital became scarce after October 2008, banks evolved their business model to the adjacent possible of marketing and operating new quasi-equity instruments. They transitioned from an intermediary role to a service provider role because it was and is profitable to do so.

But these instruments, and the presence in the markets of investors who aim to avoid loss rather than make profits, have now led to what are essentially two tier and false markets.

In my home turf of the oil market, all the signs are that in the absence of massive new flows of quantitative easing dollars from the Federal Reserve, and/or substantial cuts in oil production, especially from members of the Organization of the Petroleum Exporting Countries, there will be a collapse in oil market prices in the first quarter of 2012. Indeed, some market participants have already taken option positions in the oil market in anticipation (or in fear) of a fall in the oil price as low as $45 per barrel in 2012.

The coming collapse in commodity prices will lead to the next great regulatory scandal of mis-selling, when the risk-averse investors who bought these funds from the banks make massive market losses to which they never realized they were exposed.

At that point the way will be open to go Back to the Future – to the next adjacent possible – which is direct people-based credit and direct asset-based credit.

P & I clubs – People-based credit is not the direct peer-to-peer interest-bearing credit provided by companies such as Zopa. Instead, trade credit is extended directly from trade sellers to trade buyers, within the kind of mutual risk-sharing agreements that have existed for thousands of years. To this day, mutual “P & I club” insurance of shipping and other risks still takes place in the City of London, and these protection and indemnity mutual clubs have been managed by the same service provider for 135 years.

In a mutual “credit clearing” system within a P & I cub risk-sharing agreement – or guarantee society – buyers and sellers would pay no interest on credit but would pay for the use of the system, and would also pay a guarantee charge or provision into a pool in common ownership to guard against defaults.

21st century stock
Issues of stock appropriate for the 21st century will enable direct credit creation not only for short term/high risk development financing but also when productive assets are complete, for long term/low risk funding.

Owners of productive assets simply create and issue undated credits/units that are redeemable in payment for the use of the asset. For example $1.00′s worth of rental revenues pre-sold for 80 cents will give an absolute return of 25%, but the rate of return depends – literally – upon the rate at which units of stock may be returned to the issuer and redeemed against use.

Instead of debt fragmented by date and rate of interest, there will simply be single classes of stock, and even if financial investors do not buy stock for investment, users of productive assets such as occupiers will always buy stock at a price less than face value in order to redeem it against use.

The fact that the issuance of stock is as possible for assets in public ownership as it is in respect of assets in private ownership opens up simple but radical new options for public financing and funding.

Open capital – Stock may in fact be seen as currency sold forward at a wholesale discount, and I think of such undated credit as open capital, to distinguish it from closed and proprietary forms of debt and equity finance capital.

My vision of a 21st century “Open Capitalism” is of new forms of stock based upon land rentals which will come to be what are essentially networked land-based national currencies created literally from the ground up.

Other forms of stock, some locally acceptable, others internationally, will be based upon the intrinsic value of energy, such as stock redeemable in payment for carbon fuels; electricity, and even heat.

These currencies will change hands “peer to peer” against goods and services with the backing of a mutual guarantee based upon the capacity of individuals to provide such goods and services.

Finally, the reference point or pricing benchmark against which transactions will be made will logically be an absolute amount of energy, and the global economy will go onto an “Energy Standard” for exchange, thereby enabling the transition to a low-carbon economy.

Chris Cook is a former director of the International Petroleum Exchange. He is now a strategic market consultant, entrepreneur and commentator.  (read full article)

How’s poor old Ireland, and how does she stand?
Posted on Monday, December 19, 2011 by Bill Mitchell in BillyBlog

Last Friday (December 16, 2011), Ireland’s Central Statistics Office published their – National Accounts – for the September quarter 2011 and guess what? Things just became worse. Ireland is now nearly two years in the enforced austerity and all the deficit terrorists have been watching it closely for signs of life. The slightest upturn in GDP growth has brought a salvo of attacks on any one daring to oppose the harsh austerity. Well, I also watch it closely and the pattern that is unfolding is consistent with predictions. Things are getting worse not better. The only growth “engine” has been exports and with austerity spreading that market will not be strong enough to sustain growth when domestic demand is being ravaged by austerity…..

Here are the most telling charts

Bill finishes his well referenced and data-rich article with..

Ireland was the first nation to heel-click to the Euro bullies and in early 2009 imposed a very harsh austerity program on the nation. We were told that it would be tough but growth would come. The Irish people are still waiting while many cannot wait any longer and are leaving the nation behind.

Ireland will struggle while they remain in the Eurozone. The system is geared heavily against them.

This UK Guardian article (December 16, 2011) –
Ireland’s problems are far from over – provides an accurate assessment of what is going on in Ireland at present.

The article says:

Listening to Irish finance minister Michael Noonan you would think that exporting lots medical devices and gallons of milk is enough to support a vibrant economy. More than that, a few minutes in his company and you might be forgiven for believing this export fever will also bring down one of the biggest debt-to-GDP ratios of any nation in modern history.

It is the cheery, optimists version of economics he subscribes to, with the cavalry, in the form of the IMF, rescuing everyone in the final reel …

But Noonan’s strategy is not built on firm foundations. As such, it is not so much a confidence boost as a trick. And one that is being perpetrated on the Irish people to keep them thinking they are best served by remaining in the euro currency zone and paying back all their debts.

The article concludes that the recent Irish National Accounts data “are testimony to Noonan’s ridiculous optimism. The economy contracted by 1.9% in the third quarter, far worse than expected”.

The confidence trick is that the Irish government and the IMF and OECD and all the rest of them keep hoping that “the growing export sector will distract the Irish public from the fundamental problems of paying back debts with a smaller and slower-growing economy”.

Conclusion

In this blog from July 2010 – The Celtic Tiger is not a good example – I noted that Ireland’s growth was coming from the modest growth in the US economy. As the Euro depreciated against the US dollar, Ireland’s exports (pharmaceuticals, software, food and services) became increasingly cheaper and more attractive to its two major trading partners Britain and the US.

Exports were driving Ireland’s growth. I noted then that with the UK economy now being deliberately whiteanted by its own government (via the very harsh budget cuts) and the US economy slowing again, the Irish recovery will be stopped in its tracks. The lack of any spending recovery in the domestic components and the rising unemployment will take care of that.

That is what has happened.

Austerity begets austerity and trade is one way that the transmission occurs.

Exactly!

“Now, after the storm has quieted in the Baltics, Anders Aslund and other apologists are at it again as they promote the Baltic model. Aslund did so most recently with his Petersen Institute banking industry funded book on Latvia’s “remarkable” rebound. The only thing he failed to mention was that Latvians were voting with their feet in record numbers. Latvians were exiting at a rate of roughly 1% of the population per month in an exodus of Biblical proportions. Indeed, Latvian’s census makers were horrified when they discovered that that the country’s population had decreased from 2.3 to 1.9 million people from 2001-2011.”

Here is an excerpt from her article titled ‘Pulling Back the Curtain on the Wall Street Money Machine’

Setting Things Right
The Fed and the banking system have the unique power to create money as credit on their books, but this is not actually what is wrong with the banking scheme. The economy needs an expandable credit system and suffers recessions without it; and an expandable credit system needs a lender of last resort.

What is wrong with the current scheme is that the profits are siphoned off to the 1% at the expense of the 99%. Banks can borrow very cheaply, while individuals, corporations and governments pay “whatever the market will bear.” The banker middlemen take their cut in a scheme in which money is actually manufactured in the process of lending it.

To fix the system, the profits need to be returned to the 99%. How that could be done was suggested by Thom Hartmann in a recent editorial:

Have the central bank owned by the US government and run by the Treasury Department, so all the profits . . . go directly into the Treasury and you and I pay less in taxes . . . .For what local governments could do, he pointed to the Bank of North Dakota:

The good people of North Dakota . . . established something very much like this–the Bank of North Dakota–and it’s kept the state in the black, and kept its farmers, manufacturers and students protected from the predations of New York banksters for nearly a century. It’s time for every state to charter their own state bank, just like North Dakota did, and for the Treasury Department to either buy the Fed from the for-profit banks that own it, or simply nationalize it.We have been distracted here and in Europe by a sudden panic over our “sovereign debt” crises, when the real crisis is that our debt is NOT sovereign. We are indentured to a Wall Street money machine that creates our money and lends it back to us at interest, money our sovereign government could be creating itself, with full democratic oversight and accountability to the people. We have forgotten our roots, when the American colonists thrived on a system of money created by the people themselves, debt-free and interest-free. The continued dominance of the Wall Street money machine depends on that collective amnesia. The fact that this memory is surfacing again may be the machine’s greatest threat — and our greatest hope as a nation.

Spiegel Online repeats Wall Street Journal reports “from insiders” that central banks around Europe are preparing for a break up of the eurozone – even looking into where they can get revived national currencies printed – in particular the Irish central bank are looking into where they can print new money in case in “in the short term they
have to introduce a national currency” (“A spokesperson for the bank refused to comment” – well they would, wouldn’t they?)

http://www.spiegel.de/wirtschaft/soziales/0,1518,802395,00.html