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.)

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.  (read full article)

Ellen Brown writes in Web of Debt …

Skeptics asked how a country with a national debt that was over 200% of GDP could be “strong and wealthy.” In a CIA Factbook list of debt to GDP ratios of 132 countries in 2010, Japan was at the top of the list at 226%, passing up even Zimbabwe, ringing in at 149%. Greece and Iceland were fifth and sixth, at 144% and 124%. Yet Japan’s credit rating was still AA, while Greece and Iceland were in the BBB category. How has Japan managed to retain not only its credit rating but its status as the second or third largest economy in the world, while carrying that whopping debt load?

The answer may be that the Japanese government has a captive funding source: it owns the world’s largest depository bank. As U.S. Vice President Dick Cheney said, “Deficits don’t matter.” They don’t matter, at least, when you own the bank that is your principal creditor. Japan has remained impervious to the speculative attacks that have crippled countries such as Greece and Iceland because it has not fallen into the trap of dependency on foreign financing.

Japan Post Bank is now the largest holder of personal savings in the world, making it the world’s largest credit engine. Most money today originates as bank loans, and deposits are the magic pool from which this credit-money is generated. Japan Post is not only the world’s largest depository bank but its largest publicly-owned bank. By 2007, it was also the largest employer in Japan, and the holder of one-fifth of the national debt in the form of government bonds.

21 March 2011 by Cullen Roche

HYPERINFLATION – IT’S MORE THAN JUST A MONETARY PHENOMENON

“Inflation is always and everywhere a monetary phenomenon.” – Milton Friedman

Hyperinflation is poorly understood. As its name might imply, most people believe hyperinflation is merely inflation on steroids. But that’s not necessarily accurate. Inflation can and does occur in a perfectly healthy economy. In fact, since 1913 when the Fed was founded inflation in the USA has consistently risen at 3.5% per year on average. One might assume that this means the country has experienced some great injustice, but the truth is that the 1900′s were characterized by the greatest economic expansion and wealth creation the world has ever seen. Despite the common citation that “the $USD has lost 90% of its value” Americans experienced an unprecedented period of prosperity during this inflation. In fact, the prosperity became so gross in the 1990′s that Americans felt entitled to second homes, second cars, and just about every other luxury good known to man. What has not occurred is hyperinflation, which is a very different animal than inflation. Hyperinflation is a disorderly economic progression that leads to complete psychological rejection of the sovereign currency.  (link to full article)

However, while the list of conditions for hyperinflation make the the US or UK  very safe, they look worryingly familiar to Ireland within the EMU. Smart Taxes score is in bold.

What is consistent among cases of hyperinflation is a number of rare exogenous circumstances:

• A ceding of monetary sovereignty (usually in the form of foreign denominated debt, a currency peg, etc).      Yes, We tick this box
• Extraordinarily unusual social circumstances (war, regime change, etc.).                                                               No, thankfully
• Very low levels of faith in government during regime change (high public mistrust).                                             Yes, We tick this box
• Ineffective government response or rampant corruption.                                                                                              Yes, We certainly tick this box
• Combustible political environment.                                                                                                                                    No, OK here because of public passivity
• A collapse in the domestic economy.                                                                                                                                   No, Not Yet, but wait one year
• A breakdown in the tax system.                                                                                                                                            No, Not yet, but rising black economy

The most notable environments involving hyperinflations are war, regime change, government corruption and a ceding of monetary sovereignty.

Is there a zero bound? The “mysterious” world of negative nominal interest rates.
from Economic Perspectives from Kansas City by umkc.economists@gmail.com
By Eric Tymoigne

Yesterday I attended a Federal Open Market Committee (FOMC) simulation at Reed College in Portland, OR. At the beginning of the simulation the President of the College jokingly asked participants to find a way to make the policy rate negative, so that we (the FOMC members) could pay banks who borrow reserves. Of course everybody in the audience laughed but let’s take a look at this more carefully: Could the Federal Reserve set the nominal federal funds rate and the nominal discount rate in negative territory?

Yes.  (Find out how – link to full article)

Mainstream Keynesian economics is facing its last hurrah. The global fiscal stimulus championed last year by the Obama administration is coming undone, repudiated by the same Group of 20 that endorsed it last year. Now, against a backdrop of a widening sovereign debt crisis, we need to abandon short-term thinking in favour of the long-term investments needed for sustained recovery.

Time to plan for post-Keynesian era

By Jeffrey Sachs

Published: June 7 2010 22:22 | Last updated: June 7 2010 22:22

“…

First, governments should work within a medium-term budget framework of five years, and within a decade-long strategy on economic transformation. Deficit cutting should start now, not later, to achieve manageable debt-to-GDP ratios before 2015.

Second, governments should explain, and the public should learn, that there is little that economic policy can do to create high-quality jobs in the short term. Good jobs result from good education, cutting-edge technology, reliable infrastructure and adequate outlays of private capital, and thus are the outcome of years of sustained public and private investments. Governments need actively to promote post-secondary education.

Third, governments must of course also ensure social safety nets: income support for the poor, universal access to basic healthcare and education, a scaling up of job training programmes and promotion of higher education.

Fourth, governments should steer their economies towards needed long-term structural transformation. External-deficit countries such as the US and UK will need to promote exports over the next few years, while all countries must promote clean energy and new transport infrastructure.

Fifth, governments and the public should insist that the rich pay more in income and wealth taxes – indeed, a lot more. The upward re-distribution of the past 25 years has made our economies into extravagant playgrounds for the super-wealthy. Politicians of both the mainstream left and right in the US and UK have fawned over those who pay their campaign bills in return for low taxation. Even playgrounds should collect tolls – when it is billionaires in the sandpit.

We need, in sum, to reset our macroeconomic timetables. There are no short-term miracles, only the threat of more bubbles if we pursue economic illusions. To rebuild our economies, the watchword must be investment rather than stimulus.

Tuesday, May 11, 2010
Euro-Bankers to Greece: The Wealthy Won’t Pay their Taxes, So Labor Must Do So

By Michael Hudson

The “Greek bailout” should have been called what it is: a TARP for German and other European bankers and global currency speculators. The money is being provided by other governments (mainly the German Treasury, cutting back its domestic spending) into a kind of escrow account for the Greek government to pay foreign bondholders who bought up these securities at plunging prices over the past few weeks. They will make a killing, as will buyers of hundreds of billions of dollars of credit-default swaps on the Greek government bonds, speculators in euro-swaps and other casino-capitalist gamblers. (Parties on the losing side of these swaps now will need to be bailed out as well, and so on ad infinitum.)

This windfall is to be paid by taxpayers – ultimately those of Greece (in effect labor, because the wealthy have been untaxed) – to reimburse Euro-governments, the IMF and even the U.S. Treasury for its commitment to predatory finance. The payment to bondholders is to be used as an excuse to slash Greek public services, pensions and other government spending. It will be a model for other countries to impose similar economic austerity as governments run up budget deficits in the face of falling tax collections from the financial sector being enriched by the translation of junk economics into international policy. So the bankers for their part will have little trouble meeting their bonus forecasts this year. And by the time the whole system collapses, they will have spent the money on hard assets of their own.  (link to full article)

Reforming Seigniorage the Key to a Sustainable Economy
By Eric Zencey

Eric Zencey is a novelist, essayist, and Visiting Associate Professor of Historical and Political Studies for Empire State College in Europe and New York. His writing in environmental history and political theory has been supported by grants from the Rockefeller, Guggenheim, and Bogliasco Foundations. This essay is from the forthcoming The Other Road to Serfdom: Essays in Sustainable Democracy (University Press of New England, Fall 2011).

Here is an excerpt..

Money that is created and spent into existence by the government does not create this equal-and-opposite burden of debt. At bottom, fractional reserve banking is a routinized, publicly funded machine for inflating speculative bubbles, based on the bizarre supposition that $100 of wealth can be made to support $1000 worth of claims upon it. It takes a lot of economic growth to produce $1000 worth of wealth in the future for every $100 worth that exists today.

One reason that economic growth can’t match the rate of debt creation is the ongoing decline in the energy-return-on-energy-invested, or EROI, of oil, our economy’s primary fuel. In 1920, one barrel of oil invested in drilling and production yielded 100 barrels of usable product—an astounding 10,000% return, large enough to disguise quite a few structural flaws in our system. But by the close of the twentieth century the EROI of oil had fallen, worldwide, to 20:1 (For newly discovered oil, it is even lower: 5:1, by some estimates). This decline is both an underappreciated root of our current economic downturn and a warning that we have to change our institutions–and the thinking that underlies them.

The decline in EROI is a portent that austerity in public spending is not a temporary passage from which recovery is possible, but something like the permanent condition of governance in the post-petroleum era. Oil’s 10,000% rate of return was magic. It created fortunes (think Rockefeller and Getty), fuelled philanthropy, and ultimately paid for a lot of public works: schools and bridges and roads, Medicare and Social Security, moon missions and foreign wars. Today, governments at every level are struggling to sustain their revenues and provide essential services, even as their tax bases decline as a result of the recession. Meanwhile, the disposable incomes of many Americans have tumbled, and Tea Partiers shout that they’ve been “Taxed Enough Already”—taxes being one sizable household expense which citizens of a democracy feel they ought to have some say over.

There’s room for hope in the fact that the best renewable energy technologies come close to matching today’s world-wide average EROI of oil. But no energy technology will ever again offer the heady returns of the early days of oil. As we enter a crowded, ecologically straitened, post-petroleum era, the need for sound, far-sighted public expenditure on infrastructure, including renewable energy infrastructure, has never been greater, while the resources to pay for it have never been more constrained. Capturing seigniorage is one way out of this conundrum, and phasing out fractional reserve banking is the best way to do that.

Think back to that unnamed goldsmith who first had the idea of making loans against money that belonged to someone else. Through one conceptual lens, the man was an innovator, a banking genius: the gold was just lying there, not being used, so why not issue additional notes against it? Through another lens, though, the man committed fraud: he treated as his own something that was not his to lend. The fact that we’ve had centuries of routine acceptance of that basic fraud doesn’t change the essential character of the act. And aside from the moral considerations that call into question the foundation of fractional reserve banking, there are also large practical reasons for changing our practice. The pyramiding of debt through fractional reserve banking is one strong driver of heedless economic growth, “growth for growth’s sake,” which has expanded our economy’s ecological footprint beyond sustainable limits. Returning seigniorage to its rightful owner is a strong step toward ecological, and civic, sanity.  (link to article)

Hat tip to James Robertson. This Act could be written instead for the ECB. It goes further that the NMT or Chartalist prescription by removing all of the right to create money from the private banking sector giving it, not to government but to an arms length entity. The outcome is broadly similar to that proposed by Auerbach and Mosler – governments get to spend money without borrowing.  Here is a snippet…

Preventing Banks Creating Money

Our first step then is to prevent banks from creating money each time they issue a loan. This step is actually remarkably simple – we just set a ‘universal rule’ that banks can only credit (put money into) an account if they simultaneously debit (take money out of) another account by the same amount. As is explained in this guide, this prevents money being created (or destroyed) within the banking system.

Creating a Public Source of New Money

However, up to now the banking sector has been increasing the money supply by an average of 8% each year. While this growth rate is almost certainly too high, a growing economy does still require an injection of new money each year, in the same way that a car requires the regular addition of oil to keep everything running smoothly.

Consequently, our second step is to give the Bank of England the power and responsibility to manage the money supply and create new money as and when the economy is judged to need it. We implement strict measures to separate control of the money supply from any political influence, and further strict measures that significantly reduce the risk of inflation, compared to the existing system.

With new money now being created debt-free by the state, we need to ensure that  this money is distributed into the most economically efficient and socially beneficial method possible. We recommend that the money is given to the government as a non-repayable grant, and used to reduce the overall tax burden, phase out the national debt and invest in public infrastructure. Phasing out the national debt has its own complications, and we have made recommendations to deal with these.

…In the 1930s, John Maynard Keynes’ friendly adversary, Sir Ralph Hawtrey, insisted that deficit finance would not normally be needed as a counter-cyclical weapon so long as the potentially unstable money supply was kept under firm control. However, in the event of poor control followed by an unusually severe depression like today, Hawtrey diagnosed what he called a “credit deadlock”, in which a collapse of confidence made banks fear to lend to the private sector and the private sector fear to borrow from the banks.

In such conditions he agreed that fiscal policy should come to the rescue to break the deadlock. But he also insisted that its effectiveness depended crucially on how the deficits were financed. If the private sector is frantically de-leveraging, as today, fiscal deficits lose much of their effectiveness if paid for by increased private saving.

Therefore what is needed is for government to expand the money supply (hence net monetary expenditures) by itself spending an adequate amount of newly issued money directly into circulation rather than borrowing from the existing (and declining) circulation. This borrowing from the private sector adds unnecessarily to the national debt.

Quantitative easing will not do the trick if the Bank of England’s net purchase of debt from the private sector largely ends up as increased bank reserves. That is why the money supply in circulation (this excludes bank reserves) has registered sluggish, sometimes negative, growth through our deep recession. And that is why recovery has been equally sluggish despite a soaring public debt...(link to article)

“People find it hard to get their heads around this concept, but we must…or else we will fail to understand the financial system.

Before western societies invented bank money and institutionalised banking systems – there were often shortages of money in the economy as a whole. This was because money was linked to a commodity – like gold – which was limited, and indeed was used as an anchor, precisely to limit the availability of money.

Then some geniuses (including one John Law) discovered that it was not necessary to have the same amount of ‘money’ or ‘credit’ in circulation, as there was gold in the bowels of the earth. One just needed to create enough money equal to the amount of economic activity in the economy.

If one created less money than the amount of economic activity, the result was depression and deflation. If one created more money than the amount of possible economic activity – the result was inflation… So central bank governors were given the task of carefully measuring economic activity and then supplying enough money to enable that activity to take place.
Money is not the thing for which we exchange goods and services.

Its the thing by which we exchange goods and services.

And bank money is not tangible. You cannot touch it or smell it. You cannot even see it – except perhaps as a statement on your monthly bank account. What you do touch and smell is cash – and these days only a tiny proportion of the money we use is issued as cash. The rest takes the form of cheques (declining in number now, and soon to be abolished in some stores in Britain); bank transfers; credit card and debit card payments. (Not so in many parts of Africa where they do not trust their banking system, where they may not have developed a system of bank money with credit and debit cards, and so, in some countries, carry cash around in large bags!)
Now intangible bank money is one of the most wonderful things humanity has ever invented. It enables us to engage in economic activity. That’s all. It’s effectively incidental to that activity – because without economic activity that money would be useless.

But it is potentially also one of the most dangerous of our inventions – which is why credit creation must be so carefully regulated.

Bank money comes into existence in the form of credit, issued by the central bank, and then distributed by the commercial banking system. Credit creates deposits, and in England it has done so since 1694 with the foundation of the Bank of England.

This is the very opposite of what most people think – that only once you have deposits can you obtain credit. No, credit creates deposits in the bank.

So when you are a youngster, fresh out of school, your employer has invariably obtained credit from the bank to finance her investment, and she uses part of that to pay you, and you promptly pay that into the bank as a deposit – using some of it as cash.

That credit has stimulated or generated the first month of your productive economic activity. The deposits that the young person places in her bank account are then exchanged and transferred as ‘bank money’ invisible and intangible – but very useful when she is shopping on Ebay, using her credit card, or paying by cheque.

Until recently, most people could not bring themselves to believe in something intangible and invisible called bank money. But now we have a new phenomenon to discuss over our dinner tables: quantitative easing, or ‘Queasing’ as we joke in English.

Last year on 13th March, 2009 the governor of the US Federal Reserve, Ben Bernanke gave an interview to CBS TV, in which he was asked: “where did you find $160 billion to bail out the insurance company AIG? Was that taxpayers money that the fed was spending?”. “That was not tax money” replied the Governer. He elaborated: “the banks have accounts with the Fed, much the same way that you have an account with a commercial bank. So to lend to a bank we simply use the computer to mark up the size of the account that they have with the Fed”. The Fed did what a commercial bank does when it provides you with a loan: they entered a number into a computer and charged it to AIG’s account (Watch CBS News Videos Online).

The fact is that the Federal Reserve did not even have to print 160 billion greenbacks – they simply entered a number into a computer.

And that is what the bank does when you apply for a mortgage, to buy a house for example. All the bank needs is a) your application for a loan b) the collateral of your property and c) your promise to repay at a certain rate of interest. Hey presto! The money is transferred – digitally – to your bank account and appears there as a deposit. You may spend 10% of that money on small purchases with cash (euros), but most of that will be paid by cheque or bank transfer.
Now the point of explaining this is as follows: the creation of credit is in fact an almost effortless activity. Different for example, from growing tomatoes. To grow tomatoes one has to depend on the weather, on the rain to fall; on the land and its fertility, and on labour, yours or that of another. All of these factors can disappoint or fail a farmer.

To create credit there is no need for our banking system to depend on the weather, on land, or even on labour. “Why then”, as John Maynard Keynes once argued in his ‘Treatise on Money’:
…if banks can create credit, should they refuse any reasonable request for it? And why should they charge a fee for what costs them little or nothing?
Keynes, 1930.

The ‘fee’ that Keynes is referring to here, is the rate of interest – the ‘price’ of a loan. And the point he is making is correct: the price of money should remain low – to enable people like entrepreneurs to borrow to invest; to enable governments to borrow to invest for example in de-carbonising the economy – something that requires major investment.

However, he also argued that while the rate of interest should be low – the creation of credit should be carefully regulated. In other words, bank money should be regulated so that it is lent to stimulate productive economic activity rather than speculative, inflationary activity.
We have just lived through three decades of financial de-regulation where economic policy makers have encouraged reckless, privatised credit creation. This in turn led to crazy speculation and gambling – in derivatives, collateralised debt obligations, and a range of other parcelled up, sliced-and-diced securities.

At the same time central bank governors and finance ministers succeeded very successfully in repressing the inflation of wages and prices – while allowing the prices of assets (property, race-horses, works of art, stocks and shares etc.) to rocket upward in an inflationary bubble.
However none of the economic gurus of the time – from US Federal Reserve Alan Greenspan, to European central bankers, to orthodox economists – while ferociously opposed to the inflation of prices and wages, ever complained about the inflation of assets.

Why? It is my belief that this is because it is the rich, on the whole, that own assets. The rest of us live by our wages, or by the prices we can obtain as farmers or small business women… The rich live on rent from their assets – be it property, stocks and shares or an number of assets. And orthodox economists allowed bankers and the rich to inflate the value of their assets with easy credit. This enabled the rich to enrich themselves over the period of financial liberalisation to an extent probably unknown in our history.  (link to full article)