Vampire Economics: The Reserve Bank Act

Written By: - Date published: 1:03 pm, August 19th, 2011 - 50 comments
Categories: debt / deficit, Economy, monetary policy - Tags: ,

I came across this blog called Howdaft written by Darkhorse last night. It consists of five posts written in June. Five of the best pieces of leftwing economic thinking you’ll see anywhere – something we’ve been short on recently. I’ve tried to contact Darkhorse, but no luck. If you’re out there, drop us a line. In the mean time, here’s one of the posts. – Eddie

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Vampire Economics: The Reserve Bank Act

The Reserve Bank Act defies the most basic logic in economics – the law of supply and demand. It is also most profoundly contradictory that the most essential component of the market, the price of debt has to be determined by regulatory fiat – surely the market should be able to sort that out.

At a conceptual level the Reserve Bank Act and the medieval practice of bloodletting have the same basic premise, that draining the essential life fluids from the fevered body will make the patient well. All it achieves is to weaken the body further. Deathly pallor is mistaken for a fever cured.

The most basic failure is that when some element of the economy is over-heating the cost of debt is increased indiscriminately draining economic energy from the innocent and the guilty. The RBA transfers wealth from the productive sector of the economy just as it drains money from the speculative sector. It usually does the former more effectively than the latter as the latter is driven by higher returns and higher risk and often the risk is displaced onto the lender through default when things go wrong. The mortgaged cannot escape so easily.

Fundamentally the Governor of the Reserve Bank raises the cost of borrowing to reduce demand for new debt. This however also punishes those who already are in debt.

The indebted cannot immediately reduce their indebtedness so must pay the imposed cost of borrowing. Their demand is inelastic. The Governor at the same time increases the rewards to lenders, in doing so new lenders with a higher resistance to risk, or the careless and the greedy, are drawn to the market for debt. These new lenders draw in their equivalents among the borrowers. So putting the price of money up makes the problem much worse by increasing the riskiness of the debt funded activity. It also drains resources from productive activity while fueling speculative activity. The past decade is testimony to that.

The simple fact is that if the Governor wants to increase the cost of money but not increase the price of money then the Governor should impose a tax on borrowing. If the governor wants interest rates to provide a 4% return to the lender but impose a 6% cost to the borrower to dampen both supply and demand for debt then the only logical way to do it is to impose a tax equivalent to an annual interest of 2% to establish the difference between price and cost.

A deeper fact is that this whole artifice is a substitute for the fact that the government has relinquished its right to issue currency to the banks and uses the Reserve Bank Act to moderate the rate at which the banks create it. This doesn’t work. The banks have abused the process to inflate parts of our economy, principally property and shares, so that they can push more debt into our economy and in doing so expropriate our wealth creating ability. We have been stupid enough to think that this is a good thing.

The entire gross export earnings of the dairy industry is consumed by paying the interest on all of the debt this country has accumulated over the past two decades.

50 comments on “Vampire Economics: The Reserve Bank Act”

  1. Draco T Bastard 1

    We have been stupid enough to think that this is a good thing.

    It’s not so much that we’ve been stupid enough to believe that that is a Good Thing but that we’ve been stupid enough to believe the banksters about how great the banking sector, which they created to enrich themselves, is. Get rid of the banking sector and the economy will probably recover as we’ll be back to thinking in real terms rather than the delusional free-market BS.

    • Colonial Viper 1.1

      The basic utility functions of a banking sector which are required by the citizens and to fulfill the needs of ordinary commerce should be carried out by a state owned bank.

      Everyone please watch this on the State owned Bank of North Dakota.

      • Colonial Viper 1.1.1

        http://motherjones.com/mojo/2009/03/how-nation’s-only-state-owned-bank-became-envy-wall-street

        And this article makes it clearer how the state of North Dakota does its business and its economic planning through the Bank of North Dakota.

        Makes them sound like rat bag commies 🙂

        EH: Let me put it to you another way and tell you another thing that we do. We also provide a dividend back to the state. Probably this year we’ll make somewhere north of $60 million, and we will turn over about half of our profits back to the state general fund. And so over the last 10, 12 years, we’ve turned back a third of a billion dollars just to the general fund to offset taxes or to aid in funding public sector types of needs.

        MJ: Not bad for a state with a population of 600,000.

        EH: Right. And here’s another thing: Back in 2001, 2002, when we went through the dot com bust, all the states suffered some sort of budget shortfall, including the state of North Dakota. At that time our budget shortfall was fairly insignificant–$40 some million. And so it was quite easy to overcome that. The governor just simply said alright, we’re going to turn back 1 percent of all general fund agencies, and the Bank of North Dakota, you will declare another dividend to make up the balance. And so we did that. Our capital was in a fine position to go ahead and do that. So in some cases we’ve acted as a rainy day fund.

    • aerobubble 1.2

      Its called inertia, people just don’t change their behavior over night. Neo-liberals by concentrating
      solely on the abstract theory of free markets rather than the necessary government regulation of markets (leave it to the industry to self-regulate pathetic). So we should not forget it needs shocks
      to the great unwashed herds for them to stay in the paddock and not go wandering following
      every rightwing false angry cloud.

      First Fox must go, Murdoch is taking some heavy hits but is not out yet. Until integrity has
      returned to the information gathers and delivers the markets cannot correct themselves.
      Because its the unwashed masses that choose to revolt or evolve, presently we are set on
      a path of revolting. Elites need to realize they are the problem and sack themselves for those
      who sat out the market (or were run off for being right and a threat).

      Not looking good, the stress is there, but it seems elites also have inertia and behave like
      zombies herds too.

  2. Kenny 2

    Looks like he’s been reading “The Grip of Death’ by Michael Rowbotham.

  3. randal 3

    everything you say is true but the whole thing is hidden in obfuscation and right wing rhetoric. The bank serves its masters and they aint you and I.

    • aerobubble 3.1

      We can’t do anything, that so plays into the hands of the bankers and rightwing.

      There’s lots we can do, many are buying gold. Others are starting veggy gardens.
      Others are switching to community banking. Some are using bikes. Some are
      finding cheaper ways to do what they did.

      The market rely on the consumer continuing consuming, but if enough choose
      alternatives, banking, food, transport, then the estimates of future profit in
      the shares in banks, in supermarkets, in oil companies tumble.

      Its call the free market and the right wing had nothing to do with its signals, its
      success or anything, in fact history will show (no doubt in my mind) that
      the right actually by de-regulating corrupted the whole free market capitalist
      system as Karl Marx predicted and then warned us would we really want to
      live in a socialist utopia? Really do you? Do the right wing nutjobs?

      Well that’s where the tea party is taking us, every communist in the US
      who ever dreamed of a socialist USA is a tea party loyalist.

  4. You know what is so nice? A year ago the lot of you would have thought that this was another”Conspiracy theory”! So good for Eddy to post this!

    • Draco T Bastard 4.1

      More and more people are starting to realise that our present banking system, including the Reserve Bank, just don’t work. This is probably due to the simple fact that it keeps falling over no matter what the neo-liberal idiots and economists say.

      • The problem is it’s not falling over. It’s doing exactly what the international money masters want it to do. Help with the transfer of wealth from the pockets of the masses to their own.

        • aerobubble 4.1.1.1

          Have you a quote from international money masters who explictly state that?

          Look you are under the delusion created by the right wing that they are in control
          of the free market and since the free market is the only hope for the economy
          that they the free market proponents are to be supported.

          Its naive. Free market signals, which is what we will continue to get until someone
          actually has a socialist revolution, is pretty much giving the full finger salute to the
          neoliberals.

          Its pretty simple, a lazy politician decided that growth happens anyway, that
          nobody hates wealth, so how hard could it be to sell themselves as growth
          wealth neo-liberal. Sad f*cks didn’t understand that it’s not that easy.

          Sure Key is funneling more wealth to the richest few in the world, and
          asset sales will just accelerate this, but many people who vote National are
          realizing that owing money is stupid, that crushing consumers in the pocket
          is killing their business, that the pure insanity of National key policies
          means they will have to hold their noses and vote Labour. Who in timely
          fashion have come out with a bunch of policies that can’t be faulted
          since our major trading partners have introduced them already.

          GST off food, CGT, tax free threshold. It will make us more competive
          in attracting and retaining skilled workers if they know there will be
          clients here who have cash to keep their businesses and jobs ticking over.
          Under National we are just serfs to be exploited.

          • travellerev 4.1.1.1.1

            Ok, here we go!

            Warren Buffet: It’s a class war all right and it’s my class who’s winning! (To give him credit he added that they shouldn’t)
            “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
            – Henry Ford

            “Some even believe we (the Rockefeller family) are part of a secret cabal working against the best interests of the United States, characterizing my family and me as ‘internationalists’ and of conspiring with others around the world to build a more integrated global political and economic structure – one world, if you will. If that’s the charge, I stand guilty, and I am proud of it.”- David Rockefeller, Memoirs, page 405

            “Bankers own the earth; take it away from them but leave them with the power to create credit; and, with a flick of a pen, they will create enough money to buy it back again… If you want to be slaves of bankers and pay the cost of your own slavery, then let the bankers control money and control credit.”
            – Sir Josiah Stamp, Director, Bank of England, 1940.
            “We are on the verge of a global transformation. All we need is the right major crisis and the nations will accept the New World Order.” – David Rockefeller

            “We are grateful to the Washington Post, The New York Times, Time Magazine and other great publications whose directors have attended our meetings and respected their promises of discretion for almost forty years… It would have been impossible for us to develop our plan for the world if we had been subjected to the lights of publicity during those years. But, the world is now more sophisticated and prepared to march towards a world government. The supranational sovereignty of an intellectual elite and world bankers is surely preferable to the national auto-determination practiced in past centuries.”
            – David Rockefeller, Bilderberg Meeting, June 1991 Baden, Germany

            “In the next century, nations as we know it will be obsolete; all states will recognize a single, global authority. National sovereignty wasn’t such a great idea after all.”
            – Strobe Talbot, President Clinton’s Deputy Secretary of State, Time Magazine, July 20th, l992

            “The money power preys on the nation in times of peace, and conspires against it in times of adversity. It is more despotic than monarchy, more insolent than autocracy, more selfish than bureaucracy. It denounces, as public enemies, all who question its methods or throw light upon its crimes.” – Abraham Lincoln

            “A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the Nation and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the world – no longer a Government of free opinion no longer a Government by conviction and vote of the majority, but a Government by the opinion and duress of small groups of dominant men…. Since I entered politics, I have chiefly had men’s views confided to me privately. Some of the biggest men in the U.S., in the field of commerce and manufacturing, are afraid of somebody, are afraid of something. They know that there is a power somewhere so organized, so subtle, so watchful, so interlocked, so complete, so pervasive, that they had better not speak above their breath when they speak in condemnation of it.” –
            Woodrow Wilson – In The New Freedom (1913)

            Let me know if you need more!

            • travellerev 4.1.1.1.1.1

              Here is another goody: “If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them, will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered.” – Thomas Jefferson

              • Here is a great speech of JFK on secrecy. Got him killed of course (and wanting to print money independent of the Federal reserve of course) but that was just a lone nut with a wonky gun killing JFK with a bullet which at the same time the another passenger in the car.

              • Jum

                Travellerev

                And if individuals, with the power and the money, could control the savagery of nature and unleash it when and where they pleased, and in any form, then surely they would create the bankers’ utopia of which Naomi Klein writes in Shock Doctrine.

                Maybe they already have.

            • aerobubble 4.1.1.1.1.2

              I stand corrected. They can’t help themselve but boast how the great unwashed
              are stupid. But we have reach saturation, unlike those other times, the chaos
              that made massive concentration of wealth possible has hit the entropy limit of the sun
              rays on our world. We create more rubbish than the low entropy sun light can
              maintain.

        • Colonial Viper 4.1.1.2

          One thing though, even the guys at the very top of the, ahem, pyramid can’t predict and plan for all eventualities.

          Its going to be a very interesting next 12 months.

          Sovereign states need to reassert their power to protect their citizens from the banksert terrorists.

  5. Shona 5

    Darkhorse’s tortured prose describes nothing new and only gives limited understanding to the profound idiocy that is the RBA.. For a far more lucid and in depth understanding for Standard readers the writings of Bruce Jesson are worth reprinting right now. Especially ” Only Their Purpose is Mad” for a detailed history of NZ’s financial transformation since 1984.Printed in 1999 it not only describes the lead upto the 1987 crash and its effects on NZ it predicts everything we are experiencing now.Yes I know I should seek his stuff out online and provide links, but I can’t be arsed. His books are in local libraries his ‘Metro’ columns were required reading during the eighties and nineties.He was a key player in preventing the privatisation of the Auckland Ports and a member of the ARA.before his untimely death.

    • Lindsay 5.1

      I think it was printed in 1989

    • Jum 5.2

      Shona,
      ‘He was a key player in preventing the privatisation of the Auckland Ports and a member of the ARA.before his untimely death.’

      Fortunately, he didn’t have to witness the reversal of the 2002 Local Government Act that Labour put in place to retain the Ports of Auckland in New Zealanders’ hands forever.

      Rodney Hide, with the support of all voters that voted National in, ensured that 75% of voter agreement is no longer required to sell off the vast land and valuable income-generating Ports of Auckland holdings.

      Thanks National supporters. Will you be stabbing New Zealanders in the back yet again this year by voting in the thieves of National Act Maori and United Future? Will you then steal all our children’s future dividends for just a few of you. I’d just like to know if you have considered just how damaging to Kiwis your greed and arrogance will be and how stupid if you then aren’t part of the few percent who will snap up these state owned assets that don’t belong to just those few?

      They belong to all of us.

    • ropata 5.3

      Thanks Shona I’d come across Jesson’s brilliant book once at a friend’s place but forgot both title and author! I’m off to get a copy.

  6. Lindsay 6

    It was Keynes who wrote about madmen waking up in the middle of the night and scribbling down a new economic idea. This article is close to that.

    • I don’t know about the mad man bit!

      and whjile Shona notes that it is a very limited critique of the RBA my blogging mentor RobertGuyton has advised me against being too wordy which as you will note from some of my other posts is a personal vice. Good ideas need to be sold in bite size pieces and my comment on the RBA focuses on the core paradox. Also there is little value in carping on about the consequences of the RBA everyone knows them but no one seems to effectively articulate the fact that it is based on a completely illogical premise.

      I spend my life getting the the masses to change their philosophical position and realised long ago that the great majority do need their new ideas feed to them as bite sized bits and some pureed before consumption!

      What also surprises me is that there is a basic logic to what I argue but to so many it seems like a new idea – this perhaps is the real problem.

  7. mik e 7

    I’ve always advocated a flexible tax as well as a flexible savings scheme to control inflation, increase savings in high inflation decrease when theres low growth low inflation simple. It would keep our dollar down and stop money heading overseas to to the speculators. and would create a surplus of money within the country which would keep interest down another inflation factor thats always overlooked by the big bank economists ,because every time the RB Govenator increases the OCR those banks margins go up and the money disappears overseas our dollar goes up the productive sector gets hammered the speculative sector has a feeding frenzy and the economy stagnates.Would the big banksters agree not likely

    • Hi Mik E

      you have motivated me to dig out my ideas on tax – I’ll do a post on this this week – taxation is a tool that governments fail to use with any imagination – it is the one mechanism that can be used to fine tune both social behaviours and the performance of the whole economy with ease and precision. Instead it is largely used as a dumb and deadweight mechanism for raising revenues without thought of the consequences (and potentials) these have for also modifying the performance of the various factors employed in the economy.

  8. Thomas 8

    The RBA has been enormously successful at its goal—reducing inflation.

    http://www.rbnz.govt.nz/challenge/resources/2970552_files/mpc07-monetary-policy-and-inflation02.jpg

    In fact, inflation targeting was so successful that Australia, Britain, and Sweden among others adopted it.

    So what do you want to replace it with? What system will be able to control both inflation and deflation? Inflation targeting is generally considered to be the best system known.

    Also, if you guys don’t like banks, stop using them or set up your own. Simple! But don’t deny the rest of us the right to lend money.

    • Colonial Viper 8.1

      The abiity to create credit money (ie make loans) is not a ‘right’ lol

      Your examples are spurious. Australia’s Reserve bank for instance has far wider goals than just inflation control.

      The RBA must help create the kind of economy we want for society. It also happens that in a society with significant debt levels, a higher level of wages and higher level of inflation can come in quite handy to burn that debt off.

    • Colonial Viper 8.2

      Further to why Thomas’ spurious listing of the Australian Reserve Bank as one which followed the example of the NZ Reserve Bank, this is how the Australians are set up (my emphasis):

      ‘It is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the Bank … are exercised in such a manner as, in the opinion of the Reserve Bank Board, will best contribute to:

      (a) the stability of the currency of Australia;
      (b) the maintenance of full employment in Australia; and
      (c) the economic prosperity and welfare of the people of Australia.

      We can see there that the Reserve Bank of Australia does far far more than the NZ ‘inflation targeting model’ Reserve Bank.

      Thomas is an advocate for the failed Chicago school economic ideology.

      • Thomas 8.2.1

        CV:

        * If I want to give my money to a bank or borrow from a bank, then that is my right. If you don’t want to, then that is your right. Simple. You seem to suggest that I should not be allowed to borrow or lend money.

        * Those are some nice platitudes. But what does the Australian reserve bank actually do to achieve that goal? Exactly what the NZ reserve bank does—target inflation.

        Central banks have very limited power. They can only control our currency through setting the OCR. They can really do no more than ensure low inflation. They have no more power to change the overall direction of the economy than they have to change the weather. It’s like trying to fly a plane with only one button at your disposal.

        * What alternative do you propose to the current system? I too want full employment, a stable currency, low inflation, and high wealth. But do you actually have a better plan to achieve it?

        * Why are you so obsessed with the Chicago school? I’m just a proponent of basic sensible economic thinking. You on the other hand reject the entire substance of economics and peddle an incoherent crackpot theory.

  9. James 9

    An economist from the Czech Republic spoke to either LSE or the RSA once (sorry, this is an awful reference) about growth-rate targeting, where the permitted government deficit goes up as the growth rate goes down. As far as I know, there’s nothing written about it in English yet. That might be an adjunct to the RBA. I’d also like the Approved Issuer Levy (the special low tax on debt lent in NZ by people overseas) made variable, to signal the amount of capital we want to borrow.

  10. HI Thomas and CV you are both falling back into believing the economists. The whole logic of the RBA is wrong and it doesn’t matter that the Aussies have it less wrong than us – it is a daft concept.

    As for Thomas’s comments you will find the only thing that the RBA has achieved is effective wage deflation. The CPI is a convenient political fiction that is massaged by the reporting state agency to remove much of the real price increases occurring in the economy. The cost of property has inflated at roughly 10% annually since 2000, the cost of farm land has done similarly. I think you will have a similar experience at the super market.

    Generally your council rates reflect a more accurate CPI as they are driven by the items in the construction price index – being the cost of raw material and capital items for building and maintaining roads, water reticulation etc. The frivolities in the council rates are generally a very small fraction of the overall cost of business.

    The past ten years have provided the same rewards for speculative investment as did the Muldoon years. The real rate of interest in the key inflationary areas of the economy such as property speculation were negative for a decade until the reality of the Ponzi scheme that it all was bit. Gold will likely be next great collapse because its price bears no comparison to its value. Unlike oil and food gold has no significant utility value that supports its current market price – just a bunch of foolish fearful greedy people who are scared of loosing their hoard. Gold only has value for as long as this group of people collectively believe it has value.

    I can feel another post coming on!

    • Colonial Viper 10.1

      NB although gold has reached new nominal highs, it is still sitting significantly under its historical inflation adjusted highs (~US$2400/ounce).

      IMO gold is going to keep going up as long as US dollar notes keep going down. Your comment about how something only has value as long as a collective group of people continue to believe that it has value? That applies equally to printed fiat currency. Perhaps more so.

  11. CV you are right to an extent – money and gold are both belief systems. Money does at least have a state authority guaranteeing it as a medium of exchange for what ever that is worth in the circumstances. Gold has no support other than pure undiluted blind faith of the greedy and the fearful = mind you greed and fear are powerful and persistent forces but if stranded on a desert island and offered a pile of food or a pile of gold which would you see the greater value in?

    • RedLogix 11.1

      I prefer Steven Keen’s approach. His perspective defines virtually ALL money as pure credit. The legitimate role of bankers is simply to act as trusted book keepers of the transaction process.

      The link above is perhaps the best entry point into Keen’s thinking. I’ll indulge in a longish chunk of it here:

      It has deluded us into thinking of a market economy as being fundamentally a system of barter. Every transaction is seen as being two sided, and involving two commodities: Farmer Maria wants to sell pigs and buy copper pipe; Plumber Joe wants to sell copper pipe and buy pigs.

      Money simply eliminates the problem that it’s very hard for Plumber Joe to find Farmer Maria. Instead, they each sell their commodity for money, and then exchange that money for the commodity they really want. The picture appears more complicated—there are two markets introduced as well, with Farmer Maria selling pigs to the pig market in return for money, Plumber Joe doing the same thing in the copper market, and then armed with money from their sales, they go across to the other market and buy what they want. But it is still a lot easier than a plumber going out to try to find a pig farmer who wants copper pipes.

      In this model of the economy, money is useful in that it replaces a very difficult search process with a system of markets. But fundamentally the system is no different to the barter model above: money is just a convenient “numeraire”, and anything at all could be used—even copper pipe or pigs—so long as all markets agreed to accept it. Gold tends to be the numeraire of choice because it doesn’t degrade, and paper money merely replaces gold as a more convenient form of numeraire.

      Importantly, in this model, money is an asset to its holder, but a liability to no-one. There is money, but no debt. The fractional banking model that is tacked onto this vision of bartering adds yet another market where depositors (savers) supply money at a price (the rate of interest), and lenders buy money for that price, and the interaction between supply and demand sets the price. Debt now exists, but in the model world total debt is less than the amount of money.

      If this market produces too much money (which it can do in a fractional banking system because the government determines the supply of base money and the reserve requirement) then there can be inflation of the money prices of commodities. Equally if the money market suddenly contracts, then there can be deflation. It’s fairly easy to situate Bernanke’s dramatic increase in Base Money within this view of the world.

      If only it were the world in which we live. Instead, we live in a credit economy, in which intrinsically useless pieces of paper—or even simple transfers of electronic records of numbers—are happily accepted in return for real, hard commodities. This in itself is not incompatible with a fractional banking model, but the empirical data tells us that credit money is created independently of fiat money: credit money rules the roost. So our fundamental understanding of a monetary economy should proceed from a model in which credit is intrinsic, and government money is tacked on later—and not the other way round.

      Once you get the somewhat subtle idea that money in the modern world really IS nothing but pure credit… and stop trying to relate it back to anything ‘of real value’… like gold… then a lot of important questions fall out from that.

      And the essays up on your blog are a good read; they convey some complex ideas in an accessible way. A great start and I hope to see more from you.

      And welcome to The Standard.

      • darkhorse 11.1.1

        Hi RL

        then you head into the relational theory of money which is where I think the answer is. The money supply should be determined by the amount necessary to facilitate the trading capacity of all of the parties who wish to buy and sell within the economy. This leads down some really interesting paths that include the American one occurring right now – they as the global currency can just keep printing the stuff – particularly if the banks keep burning it through write-offs in bad debt – which is why US is not having inflation while they double and treble their money supply. In addition they are exporting their inflation while effectively defaulting on their debt incrementally. Print twice as many dollars halve the value of Chinese debt. Indeed why not just print a trillion of them and give them to China in return for all the bonds and bills. China gets toilet paper US gets home free. Both deserve the consequences because each are as guilty as the other of creating the whole fantasy in the first place.

        Nothing stopping NZ doing the same to the Aussie banks – just print dollars and buy back all of the Aus backed mortgages = they can trade the kiwi dollars at the border on the way home – our dollar goes down by half our economy becomes balanced our internal wealth goes up our unemployment disappears – hey presto – and no more prestidigitation than the banks do in the first place to create the stuff but the revenue derived from the right to generate debt goes to the state not the banks. This takes us to all sorts of interesting possibilities too.

        We kiwis are poor by our own hand!

        • RedLogix 11.1.1.1

          The money supply should be determined by the amount necessary to facilitate the trading capacity of all of the parties who wish to buy and sell within the economy.

          OK but from a pure trading perspective it actually doesn’t matter how much money there is. Neo-liberal economists explain that whether a cow is worth one dollar or ten million doesn’t matter. Bizzarely enough economists generally aren’t all that interested in money itself. It’s kind of like arithmetic to mathematicians.

          To quote Milton Friedman on this point:

          “It is a commonplace of monetary theory that nothing is so unimportant as the quantity of money expressed in terms of the nominal monetary unit—dollars, or pounds, or pesos… Let the number of dollars in existence be multiplied by 100; that, too, will have no other essential effect, provided that all other nominal magnitudes (prices of goods and services, and quantities of other assets and liabilities that are expressed in nominal terms) are also multiplied by 100.” [15]

          The madness in Friedman’s argument is the assumption that increasing the money supply by a factor of 100 will also cause “all other nominal magnitudes” including commodity prices and debts to be multiplied by the same factor.

          (Same source as above)

          But of course nominal debt does not change with time. And therein lies the crunch.

          We use money for two crucial functions; a means of exchange and a store of value. In the modern world we use debt as a store of value because most other things are fragile or require effort to sustain. Debt on the other hand earns interest that compensates for inflation (ie the changes in the nominal value of money) and a return over and above that to compensate for risk.
          (Well at least that is the theory..)

          During periods of inflation, interest rates rise to sustain the ‘store of value’ represented by debt in the system. But when deflation occurs debtors are stuck with a nominal debt that is now rising in real terms, on an asset that is reducing in value and returning lower cash flow. But because interest rates cannot be negative (or at least in conventional thinking) debtors become intolerably squeezed… usually out of business.

          This is why the nominal value of money is important, because debt is always expressed in nominal terms. (ie if you borrowed $100k on an interest only mortgage in 2001, ten years later the principal would still be only $100k, even though it’s probably worth $200k in real terms today.)

          Throw in the way the countries of the world manipulate the nominal value of their currency and the madness of the whole system is even more stark.

          I tend to see the whole globalisation process as highly fraught and complex, but inevitable all the same. What I expect to see fall out of this current round of insanity is the beginnings of a true global currency. That will be a whole can of worms in it’s own right, but any thinking person can see that the present system is utterly broken and cannot be fixed.

          • Colonial Viper 11.1.1.1.1

            The US Fed has destroyed the notion, as always seems to happen with fiat currencies, that money is a store of value.

            Hence the flight to gold, and the effective negative interest rate on cash deposits in many places now.

            What I expect to see fall out of this current round of insanity is the beginnings of a true global currency. That will be a whole can of worms in it’s own right, but any thinking person can see that the present system is utterly broken and cannot be fixed.

            The conspiracy theory goes that when the global financial crisis hits a peak and the USD effectively loses its reserve status, a white knight global reserve bank will appear, with a new, centrally controlled reserve currency for all to use. Some thing that IMF special drawing rights might be a precursor to such a global currency.

            btw globalisation is not inevitable, in fact it is quite likely to be doomed by energy depletion within 50 years.

            • RedLogix 11.1.1.1.1.1

              globalisation is not inevitable, in fact it is quite likely to be doomed by energy depletion within 50 years.

              I understand why that seems apparent and I agree that much of the technology that has enabled it is dependent on cheap energy. Take away the easy energy and logically globalisation as we conceive it will fail. Accompanied by a mass die-off of people. Fewer than 1 billion of us could survive.

              But we are an adaptable species CV. No I’m not invoking some vapourware techno-fix for the era of ‘peak everything’ that is rushing towards us. There’s no dodging that predicament. But I’m willing to bet we are capable of changing who we are in the face of it.

              As the nightmare years of WW2 gripped humanity, few would have imagined the signing of the UN Declaration of Human Rights was imminent. (Did that turn out perfect? No. All human effort is a work in progress.) And as with the end of the Roman Empire, while much of humanity slid back into relative backwardness, the subsequent Christian and Islamic periods… although both shared very modest beginnings… essentially laid the foundations of the modern nation state.

              I’ve no doubt that the end of the world as we know it will be very disruptive for most people. But those humans who are capable of extending their capacity for altruism and co-operation to a universal, global scope will ultimately survive and flourish. All the real problems we face as a species are global in nature, and for this reason the solutions must be universal also.

              And the world they create will be unimaginable to us… as was our world to the last Roman.

              • Colonial Viper

                And the world they create will be unimaginable to us… as was our world to the last Roman.

                I’m going with Greer here: gradually deindustrialising scarcity driven western civilisation (we have been entering this for the last few years), then a scavenging scarcity based society, then finally an ‘eco-technic’ civilisation.

                http://www.energybulletin.net/node/50813

                But we are an adaptable species CV.

                Yes we are. Which is why we will survive as a species. At between the 1B and 2B global population level.

              • Rome failed for exactly the same reason as the current “empire” is failing, it exhausted its resource base to the extent that its effort/cost of bringing supplies to the core of the empire was greater than the value of the supplies once the got there – negative nett yield, The empire collapsed to the point where the yield became positive and with the resource depletion that had occurred,this was inevitably a much smaller society.

                While the Romans would be amazed, for a substantial part of the intervening two millenia they would have been rather dismayed as you may recall the dark ages followed with much bloodshed. Unlike growth, collapse is rarely a stable process because it is human nature to resist adaptive change until there is no other alternative.

                • RedLogix

                  Unlike growth, collapse is rarely a stable process because it is human nature to resist adaptive change until there is no other alternative.

                  Actually human nature is not fixed at all.

                  Most people have the strong tendency to be risk averse and resist change for good reason. In good times these are the people who happily roll out the proven and successful traditional strategies. The sheer weight of their collective success is what we call civilisation. Not all a bad thing.

                  Then there are the risk takers. They welcome change because they see it as a way of finding an escape route out of the stultifying fixed structures that limit them. Most new ideas don’t work as well as hoped and ultimately fail. But when times are bad, new ideas are exactly what is needed… and sooner or later one of them proves to be the new winning formula.

                  But here is the crucial pivot… we are possibly the first generation not to just have this insight, but to have possibly the tools to manage the impact of this collectively. We have the information; we will have some form of the internet, not the mass marketing machine it is now, but a morphed eco-technic version of it forever. In the last few decades immense strides have been made in many fundamental sciences most of us are only faintly aware of.

                  With the collapse of the materialistic, money empire we will have to fill the vacuum with something new, a re-invention of the shape of what makes us human on a universal scale.. with rich diversity and deep social co-operation.

                  • Hi Red I agree completely

                    I am a techno-optimist though do still consider that there will be much of the dark ages in the years ahead as the difficulty with the present challenge is that we are confronted by a complex system that needs changed in an incredibly complex way. Our entire belief system needs to be taken back to first principals and reconfigured. At present we are seeing the old patterns of societal decline where those in power think they can insulate themselves from the decline by grabbing ever increasing shares of the resources that are left – no different than the tribal warlordism that followed Rome’s decline.

                    Unfortunately our ability to follow the adaptive path you identify requires a rapid, progressive and visionary investment in the foundation infrastructures that can only be achieved by communal action. This is prevented or severely limited by the private ownership of the core infrastructures.

                    Have you read my post http://howdaft.blogspot.com/2011/06/community-ownership-of.html

  12. randal 12

    The guts of the matter is that the system is not rational and based on credit and desire for goods that is not constant.
    Because of these variables and others the “AUTHORITIES” whoever they are can make up anything they like knowing full well that in the washup they will come out usncathed.
    They wrap it up in jargon and functions expressed in the differential calculus and the layman doesn’t have a flipping clue what any of it means except that they must work harder and harder for less and less but the rich get more and more.
    This is the best trick of all.

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