Posts Tagged ‘fiat money’

On The Desirability Of Debt Based Fiat Money (DBFM)

December 27, 2012

The debate is still going on and it is in fact not getting any easier to explain effectively why DBFM should or should not be desirable.

My last attempt here gave rise to all the usual questions followed by all the usual unsatisfactory answers.

Once again however, I’ve come across a nugget of truth that fits neatly in the completion of the final puzzle that should, if not totally debunk, at least help shed light as to why money should be a monopoly of state and if it is, what the arithmetical consequences may be.

In the West we are proud of our democracy because we feel it engenders open societies, open economies thus personal freedom.

But our open, literate and ostensibly civilized societies have allowed government the monopoly of money. To be exact, government has unilaterally and arbitrarily arrogated itself the monopoly over money thereby simply skirting the democratic process and our societies have thought nothing of it; because we are free you see. We can travel; we can pick where to work (to a certain degree, I am Italian so ask me); we can buy property and we generally can enjoy all the trappings of an ostensibly free society.

But if we are open and free societies endeavoring under free markets, then why is there the need for a monetary authority to have the monopoly over money?

As free citizens, why do we not have the right to choose what to exchange our labor for? Our labor is our effort; it is what we deploy in order to improve our lives and expand the wider economy.

Why then should a presumed democratic government want the exclusive privilege to dictate what money is?

In a true “democratic” society, each individual would have the right to choose what they wish to exchange their effort for. Provided it is allowed to compete with any other type of money individuals can choose from, there is nothing wrong with state sponsored money per se. Quite the contrary. In ideal circumstances, state sponsored money should be a steadfast store of value thus of purchasing power, thus enticing everyone and their cousin to make use of state money.

But that is clearly not the case because we have an arbitrary and unilateral monopoly here.

Why then, is money so important that the state has deemed it necessary to impose this particular variety upon society to the exclusion of any other under penalty of violence?

The truth is not entirely intuitive but it becomes gradually more evident as the arithmetical limits of an artificial monetary system are reached.

By imposing DBFM, government sells individuals to the monetary authority. The word is “sells” – individuals are sold into slavery. It is a forward sale to be sure but a sale undisputedly it is. And a mighty future revenue stream it is too.

In return, the monetary authority grants the political establishment the funds necessary for the electoral dog and pony show and funds and encourages the establishment of different political forces and parties including the establishment of those presumed bastions of the rights of the common folk that are the unions. Unions are nothing but the addition of more layers of corrupt and privileged individuals over already bloated and corrupt layers of government – corruption that is an inherent and mathematical ramification of an artificial monetary system.

Money is a natural extension of who we are. Money is a natural right. Money is intrinsically and nominally expensive to produce because our physical and intellectual efforts represent who we are. What is the price of a human life?

By imposing artificial money upon society, government takes control of your effort. By instituting a monetary authority and bestowing upon it the privilege to create the money that society will have to make use of, government has sold your effort to the monetary authority.

Artificial money has no intrinsic value. The liberal creation of fiat money allows the monetary authority to gradually but arithmetically appropriate the wealth of society.

What I am outlining here is not an event of course. This is a dynamic that takes place over generations but the outcome is guaranteed. At the outset, the trap may not be evident. As the system expands, dissent is silenced or brought on side by applying a mix of coercion or flattery or by invoking personal interest. The easiest way to do that of course is to gradually expand government and para governmental institutions. The recent and current crop of politicians have invented nothing that the Romans, the Ottomans, the French or the British before them had not already devised in order to subjugate conquered societies.

Government expansion is usually justified by a mix of vague concepts that relate to justice, peace and safety; safety of the individual as well as safety of professional classes or industries or minorities and justice and peace for the citizens of sundry countries. Naturally however, what remains unseen is that the expansion of government is the primary cause of the lack of safety, justice and peace.

The need to expand government carries the perverted but inherent need to create a pretext. It begins by offering the masses unrealistic promises of health and financial security. It is boosted by building a powerful and sprawling armament sector and army (which combined employ significant chunks of the population) and it is cemented by the creation of entities that travel the globe offering developing countries advise and counsel on the benefits of borrowing artificial money and joining the Western sponsored monetary system.

Taken together over decades, over a century in fact, this dynamic fosters a number of socio/economic characteristics that are all evident today but that most people cannot relate to the original cause.

In over five thousand years of recorded history, there has not been one instance of an artificial monetary system that has lasted as long as our has or that has ended happily.

Money cannot be and must not be cheap. If society surrenders the right to choose what it deems worthy to accept as money, the usurper of that right will always and everywhere end up owning you.

If you think I am talking shite than answer me this.

How many of you reading this post feel comfortable quitting your job safe in the knowledge you will find alternative occupation that will allow you to live comfortably?

Better still. How many of you reading this post feel unhappy in your present employ and feel comfortable that you can quit and find alternative suitable employment?

How many of you work for government, a major bank or a para governmental organization such as the UN or the IMF or USAID?

But more importantly. How many of you feel you can now quit your job and live a less stressful though more frugal life doing the things you’ve always wanted to do but never had the time to?

This is the end of an era and like previous ends to similar monetary fantasies, it will be painful and bloody… and I am not talking twenty years from now.












Sound money by Bill Frezza (Forbes op-ed)

November 16, 2011

In the recent past, Forbes has surprisingly and boldly gone where few, if any, main stream publications have gone or will go.

Granted, it is only an op-ed as, in the recent past, it was always third party contributions making similar points rather than Forbes actually picking up standing behind the ideas and arguments being expounded. But it is a start nonetheless.

Here are some excerpts that define the entirety of what money is and how it should do what it is supposed to do. Nonetheless, the entire article is truly worth a good read.

[…] Frédéric Bastiat […] stat[ed]ing that money was a promise to “Pay the bearer a service equivalent to what he has rendered to society.” Note the past tense — a product or service must be rendered before money can properly come into existence.

Money’s unredeemed promise might be tokenized by a paper note, a gold coin, or a few bits in a computer database. ” […] The moral claim real money places on society on behalf of its bearer comes not from the intrinsic value of the token but from the fact that the bearer had previously produced some good or service deemed valuable by others. This is what gives money its moral legitimacy.

Note in the above excerpts that money might be tokenized. It might be, because it does not have to be. Money is only a vehicle that facilitates exchange. Money is not intrinsically valuable. It matters not what is used as “money”. In prison, cigarettes can be money. On Yap island, stones was money. On some Pacific islands, shells was money.

“Money” only facilitates the exchange of one’s skills and ideas in order to obviate the problem known as “coincidence of wants”. That is, in a barter society if you are a shoe maker and need bread, you must find a baker that might want shoes before you can get your bread. Money allows you to sell your shoes to absolutely anyone that might want shoes an then you can use that money to buy your bread or anything else you might need. The “wealth” in this example is represented by the bread and the shoes. It is the product of human ingenuity and skills that is intrinsically valuable. Not the vehicle that allows the exchange of same.

In the article, Mr. Frezza also remarks on what effectively is happening on the ground in Greece where barter networks have sprung up in order to obviate to the loss of revenue of individuals and their lack of savings. The necessity of returning to barter also suddenly enlightens individuals to what money is or at least, what it should be.

Money cannot exist prior to anything having been produced.

And this is the great con that a restricted elite of bankers with the assistance of politicians has successfully pulled over society in the past century. It began in the USA on 23rd December 1913 and was subsequently pulled in Europe in 1971 and then, through globalization, gradually on all countries that became members of the “Floating Exchange Rate” mechanism i.e. all currencies that accepted the US$ as reserve currency.

Today, the nature of money has been subverted to the point where even most finance professionals staunchly believe that Debt Based Fiat Money is capital.

It is not. And the reason should by now be clear as to why.

But why is it important for us to understand the nature of money? All of the above may seem like an interesting intellectual exercise. But are there any real life implications in pushing for one type of money or the other?

Those individuals that are now having to resort to barter not by choice but by necessity, have understood the real life implications of DBFM:

““The most exciting thing you feel when you start [bartering] is this sense of contribution,” a participant reports in a recent news story. “You have much more than your bank account says. You have your mind and your hands.”

– Permit me to issue and control the money of a nation, and I care not who makes its laws. (Mayer Amschel Rothschild)

As an illustration of the nature and consequences of DBFM imagine the following. You are playing Monopoly with your friends and you are the bank. Imagine too that you just happen to be the owner of the factory that produces the Monopoly game boxes. In this construct, your source of Monopoly money is inexhaustible. Thus, in this construct too, you cannot lose. No matter how inept you may be, eventually you’ll buy everyone and everything out.

And that is the reality of DBFM. The monetary authority and the entities that gravitate around it, simply by dint of having access to the newly created currency and credit first, enjoy a disproportional purchasing power advantage over anyone that comes later in the chain of users of the currency. And as far as the consumer is concerned, well, by the time the new money reaches his/her pocket, it is at the lowest purchasing power. So that, in due course, the monetary authority and its acolytes will end up owning everything … and everyone…

This is the importance of understanding what money is and how it works.  And although this dynamic has been evolving over the past century it is only today that most people are beginning to feel the real life squeeze the monetary authority has over people. This is not a metaphor. This is a real, honest to God, no holds barred coup by a restricted elite over the rest of society. This is the reason why, financial institutions are at the top of the ownership tree of most productive assets in the West and why today all our leaders are capable of doing is shoveling money hand over fist towards the banks.

Other than open and violent rebellion, is there anything that we can do to reverse our descent towards physical and material enslavement?

So far, I have been advocating collapsing the velocity of the currency so as to impact the capital ratios of the major banks by closing lines of credit, moving savings to smaller local banks or co-ops, increasing savings, accumulating gold bullion and, eventually, just plain leave your country so as to starve the beast of your fiscal contribution.

But after reading Mr. Frezza’s Op-ed, I am reminded that barter too is a very effective way to collapse the velocity of the currency. So, yeah, barter… barter anything and everything… barter away all you are allowed to… because, for example, in countries like Italy, there are restrictions as to what assets can change ownership without making use of money. I found this out twenty years ago when I wanted to gift my vehicle to my sister.

There is more to money than just the bits of paper in your pocket. Money and the monetary system are upstream of all and any human dynamics bar none. The choice of monetary system is a choice between liberty and enslavement and indoctrination.

A bon entendeur, salut!

– If the American people (or any other people) ever allow the banks to control the issuance of their currency, first by inflation, and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property, until their children wake up homeless on the continent their fathers conquered. The issuing power of money should be taken from banks and restored to Congress and the people to whom it belongs. I sincerely believe that the banking institutions having the issuing power of money are more dangerous to liberty than standing armies.
(Thomas Jefferson)

Fiat money… a bit of a debate with antoher blogger…

August 5, 2011

… whom is a trained economist … so since I am out of my depth on a number of issues, I can only argue from the empirical point of view…clumsy I know but that’s all I can do…

If you are interested in reading the comments:



A government salary for every man, woman and child

July 4, 2011

This comes apropos following on from my previous post with real life examples of how DBFM forces individuals to run faster just to stay in place.

The absurdity of DBFM is usually highlighted by pointing out that the mathematics underpinning the system lead to the perceived necessity for government to stimulate the economy in order to foster expansion. Thus, critics say, if government stimulation was a solution, then by giving a government salary to every man, woman and child we could ensure constant prosperity beyond anyone’s wildest dreams for ever.

Don’t laugh.

Despite being only a timid attempt, this is exactly what is now going to happen.

New Program: $50,000 in Fellow Taxpayer Money if You Don’t Pay Your Mortgage AND (Preferably) Don’t Have a Job

… and with this…

As millions of Americans struggle in foreclosure with little hope of relief, big banks are going to borrowers who are not even in default and cutting their debt or easing the mortgage terms, sometimes with no questions asked.

These are only timid attempts because the absurdity of this purported solution is obvious for anyone with a basic grasp of math to see. Which means that it is also clear to the stewards of the monetary system. But, such is the warped logic of DBFM that this is exactly the type of solution that will be implemented at ever greater degrees till not only the entirety of the productive capacity of society is thoroughly drained and transferred, but also till the entire moral fabric of society is thoroughly subverted and corrupted. In a DBFM system, government wants you to spend liberally, excessively and pervasively taking on debt and taking out even more debt to repay previous debts till you are thoroughly dependent on the monetary authority and the government for your daily needs. At that point, you will be used to do your government bidding and if that means you have to go to war to fight some ostensible foreign evil because your life style is threatened, that is exactly what you will do.

By the way. In case anyone should wonder, these solutions can only have a deflationary outcome as the value of all assets will get marked down accordingly because even mortgage holders that are up to date with their payments will be encouraged to default. Not to mention that this will also give rise to all sorts of scams on the part of banks. Finally, don’t forget that deflation is anathema to DBFM thus it is the enemy of banks thus the state….

What a crock of shit.

On the desirability of Debt Based Fiat Money

July 4, 2011

Recently, I had a discussion on another blog with someone who asked why Debt Based Fiat Money (DBFM) should be such an evil construct and how it is that it should be better or worse than any other monetary system.

As expected, I launched in my usual rant about exponentiality, diminishing marginal utility, transfer of productive capital yada, yada, yada till, I thought, I had defined the issue in its entirety. Whether she was being kind or whether she just wanted me to stop, my interlocutor acknowledged she now understood the mechanics of DBFM. However, she wondered, how much worse can DBFM be than any other variety of money?

It is only some time later I thought of something that should finally clarify the evil of DBFM.

In a non debt based monetary system (that could be either value based or predicated on a fixed amount of fiat money), an individual may choose to work less and, provided he at the same time chooses to consume less, said individual could still be able to save a portion of his earnings.

On the other hand, DBFM does not allow this choice. In a DBFM system, the same individual could not choose to work less because even assuming he decided to consume less, government would overspend on his behalf thus not only devaluing the little income the individual may have saved, but also saddling him with public debt which he is going to have to pay through taxes and/or through an increase in the cost of living.

March 1st, 2012 addendum

In the case of individuals that cannot or do not want to work, DBFM allows politicians to promise all sorts of state aid under the guise of social safety nets and safe in the knowledge that outlays can always be covered by newly minted currency. A cursory look at the creation of credit and currency over the past forty years will readily evidence the profligacy of our expedient political/monetary system. And, by the way, we ain’t seen nothing yet. The diminishing marginal utility of debt ensures that as the mathematical limit of the construct is reached, credit and money creation must go exponential:

FRED Graph
This picture requires little comment me thinks.

So even though, given political will, either monetary system can be subverted, a non debt based monetary system has the virtue to at least allow a 50% chance that the system can be managed properly ensuring fiduciary duty, true free markets, true freedom of choice and true democracy. Not so DBFM which from the get go is geared towards statism via the debasement of the currency and which is set up to transfer the productive capital of society into the hands of a financial elite and its cronies.

Social unrest a precursor to total war.. tic-toc… tic-toc…

May 25, 2011

Things are coming together nicely. What we are missing is for these localized national movements to coalesce across borders and Bob will be your proverbial uncle… our leaders will precipitate a conflict requiring drafting millions into the war effort…

Of course, the alternatives are only two. Let things develop and do nothing. The sequence of events would go something like this:

– mobs start roaming the streets looking for some politicians and bankers to lynch

– governments are taken down wholesale

– political and social strife for control

– likely rise of an extremist government

Second alternative, would be to come clean, let the banks fail, abolish central banks, repudiate debt based fiat money, place monetary policy within the democratic framework and prosecute all fraud dating back to, say, the past 10 years.

So, what are you going to do?… To answer this question it helps to know that similar junctures in history have resulted in global conflicts. Global conflicts typically preserve banking and, to a certain extent, political interests.

Some of us consider ourselves progressive, others conservative. Some of us are believers, some not. Some of us have clearly defined ideologies, others are apolitical, but we are all concerned and angry about the political, economic, and social outlook which we see around us: corruption among politicians, businessmen, bankers, leaving us helpless, without a voice.

Rural migration (tic-toc… tic-toc)

May 16, 2011

It’s been some time since I wrote one of my “tic-toc” posts and although till then what I was writing about could have been considered speculation, this Guardian article bears out some of the logical outcomes I was pointing out.

There are also other aspects of this article that are interesting from my point of view. I am going to post the entire article and intersperse my comments throughout.

Debt, unemployment and poverty is causing mass unrest and thousands to seek a cheaper lifestyle outside the capital

High in the hills of Arcadia, in a big stone house on the edge of this village overlooking verdant pastures and a valley beyond, a group of young Athenians are busy rebuilding their lives.

Until recently Andritsaina was not much of a prospect for urban Greeks. “But that,” said Yiannis Dikiakos, “was before Athens turned into the explosive cauldron that it has become. We woke up one day and thought we’ve had enough. We want to live the real Greece and we want to live it somewhere else.”

Piling his possessions into a Land Rover and trailer, the businessman made the 170-mile journey to Andritsaina last month. As he drove past villages full of derelict buildings and empty homes, along roads that wound their way around rivers and ravines, he did not look back.

“Athens has failed its young people. It has nothing to offer them any more. Our politicians are idiots … they have disappointed us greatly,” said Dikiakos, who will soon be joined by 10 friends who have also decided to escape the capital.

They are part of an internal migration, thousands of Greeks seeking solace in rural areas as the debt-stricken country grapples with its gravest economic crisis since the second world war.

“It’s a big decision but people are making it,” said Giorgos Galos, a teacher in Proti Serron on the great plains of Macedonia, in northern Greece. “We’ve had two couples come here and I know lots in Thessaloniki [Greece’s second biggest city] who want to go back to their villages. The crisis is eating away at them and they’re finding it hard to cope. If they had just a little bit of support, a little bit of official encouragement, the stream would turn into a wave because everything is just so much cheaper here.”

GR: Mr. Galos is oblivious to what exactly has caused this crisis which is in fact government intervention. Seeing the devastation wreaked on his nation, Mr. Galos calls for more of what has caused the crisis in the first place in the form of “official encouragement” in order to nudge those that are sitting on the fence to make the move because, as he says, “… everything is just so much cheaper here”.  But that’s exactly the problem and Mr. Galos does not see it. As is always the case, things are “cheap” till government encourages people to make use of something. The moment government encourages some entities to do something, prices will automatically rise not least because when economic actors perceive that there are funds to be had from the government they will feel no compunction at all to take advantage of the perceived free money… because it is government money… and government money is not perceived to be any natural person’s money… but, of course, it is and sooner or later it has to come out of our taxes or increased cost of living somewhere. Similarly, politicians are naturally inclined to give away funds as a way to garner votes from interest groups. Crucially, debt based fiat money allows politicians to be profligate because unlike value based money fiat money is perceived to be cost free. All that is needed, it is thought, is to expand the debt. And, anyway, in an electoral democratic system, a politician is never around to see the extent of the ramifications his/her policies engender.

The trickle into Proti Serron might have gone unnoticed had the village not also been the birthplace of the late Konstantinos Karamanlis who oversaw the nation’s entry into the then European Economic Community in 1981. An alabaster white statue of the statesman in the village square is adorned with the words: “I believe that Greece can change shape and its people their fate.”

Nearly sixty years after they were uttered, a growing number of Greeks, at least, are beginning to wonder whether the old man was right. The drift towards the bright lights of the big cities were by Karamanlis’ own admission one of the great barometers of the country’s transition from a primarily agricultural society into an advanced western economy.This week, as the IMF and EU debated ways of trying to re-rescue Greece and observers openly wondered whether the country would have to leave the euro, Greece appeared more adrift than ever, tossed on a high sea of mounting anger and civil disobedience from people who have lost trust in their politicians, and at the mercy of markets that refuse to believe it can pull itself back from the brink of bankruptcy. “The reality is that these people, they are in deep shit,” the managing director of the IMF, Dominique Strauss-Kahn said recently. “If we had not come they would have fallen into the abyss. Two weeks later the government would not have been able to pay civil servants’ wages.”

GR: Mr. Strauss-Kahn is a product of his environment and cannot therefore admit the perversity of his statement. The IMF rides ostensibly to the help of countries distressed by debt by offering… more debt… Of course, if you understand the nature of debt based fiat money, then you also understand that supranational entities such as the IMF exist precisely to prop up the monetary construct. Debt based fiat money can only exist in an environment of expanding credit regardless of the natural characteristic of debt to conform to the law of diminishing marginal utility. Had the IMF not offered assistance, Greece wouldn’t be any worse off. Look to Iceland for a glimpse of what can be achieved if only politicians had the balls to stand up to banking interests. But of course. A politician is by definition someone that lives by expedients so that biting the hand of the entity that finances your politically expedient programs is not done.

Ironically, it is the medicine doled out under last year’s draconian EU-IMF €110bn (£96bn) rescue programme, implemented to modernise a sclerotic economy, that has made their lot worse. Twelve months of sweeping public sector pay and pension cuts, massive job losses, tax increases and galloping inflation have begun to have a brutal effect. GDP is predicted to contract by 3% this year – making Greece’s the deepest recession in Europe.

GR: The author of the article at once identifies the problem and then negates it. GDP is contracting simply because it had been artificially inflated for so many years prior. If anything, GDP is reverting to its true intrinsic value. The public sector in Greece like in the rest of Europe but, particularly in Latin Europe, is bloated because it is politically expedient to just hire people in order to garner votes from unions and interest groups. One of the most glaring examples of political expediency of the past 3o years was the Italian airline Alitalia where over staffing and staggering losses reached biblical proportions over the years.

In Athens, home to almost half of Greece’s 11 million-strong population, the signs of austerity – and poverty – are everywhere: in the homeless and hungry who forage through municipal rubbish bins late at night; in the cash-strapped pensioners who pick up rejects at the street markets that sell fruit and vegetables; in the shops now boarded and closed and in the thousands of ordinary Greeks who can no longer afford to take family outings or regularly eat meat.

“We’ve had to give up tavernas, give up buying new clothes and give up eating meat more than once a week,” said Vasso Vitalis, a mother-of-two who struggles with her civil servant husband to make ends meet on a joint monthly income of €2,000.

GR: Not to detract from the real drama Ms. Vitalis is experiencing but one of the less intuitively related advantages of decreased consumption is a decrease in the rate of depletion of food stocks, a diminished carbon foot print and the concomitant beneficial effects that counter the devastation of the environment that has, in large part, been brought about by aberrant inflationary monetary policies over many decades. Greens the world over should embrace this crisis. Reduced consumption of animal protein could allow the replenishment of fish stocks that have been decimated over the years as well as the re-stocking of staples that no longer need to be used to rear live stock. Prices drop, the environment is saved and food stocks get replenished. Everyone’s a winner.

“With all the cuts we estimate we’ve lost around €450 a month. We’re down to the last cent and, still, we’re lucky. We’ve both got jobs. I know people who are unemployed and are going hungry. They ask family and friends for food,” she sighed. “What makes us mad is that everybody knew the state was a mess but none of our politicians had the guts to mend it. It was like a ship heading for the rocks and now the rocks are very near.”

GR: Bingo! Except that we are already on the rocks. And, yes, it has been clear for many decades that the system is mathematically not viable… but politics being the expedient animal it is… what is happening was a foregone conclusion… and we are no where near the end of it all...

Greeks also know that with their economy needing another financial lifeline, and few willing to lend to a country in such a parlous state, it will also get much worse before it gets better.

GR: Once again. The author of the article fails to recognize the problem of insolvency brought about by too much debt. Particularly when every single country in the world is afflicted by the same problem. You see, in a global economy, for as long as only one or two countries are afflicted by too much debt as, for example, Japan was in 1989, increasing the debt burden appears to help because a country could still sell goods and services to other countries. But, as time goes by and each country feels the necessity to expand their credit market in order to stimulate the national economy, the diminishing marginal utility of debt ensures that at some point all countries will be buried in debt simultaneously. At that point, more debt no longer helps. And this is the point we are at today.

“In the past, the future always implied hope for Greeks but now it implies fear,” said Nikos Filis, editor of the leftwing Avgi newspaper. “Until this week people thought that with all the measures the crisis would be over in a year or two. Now with the prospect of yet more austerity for more aid, they can’t see an end in sight.”

With unemployment officially nudging 790,000 – although believed to be far bigger with the closure of some 150,000 small and medium-sized businesses over the past year – there are fears that Greece, the country at the centre of Europe’s worst financial debacle in decades, is slipping inexorably into political and social crisis, too. Rising racist tensions and lawlessness on the streets this week spurred the softly spoken mayor of Athens, Giorgos Kaminis, to describe the city as “beginning to resemble Beirut”.

GR: Greece is not at the center of Europe’s crisis. Greece was merely the first in Europe to succumb to the debt crisis. Others have followed Greece since and still more will follow in months to come or till politicians will grow a pair and we let global banks fail.

Yannis Caloghirou, an economics professor at the National Technical University of Athens, said: “Greece has become a battleground, at the EU level where policymakers have made the crisis worse with their lack of strategy and piecemeal approach, and among its own people who no longer have trust in institutions and the ability of the political system to solve the situation. My concern is that the country is slipping into ungovernability, that ultra-right groups and others will grab the moment.”

GR: As a person Mr. Caloghirou is entitled to his opinion. As an economics professor Mr. Caloghirou fails to grasp the dynamic that is afflicting Greece. A debt crisis is not due to lack of strategy and piecemeal approach. It is due to too much debt that has been piled on by deliberate political decree. So, the strategy was not so much lacking as it was aberrant.

Nineteen months into office the ruling socialists, riven by dissent and increasingly disgust over policies that ideologically many oppose, are likewise beginning to show the strain of containing the crisis, with the prime minister, George Papandreou, being forced publicly to whip truculent ministers into line.

A mass exodus of the nation’s brightest and best has added to fears that in addition to failing one or perhaps two generations, near-bankrupt Greece stands as never before to lose its intellectual class. “Nobody is speaking openly about this but the prospects for the Greek economy are going to get much worse as the brain drain accelerates and the country loses its best minds,” said Professor Lois Lambrianidis, who teaches regional economics at the University of Macedonia.

“Around 135,000, or 9% of tertiary educated Greeks, were living abroad and that was before the crisis began. They simply cannot find jobs in a service-oriented economy that depends on low-paid cheap labour.”

GR: Other than to say that exodus of  people whether bright or not is not a big deal, Mr. Lambrianidis hits the nail on the head although I suspect he does so unwittingly. Namely, Mr. Lambrianides identifies the problems of a service based economy but, from what we are given to understand from this limited quote, fails to realize that a service based economy is the inevitable consequence of debt based fiat money.

Just as in Arcadia where the young are choosing to start anew, Greece, he says, needs to rebuild itself if it is to survive its worst crisis in modern times.

Savings, capital formation and the monetary system

April 23, 2011

You all of course remember the tale of the grasshopper and the ant that has variously been interpreted to teach the virtues of hard work, saving and dedication.

Although “saving” is an integral part of the interpretation of this fable, narrators and interpreters do not nearly spend enough time on this point considering the ramifications of this deceptively simple concept.

For example, in economics capital formation can only take place in the presence of savings.

Think about that.

Salting a little something away can only happen if and only if an individual produces more than what he consumes. In other words, you can only “save” if you spend less than what you earn.

The reasons individuals may want to save are varied. But the one underlying common theme is that saving is supposed to, at the very least, hold its original exchange value. In other words salting away your excess salary or your excess production only makes sense if you know that in the future the money or items you have set aside can be exchanged for at least the same quality and quantity of goods as today if not allow you to exchange them for more items of better quality.


In ideal circumstances therefore, savings allow you to front unforeseen future circumstances or to provide you with a source of income when you should no longer be able to work.

But the most important function of saving excess production is that it allows investment (Pool of real funding). Thus savings allow the formation of capital thus the expansion of the economy.


In a healthy economy, banks would be mere storage and distribution centers where individuals would store savings and the banks would then distribute them to entrepreneurs for a fee. In this hypothetical construct, savers and banks would become partners in sourcing new investment opportunities in order to maintain or enhance the quality and quantity of savings. In this construct too, both banks and savers would share in the profits or losses of new investments.

Enter Debt Based Fiat Money.

Fiat Money is a brilliant concept. It is flexible, it is easy to create, it is easy to store, transport and to account. It is a truly brilliant concept. Debt Based Fiat Money on the other hand, not so much. Readers of this blog will know DBFM is predicated on inflation and that inflation conforms to the law of diminishing marginal utility.

Thus, the choice made, DBFM can only exist in an environment of expanding monetary base and credit. In other words, the DBFM construct can only exist for as long as the currency can be debased. In turn, currency debasement is anathema to saving because in a context of currency devaluation, savings no longer perform their supposed role.


Now pay attention because this is subtle.

Having opted for DBFM, the governing elite must move quickly to pre-empt resistance to the use of same. Thankfully, the arithmetic underpinning DBFM is such that dissenters can be brought to heel through a rich mix of what appear to be politically and ideologically driven policies: subsidies, social programs, incentives, government programs requiring the creation and staffing of new departments, preferential accounting treatment or preferential legal treatment that are all magically made possible by the not so subtle expansion of credit and the monetary base.  Simultaneously, the monetary authority must also pre-empt the emergence of future more structured critics so that study of DBFM must be expunged from the academic curriculum.

And this is where it gets subtle.

The whole DBFM construct holds for as long as society can be convinced that not only is saving of no use but that spending in excess of one’s capabilities is what constitutes wealth (in this regard, social programs help the governing elite convince the electorate that their future needs are secured by the state).  If the GDP of a country increases nominally, the governing elite will declare that wealth is growing.  In other words, consumption is wealth. The greater your consumption capacity, the wealthier you are. Thus government’s long term need to manipulate the  interest rate lower to sustain the illusion.

You may think this is a trite explanation. But get this. In this transition from a society that saves and provides the basis for capital formation for a fee, the monetary authority now sidelines the individual and usurps the role of “capital” provider thus cutting out the original partner.

In the context of DBFM, banks gradually do away with the original capital provider by progressively turning him into a capital consumer. This is achieved by the gradual debasement of the currency till the point at which saving no longer makes sense.

And here is the absurdity of the entire construct.

Not only is the original capital provider (the individual) subverted into a capital consumer but banks are left as the only entities ostensibly providing capital. But the type of capital provided by the banks is produced out of thin air and, through the magic of fractional reserve banking, is boosted … at virtually zero cost.

The difference is this. The capital provided by an individual has a cost structure that involves time, labor and capital equipment. Ergo, the production or excess production of an individual helps to expand the wider economy. On the other hand, the capital provided by a bank has no similar labor, capital or temporal input. It is purely conjured by decree. Nobody is employed, no resources are extracted, processed or delivered. No transactions have resulted in excess capital. A bank merely creates a sum at no cost.

But although the bank has no cost of production, it is allowed to sell its capital at a substantial premium to economic actors whom, under penalty of incarceration, are not only obligated to make use of said capital but must by law promise to pay it all back plus more.

It is clear in this construct that the relationship between economic actors and capital provider is skewed in favor of the bank. From an arithmetical point of view, pushing DBFM to its logical conclusion results in the transfer of the productive capacity of society to the banks.

In other words. Towards the conclusion of the DBFM induced credit cycle, the economy of a country is predominantly a consumer based economy. In other words, it is an economy that by definition does not set aside a little something that can be sold onwards for equal or greater value than its original cost of production. At the same time, banks become the last and only pillar of the system and the only providers of credit (I mean credit here as opposed to capital which the bank does not create).

As the DBFM induced credit cycle reaches its mathematical limit, economic actors are heavily burdened by debt and credit will no longer be sought from banks.  In turn this situation precipitates a crisis that is thought to be due to lack of liquidity. As by this stage the banks are proclaimed to be the one and only pillar of the system and despite the obvious lack of demand for credit, the monetary authorities will pump the banks full of liquidity. This is done ostensibly in the hope that fractional reserve banking can translate these gargantuan sums in a quantity of credit that is many folds the original amount, thus helping to maintain credit expansion on a positive trajectory.

At this point the situation is as follows. Individuals are out of the credit market trying to repair their balance sheet by attempting to cut down on their debt load because despite preferential accounting treatment for the banks, the monetary authority is not assisting the individual. Corporations are out of the bank credit market because as interest rates are the lowest in generations they prefer to turn directly to institutional funds. Banks on the other hand are stuffed full of reserves that are not and cannot be disbursed to economic actors because, on one hand, of the lack of credit worthy borrowers and, on the other hand, of the mountain of bad debt that has piled up over the years and that will at some point need to be written off thus requiring substantial reserves to compensate the hit.

There is only one way this ship can be righted.

Charlie Rose interviews Charles Ferguson (Inside Job the movie)

April 3, 2011

Zero Hedge reports the full interview here.

Inside Job is a good movie to the extent that it may make people realize this debacle is entirely man made if not down right intentional.

But… there is a “but”!

Despite Charles Ferguson’s courage, he too fails to make the connection as to the why what happened happened. When asked what it would take to fix the broken system we find ourselves in Mr. Ferguson suggests: “(i) change the role of money in elections, (ii) to pay regulators well, and (iii) have law enforcement that is necessary to enforce the laws we have.”

Readers of this blog will by now know that the reasons mentioned by Mr. Ferguson are but the proximate causes of socioeconomic failure. But Mr. Ferguson fails to identify the ultimate cause and the prime driver of scioeconomic failure.

Allow me here to be absolutely clear about something that seems to be missed by the wider public. As everything else in life, one man’s crisis is another man’s bonanza. As has been been made abundantly clear already, this quick succession of failures of social and economic constructs we are witnessing today is in fact a God send for a handful of global banks. This you must not forget.

As to the ultimate cause of this phase we are living in today, we must go straight up to the one dynamic that frames all other dynamics: the monetary system.

When asked what it would take to fix the broken system, Charles Ferguson should first and foremost clarify whom the system is broken for because it sure as heck ain’t broken for the global banks and for the US Primary Dealers in particular. In fact, this is the single best possible universe the Primary Dealers can evolve in. That done, Mr. Ferguson could simply point the finger at the monetary system. And guess what! It is exactly what today are the Primary Dealers that have sold this particular variety of monetary system to the politicians whom, in turn, impose it on society.

We can argue today whether politicians are truly witting accomplices of the banks or whether they are mere useful idiots. But we can certainly not overlook the primary and central role the monetary system plays in our lives. This particular variety of monetary system in use today in the West is predicated on inflation. Thus our monetary system is predicated on discouraging savings and encouraging rampant expenditure. Rampant expenditure can be encouraged via aberrant fiscal and monetary policies of which low interest rates is the first and most basic. Debt based fiat money is predicated on hollowing out the productive capacity of society transferring said productive substance to the entity that has the privilege to create the currency…. this may appear too abstract to wrap your head around so picture the following…

Draw two separate circles on a piece of paper. One circle is much larger than the second. Now imagine that the larger circle represents society as a whole – all men, women and children, all governments, all factories, all schools… everything. The second circle stands apart from the first circle and it represents the entity tasked with the authority to create money.

Now think about this.

The small circle is arbitrarily bestowed three privileges. 1) It can create a substance that has zero cost of production 2) It is allowed to inject said substance into the larger circle. 3) It can demand said substance must be returned in its entirety PLUS more of it.

The large circle is forced to make use of said substance but at cost.

In the above construct, simple arithmetic says that if the large circle is forced to make use of the substance that is the exclusive privilege of the small circle to create, because the small circle has no cost of production and because the same amount of substance PLUS more must be returned to the small circle, eventually the large circle will transfer all productive capacity to the small circle.

In the construct above, it is clear that the politicians and, indeed, the banks have a vested interest in concealing the true nature of the monetary system and in avoiding as well as discouraging any discussi0n of same. But what is also painfully clear from the above construct is that the politicians and the banks have an interest in not pursuing regulation too vehemently particularly with regards to selected entities of which the banks are the most prominent example.

Thus, identifying “the role of money in election” is not a useful observation not only beacuse as long as there is politics, money will always play a role and this is particularly so in the context of electoral politics. But because Debt Based Fiat Money is predicated on spending money far and wide regardless of how or why. We cannot alter the reality of politics but we can change the nature of money.

Similarly, “paying regulators well” is not a solution. This is a concept that harkens back to 18th century political theory that says that civil servants should be well paid in order to discourage them from succumbing to corruption. Obviously that hasn’t really panned out well particularly in Europe where for example civil servants in France and Italy are by far the best paid in the world and yet corruption is rife in both countries. And, anyway, in a Debt Based Fiat Monetary System, regulation must be loose so as to allow the expenditure of great sums far and wide. Once again, we cannot alter the nature of man but we can change the nature of money.

And of course, “have law enforcement that is necessary to enforce the laws we have” isn’t going to be much more helpful because in a system predicated on spending money far and wide, law enforcement must by necessity be fairly lax particularly with regards to laws that may regulate the spending of money.

The corollary to all of the above is that this system lends itself to aberrant policy. Take the issue of “money in elections”. Debt Based Fiat Money allows politicians to promise outlandish expenditure to various interest groups. In turn, this dynamic fosters the creation of more interest groups thus always requiring more extravagant projects to be proposed as political platforms. Rinse repeat.

Take the issue of “paying regulators well”. In a debt based fiat monetary system, the inflationary dynamic dictates that government must progressively but necessarily become the largest actor in the economy thus the largest employer and the most munificent. This dynamic along with the dynamic of “money in elections” ensures that civil servants and regulators are fully aware which side their toast is buttered on. So that as the recipient of special interest money regulators are hired by the politicians that have been put in place by the interest groups because they agree to pursue a certain regulatory policy.

The same goes for law enforcement.

What is afflicting society today is the monetary system. But it is afflicting society. It is most certainly not afflicting the Primary Dealers. Quite the contrary.

So, “Inside Job” is a good movie and a worthy subject to explore. But we must not lose sight of the fact that our problems stem far upstream than mere regulators or law enforcement officials.

We must take the monetary system to task along with the sponsors of the system

Thoughts on Japan

March 13, 2011

The tragedy befalling Japan is likely to have much wider consequences for the global economy.

Japan is already the single most indebted country in the world as compared to GDP. As a consequence of this earthquake and the destruction that it has caused, Japan will need to sell billions more of sovereign debt into the market. As a result, sovereign funding needs for Japan, the USA and Europe in 2011 are going to be in the $10Trillion range.

Where is this money going to come out of?

Moreover, coming on the heels of already heightened volcanic and seismic activity globally, I should think that the likelihood of more events taking place globally is fairly high.

Too, we’ll have to monitor whether Japan’s rice growing capacity is intact or has been hindered and, if it has, to what degree.

So that’ll probably mean more sovereign debt come flooding onto the markets at a time that sovereigns are already attempting to compensate for lack of funds globally buy ‘buying’ their own sovereign debt.

This is the predicament brought about by a debt based fiat monetary system.