Archive for October, 2011

Ellen Brown’s Web of Debt

October 31, 2011 81 comments

I am going through Ellen Brown’s “Web of Debt” book, and page 46 really jumped out at me.

One of my major problems with monetary policy is that it must end in either a bust, or lots of little, horrible human miseries.  This isn’t even debated by the supporters of Monetary policy.  It’s just assumed its natural and desirable.

Monetary Policy is about creating human misery, over and over again.  I think the idea behind line is simply handwaved away by fans of monetary policy, as though defaults are’t a big deal:

“But the premise still applies: in a system in which money comes into existence only by borrowing at interest, the system as a whole is always short of funds, and somebody has to default.”

Usually, these defaults come at a steady stream, so we just hear about stories of some second hand person who lost it all.  Every few generations, massive amounts of people default.

Monentary Policy is all about the central bank deciding that someone needs to go bankrupt, that someone needs to get fired, that some couple should fight about money for the next year.  It’s all about pushing thriving companies into a spiral of debt.

Compound interest cannot be eternal, because it grows exponentially.  But we’ve created a such a good system of record keeping that we’re seeing it on the book for decades and decades, so we are seeing the end game of this exponential growth.

Here is Ellen Brown, talking about planet sized hunks of gold:

The Importance of Usury Laws, a writer named John Whipple did the math. He wrote:

If 5 English pennies . . . had been [lent] at 5 per cent compound interest from the beginning of the Christian era until the present time (say 1850), it would amount in gold of standard fineness to 32,366,648,157 spheres of gold each eight thousand miles in diameter, or as large as the earth.18

Thirty-two billion earth-sized spheres! Such is the nature of compound interest — interest calculated not only on the initial principal but on the accumulated interest of prior payment periods. The interest “compounds” in a parabolic curve that is virtually flat at first but goes nearly vertical after 100 years. Debts don’t usually grow to these extremes because most loans are for 30 years or less, when the curve remains relatively flat. But the premise still applies: in a system in which money comes into existence only by borrowing at interest, the system as a whole is always short of funds, and somebody has to default.

Bernard Lietaer helped design the single currency system (the Euro) and has written several books on monetary reform. He explains the interest problem like this:

When a bank provides you with a $100,000 mortgage, it creates only the principal, which you spend and which then circulates in the economy. The bank expects you to pay back $200,000 over the next 20 years, but it doesn’t create the second $100,000 — the interest. Instead, the bank sends you out into the tough world to battle against everybody else to bring back the second $100,000.

The problem is that all money except coins now comes from banker- created loans, so the only way to get the interest owed on old loans is to take out new loans, continually inflating the money supply; either that, or some borrowers have to default. Lietaer concluded:

[G]reed and competition are not a result of immutable human temperament . . . . [G]reed and fear of scarcity are in fact being continuously created and amplified as a direct result of the kind of money we are using. . . . [W]e can produce more than enough food to feed everybody, and there is definitely enough work for everybody in the world, but there is clearly not enough money to pay for it all. The scarcity is in our national currencies. In fact, the job of central banks is to create and maintain that currency scarcity. The direct consequence is that we have to fight with each other in order to survive.

I’ve heard ideas like this before from Ed Seykota (penny at 3% from the time of Christ), and there was recently a post somewhere about how really high rates of return are impossible to sustain much longer than a few decades.

Even very, very small rates of money capture by banks end up swamping the entire system.

[Update: A Summary Here – this comments section is getting very long]

Categories: Main

People notice that BoA is ripping off Taxpayers

October 21, 2011 4 comments

Felix Salmon notices:  BofA puts taxpayers on the hook for Merrill’s derivatives

Business Insider Notices: Here’s Why Everyone’s Freaking Out About BofA Moving Its Derivatives To Its Retail Banks

#OWS notices:
Here is the question: Does it matter?  As beowulf points out – this is clearly illegal and shouldn’t happen.  But does it even matter anymore?

Who can we even call about this?  Who is watching the watchmen?










Categories: Main

Can We Prevent a $100 Billion+ BoA Taxpayer Ripoff?

October 19, 2011 3 comments

This story is astonishing.  I can’t believe I am seeing it happen right now.

Bank of America Deathwatch: Moves Risky Derivatives from Holding Company to Taxpayer-Backstopped Depositors

This is a taxpayer ripoff, pure and simple.  If the counterparties need a bailout, let them do it above board.  Don’t give out FDIC money to derivative counterparties.

As Yves points out – why not just post more collateral?

We were ripped off when the feds bailed out AIG’s derivative counterparties.  There was no reason to do this – we can and should have been far more agressive in the negotiations with these people.

(I also suspect that Hank Paulson acted in a criminal manner.  He was CEO of Goldman during the time when these trades were being created, and this division was a major profit center for Goldie.  He knew.  )

[Update: beowulf points out its actually even worse than we thought in a comment over at Naked Capitalism.

ITS WORSE THAN EVEN WORSE THAN THAT. In January, the Federal Circuit Court of Appeals ruled in Slattery v US that FDIC obligations are also direct Tsy obligations. Congress doesn’t even have to vote on it, FDIC creditors may now elect to file suit at their local US District Court against FDIC or in in DC at the Court of Federal Claims against Tsy directly. Geithner might have to mint those platinum coins after all.

Because the majority rules that the FDIC is not a NAFI, the United States is now directly liable for the FDIC’s contractual commitments. Mr. Slattery and future plaintiffs like him can now sue the United States in the Court of Federal Claims… The FDIC, however, has no statutory obligation to reimburse the government for any damages paid out of the Judgment Fund. Accordingly, from this date forth, taxpayers, not the FDIC, shall bear the burden of the FDIC’s contractual commitments… the majority has by judicial fiat created a more direct bailout than the 1989 Congressional bailout of the savings and loan industry

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Aggressive NGDP Targeting gets us Recession levels of Unemployment!

October 18, 2011 6 comments

This recent note by Jan Hatzuis about NGDP targeting shows just how bad monetary policy is at getting unemployment down.  Scott Sumner is cheering this.   So is Matt Y.

If you just check out the charts, you’ll see that NGDP targeting does reduce unemployment.  The unpleasant part is: Unemployment gets down to 6% after years and years of targeting.

Now 6% seems like good days when we are at 9% unemployment.  But for most of the last 30 years, and most of U.S. history, 6% unemployment was recession level unemployment.   The only times we’ve been over 6% unemployment is when times were tough and we needed to get the economy moving.

I don’t know why people think 6% unemployment is a good target.  It’s a horrible level of unemployment that only looks good from the perspective of the aftermath of a gigantic global crisis.

We need fiscal stimulus, not more bank lending.

[Update:  Here is the paper

and nothing about how they might do this NGDP targeting.  Perhaps more talk? ]

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Yuan non-Appreciation: Strip Mining the Middle Class and we’re poorer

October 12, 2011 10 comments

This astonishing car required many decades of a thriving middle class to make it possible.

Matt Y goes all in on the crazy ideas that the Yuan is self correcting – and that its not really a problem in the first place.

I don’t think this remotely reflects reality.    Warren Mosler also says the trade deficit isn’t that big of a deal.

Of course, Warren’s right – if we were running an MMT based economic policy from our government.  If Warren was in charge of spending, I’d be happy to let him make aggregate demand high enough to overcome any offshoring of U.S. industry.

As Rodger points out in a private discussion, the proper policy would be to allow China to give us stuff for free, and then to make up the demand leakage with fiscal policy (read tax cuts and even tax income guarantees for workers) aimed at the middle class.

This would maximize the increases in our standard of living – and probably make for a more stable economic system.

But we’re not running an MMT based policy.   We’re running a semi-coherent gold idolization economic policy that doesn’t even recognize we can’t go broke.

I’m all for pushing the boundries of what’s acceptable discourse and moving the center.  But the proper policy isn’t going to happen in during the 12th 5 year plan.  

I’ll just talk about what’s politically possible with the Yuan.  If we assume we’re going to get the economic policy we’ve had for the last 30 years or so, we’re not going to see an in paradigm policy in place.

What this means is the Chinese Yuan policy is hugely detrimental to the United States, given the current policy of the U.S.   I call it strip mining the middle class, because this is what it does.   The Yuan policy takes jobs from U.S. residents and moves them to China.

Our overall society benefits a little – we shift computer bits around, and they send us real world goods.  This is usually seen as being good for the U.S. in aggregate. But specific groups in our society are worse off – this is widely accepted as true, even by mainstream econ.

Specifically, the middle class is worse off.

Now, for some people, this isn’t a bad trade.

But I am a huge – huge, huge, huge – believer in the value of mass production. Mass production is the way society progresses, to riff on whitehead.

It’s been pointed out to me that mass production requires mass consumption.

This idea – that mass production requires mass consumption – has somehow been lost.  I’d like to point out that 100 iPhones aren’t viable or useful – you couldn’t even think about creating an iPhone with a production run of only 100.  It’s nonsense to think of something like this.

100 million iPhones are useful – because with 100 million iPhones, the prices are low enough for people to buy them, and the app store becomes something truly wonderful.

But the iPhone was made possible by the iPod.  The iPhone isn’t possible until the iPod works out lots of problems.

It’s only after the iPod is mass consumed that the incredible iPhone becomes possible.

So when we allow China to keep their Yuan far, far below it’s fair value – and even farther below the value of “a country growing at 10% per year for another 20 years”, we’re allowing the middle class to be stripmined.

But even worse, we’re missing some truly great consumer product that aren’t being produced.  I don’t know what these products might be.

All I know is that the middle class of 2011 can’t afford them – so they aren’t even being manufactured.   This means we’re missing out on the second and third generations of these things that would probably have gigantic impacts on how we live.


Categories: Main

Unleaded Gasoline vs. Abortion – which caused the drop in Violent Crime?

October 5, 2011 16 comments

This is something that’s bothered me for a long time.  I suspect the drop in violent crime  (in the U.S.) identified by Donahue and Levitt is not due to legalization of abortion in early 1973, but rather the move to unleaded gasoline in 1975.

We know these facts about lead poisoning and kids:

Lead exposure in children is also correlated with neuropsychiatric disorders such as attention deficit hyperactivity disorderand antisocial behavior.[97] Elevated lead levels in children are correlated with higher scores on aggression and delinquency measures.[19] A correlation has also been found between prenatal and early childhood lead exposure and violent crime in adulthood.[92] Countries with the highest air lead levels have also been found to have the highest murder rates, after adjusting for confounding factors.[19] A May 2000 study by economic consultant Rick Nevin theorizes that lead exposure explains 65% to 90% of the variation in violent crime rates in the US.[103][104] A 2007 paper by the same author claims to show a strong association between preschool blood lead and subsequent crime rate trends over several decades across nine countries.[105][106] It is believed that the U.S. ban on lead paint in buildings in the late 1970s, as well as the phaseout of leaded gasoline in the 1970s and 1980s, partially helped contribute to the decline of violent crime in the United States since the early 1990s.[106]

Lead makes kids and people dumb, agressive, violent, and anti-social.

Rick Nevin is the person who first proposed this idea and did a series of studies on the effects of lead gasoline across countries.   It seems to be a stronger link than the link between abortion and violent crime.

I just wanted to put this out there, because I was was on the train yesterday going downtown, and everyone seemed so friendly.


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Fall in Gasoline prices could spark a Boom

October 3, 2011 4 comments

Gasoline prices are linked more to Brent Crude than to RBOB over the last year or so.  There are complex reasons for this, but lots of it is due to not enough infrastructure here in the United States to move oil and gasoline across the country.

Brent is down about 25% right now from it’s highs, but Gasoline is only down about 12%.  If we look at a 20 day moving average – which is about 1 month of trading days  – we can see Brent has only fallen about 12% too.

Still, with the QE II trade going away entirely, we can expect the price of gasoline to fall further.  This could spark a boom.

The payroll tax cut stimulus was soaked up entirely by the increase in gasoline prices.  Now that gasoline is falling, this tax cut is beginning to be felt by the consumer.  If gasoline prices fall to 2.70 a gallon across the country – and they could fall much lower – then we could see over 1% added to GDP.

Usually, it’s about 1.4bn added to consumer spending for every $.01 drop in gasoline prices.  Prices peaked at around 3.96 nationwide, and they could fall to $2.75.     This means we could add as much as 121 * 1.4 = $169bn in stimulus when gas prices fall.

This spending is most likely subject to a multiplier of probably 1.3, so we’re going to see something like $220bn in spending, or 1.5% of GDP

We’re growing at about 1.3% for the last quarter.  1.3 + 1.5 = 2.8%

That’s not bad growth.  2.8% is near the rate necessary to make a good impact on unemployment.


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