all hat and no cattle

"All hat and no cattle" is a Texas put down about someone who talks a big game but has nothing under it. Our last cattle ranching president was Lyndon Johnson and that sure wasn't a crack you could make about Lyndon. In '64, when he signed the Civil Rights Act, he told his fellow Democrats he was signing away the South for fifty years, he did and the South went. Such is too often the reaction to true reform.

However, the saying takes on new meaning today with an article from Bloomberg(tx jesse) which states:

The U.S. cattle herd may have shrunk to the smallest size since 1958, as mounting losses during the recession spurred beef and dairy producers to cull animals, analysts said. Wholesale choice-beef prices averaged $1.4071 a pound last year, the lowest level since at least 2004, as U.S. job losses climbed and meat demand waned.

That ya'll is deflation and the question of deflation vs inflation remains the great question of the day. It sure seems despite all the money being poured in by the Fed, it is at best slowing the deflation rate. We have a still ongoing case in Japan, which for twenty years has flooded the system with money and remains in a deflationary environment. The guys who wrote the book on this phenomenon, Mr. Rogoff and Mr. Reinhart have a good piece in the FT explaining. Simply, this bad debt is dead money and it ain't going to resurrect and start walking, much more running. It needs to be buried, and until it is, it's going to act like cholesterol in our economic arteries. Older industrial economies like the US, are not going to grow like emerging economies across the globe. We're not going to be able to keep piling on debt and grow out of it. We need to fundamentally rethink our political economy.

Unfortunately, our political economy is in atrophy. Our once dynamic democracy is captured by entrenched power, and the only way it's going to change is for us to change. We need to quit worrying about what's happening in DC and start worrying what we, the people are doing. There is no dynamic change in DC because there is no dynamic change with us. If we are going to reinvigorate our political economy, it needs to start with us. We are watching the entrenched interests circle the wagons and become increasingly concerned with the "anger" peculating amongst the commoners. Populist has become the disparaging term used by knuckleheads like David Brooks to those who have the audacity to claim people in fact should be mad as hell about the looting class. Matt Taibbi has an excellent response.(tx yves)

If you know the history of the Populist movement, one of the great small "d" democratic mass movements in American history, one would be proud to be called a Populist. I'll again recommend as strongly as I possibly can the reading of Lawrence Goodwyn's The Populist Moment, if nothing else read Goodwyn's introduction here, which is simply a sublimely beautiful piece of thinking on democracy. Nothing is going to change, until we, the people change. All hat and no cattle, today that describes us, whenever we talk about democracy.

Monetary Relativity -- On Money-V

This, then, is the dilemma of an international monetary system—to preserve the advantages of the stability of the local currencies of the various members of the system in terms of the international standard. – JM Keynes

In a closed national or local system, the question of money is simpler than in a global system where currencies are exchanged. Over the course of history, commodities, particularly gold and silver served as monetary standards, providing objective value by which currencies could be exchanged. However, over the last four decades, a new system has evolved. In this system, money has no objective standard, but is given value by “the market”. It is a system of relative value vulnerable to profound volatility.

How does a currency derive its value when it is tied to no objective standard? The short answer is through “the market”, but that is insufficient. For thirty years, “the market” ace has trumped all questions on the economy, despite the extremely squishy understanding of just what “the market” is. To say the market defines value of contemporary currencies is at best a dodge.

Today's currencies, tied to no objective standard, are instead valued by everything. The entire economy of any nation gives their respective currency value, while their central bank assists by controlling volume. In some nations, such as Australia, or smaller and less developed nations, currency values are greatly dependent on their natural resources, like commodities such as oil. Others, such as Japan and South Korea, gain value with their industry. Many currencies are also tied directly to the dollar, as the dollar, though no longer an objective standard, remains the main global reserve currency. A nation can keep its currency stable on global markets by keeping in their possession dollar reserves -- holding onto a certain quantity of dollars.

The value of the dollar is derived from US agriculture, natural resources, industry, education, and all other aspects of our economy. The dollar's value is also derived from the military, by far the largest on the planet, which holds together much of the global economic system as currently structured. Thus the dollar, serving as the dominant global currency reserve, also gains value from this global system as a whole.

In the present system, the day to day, or more accurately the second to second value of the currency is gained by traders, who buy and sell currencies twenty-four hours a day. Just as every other aspect of our economy has been financialized, that is made trade-able, so too has the dollar and most other currencies.

Over the last decade, the dollar undertook an almost uninterrupted steep devaluing against most other major currencies, a decline of almost 40%. This devaluing has raised increasing questions on the role of the dollar as the major global reserve currency, for if a nation is holding dollar reserves, which are incessantly losing value, it becomes a problem for your currency, particularly if you're an exporter.

One result of the devaluing dollar global currency standard has been a massive increase in the price of commodities – agriculture goods rose 20%, metals by 300%, and fuel by 500%. Of course, there are other factors involved in the rise of commodity prices, including rising demand and tighter supply, and dysfunctional too speculative driven market structures, however, after the dollar rose in response to the Great Financial Panic and then began to fall again, the correlation between rising commodity prices and the falling dollar once again proceeded in lockstep.

In the last four decades, for the first time in history, we have created a completely relative monetary system, where currencies are untethered from any standard, and priced by being bought and sold through jokingly loose regulated trading. This creates two problems. First, as currencies become value relative, they lose their ability to provide vigorous price signals, thus undermining one of laissez faire's cherished orthodoxies, the pricing system, and creating distortions in valuing the real economy. One only needs to look at the volatility of the commodity sector in the last ten years to understand the impact of monetary relativity. Just as all other aspects of economic financialization, monetary relativity has been advantageous for one group – traders, Wall Street. It has been harmful to the real economy.

Secondly and most urgently, the break down of, or call it the "financial innovation" of fixed currency standards, and their replacement with distorted relative values derived from a dysfunctional trading system, has created a situation of increasing currency instability, susceptible to violent swings. Just as we saw in the recent financial panic, currency markets have been deregulated and untethered, while on top of them lie trillions of dollars in derivatives tied to currency values, interest rates, government bond prices etc, in which a period of sharp currency volatility or panic could cause great damage. This volatility would not need to be instigated by a sharp decline or rise in the dollar, though that would serve the purpose, it might also be catalyzed simply by a short period of sharp fluctuating currency values, that were large enough to begin a series of events where parties could not meet their obligations, such as the recent failure of AIG, but in amounts and damages to the system that would dwarf the AIG fiasco.

Now, as stated in the beginning, central banks by controlling volume of a currency and taking active roles in buying and selling, also contribute to a currency's value. In the last two years, we have seen unprecedented and extraordinary moves by the Fed and many other central banks to flood the system with money in an attempt to fight the deflationary results of a popped financial bubble, in part caused by the devaluing dollar. The action of the Fed has created new inflationary asset bubbles across the globe; in commodity markets, housing values in China, and stock markets. It has made the pricing mechanism already distorted from years of monetary relativity, all the more so. It is the equivalent of dumping gasoline on a thick forest with decades of dead undergrowth, all that's missing is a spark.

Next: Rethinking Money

trinkets for the villagers, kowtowing to the gods

As the torches are put out across Massachusetts, the White House has responded in what is becoming a distressingly hack fashion, throwing a few tax cuts and other trinkets to the "middle class". While in the other room, the White House is doing all it can to show its subservience to the bond gods. They announced in favor of the commission to cut social security and they will freeze discretionary spending minus the military, as Mars, the god of war, still reigns even above our bond pantheon.

I've noted people should pay attention to PIMCO's Bill Gross, one of the largest bond dealers on the planet. In November, PIMCO sold $27 billion in Treasuries and in December unloaded $37 billion more. In his 2010 outlook, Mr. Gross wrote,

If, in 2009, PIMCO recommended shaking hands with the government, we now ponder "which" government, and caution the days of carefree check writing leading to debt issuance without limit or interest rate consequences maybe numbered for all countries.

Really Mr. Gross started vigorously shaking hands with the government in 2008, when in June, he schooled a bunch of money knuckleheads on how financial bailouts work. At that point, many on Wall Street rightly thought the government would come to the rescue of Fannie and Freddie. Many bought F & F equity, while Mr. Gross bought the then under priced bonds. When the rescue happened, equity was wiped out, the bonds brought to full value. That's why Mr. Gross gets the big bucks. But now, Mr. Gross has in actions and words made clear the handshaking with the US government needs to be released. His February Outlook puts the US economy, because of the deficit, on the not getting out of bed anytime soon list. In short, Mr. Gross and no doubt the rest of the bond market are sending strong signals to their servants in government, the spending must end. The White House, as they seem genetically programmed, are responding in a hack way.

Now, what Mr. Gross hints around at, but doesn't really connect the dots, is that the major factor in the rise in government debt over the past eighteen months has been the bailouts of Wall Street and the banks. John Hussman, in an excellent piece, puts the transference of private loss to the public books through the Fed, Treasury, Fannie and Freddie et al in the range of $3.6 trillion dollars, which would go a long way to balancing the government books. But that's for you villagers to worry about, while our bond lords make sure, as it seems is there prerogative, they incur no losses.

After a year, it's pretty obvious Mr. Obama hasn't a reforming bone in his body. The only remaining question is if this White House has any more than hack political instincts, as it seems fast careening into irrelevance, or at least as irrelevant as a President can be, hoping the great gods of the business cycle will make things look not so bad by 2012. Make no mistake, this isn't 1993, 1981, or 1933 for that matter, it's 2010 and our political economy is more dysfunctional than at any point in our history. But that puts matters exactly where they should be, squarely on the backs of the American people. What are you going to do?

Debt and the Politics of Stagnation

I think it is desirable that the obligations arising out of past borrowing, of which National Debts are the most important, should, as time goes on, gradually command less and less of human effort and of the results of human effort; that progress should loosen the grip of the dead hand; that the dead hand should not be allowed to grasp the fruits of improvement long after the live body which once directed it has passed away. -- JM Keynes, Treatise on Money

The way our financial system is construed, debt is both necessary and in certain matters healthy. For example, if a company wanted to expand its business building a new plant, it can go in debt in order to provide future growth. Or a city can sell bonds so that it can build a new sewer system or fund parks for the enjoyment of future generations. Debt can provide the ability to marshal present resources for future wealth and utility. However, there is also unhealthy debt, simply defined as a means to preserving the present at the expense of the future. The easiest example of this is the old landed aristocracy of Britain. As Britain moved from an agrarian political economy to an industrial system, the political economy that empowered the landed gentry was hollowed it. Over time, much of the aristocracy went further in debt trying to hold onto lifestyles the underlying economic conditions could no longer uphold. Eventually, when they no longer could even pay the debt incurred on the estates themselves, the game was over.

This is the insidious game the United States has undertaken over the last several decades. The underlying 20th century industrial model has been changing, instead of fundamentally changing how the system operates, we have indebted ourselves to the status quo. Even more harmful, our financial aristocracy has grown and not loosened its grip on the political economy, but tightened it. They have not just placed themselves further in debt, but the entire political economy. It has been quite amazing in the last week, as the White House minutely turned up its rhetoric on our financial aristocracy, how overwhelming the push back was, even from some who deem themselves "reformers". We are now told, we can't do anything about Wall Street, we need them, and changing the financial system will wreak havoc. Each day we pile on more debt, entrenching the status quo, and seemingly as the saying goes, sealing our fate.

The financial system that evolved over the last several decades has placed a premium on entrenching established ways. It was even more destructive as the game was rigged so that a few could make more money by taking existing debt and piling more debt on top of that, call it "financial innovation." A great deal of this debt is now bad, and all the moves of our financial lords in the past two years has been to pile up more debt, with the completely false notion that the new debt will make the old debt solid. Most despicable has been the movement of trillions of dollars of private debt onto the public books, the equivalent of mortgaging the American estate, which is left out of the equation when you hear the bond barons and other deficit hawks lamenting about the debt.

The last several decades, we sat and watched as a financial aristocracy gained further and further control of our government. We sat and watched our government become increasingly centralized, leading to one thing, a further entrenchment of an unsustainable status quo. Each day, we sit and watch as the American system, based on distributed and separate powers, and checks and balances, is in the name of security and stability centralized and made less accountable. Yesterday, as Yves Smith points out, we are now aware of the merging of our behemoth national security state procedures and the financial sector. We find the Fed placed its dealings with AIG under "special security procedures. The foundation of self-government is openness. Power cannot be held accountable without access. Yet every day we sit and watch our government become less and less accountable.

We our caught in a nasty trap at this point, a cult of expertise. The modern world is much more complex than those that preceded it. While we our flooded with information, the average person is much less educated on the forces that impact their daily lives than the peasant of Medieval Europe. Instead of evolving new processes by which people are brought in to be educated, manipulators and editors of information, that is decision makers, we increasingly centralize more and more decision making and empower "experts", people who have come to their position because they understand the status quo, and then become its protectors.

In such a centralized system, reform of relevance never comes from the top. The only way to do it is to break up power and redistribute it, allowing the freedom and creativity to reform, create and evolve. The first step in creating this freedom is going to have to be destroying a lot of the dead debt that sits on the books of our banks, corporations, government, and households. We need to begin redistributing power and wealth, and by that I don't simply mean taxing the rich, but the wealth and power entrenched in our unsustainable ways of doing things and its institutions. Only by destroying debt will we be able to free ourselves from the status quo and begin to reform America for a vibrant future, giving the future the same opportunities bequeathed to us.

Scaring Democrats

Over time, as the Democratic party lost all moorings, it became, as tends to happen under such circumstances, the party of fear. The only way you could tell what Democrats where going to do was how fearful they were, and the only way to get them to do anything was to scare them. So, in that best tradition, the Post has a house of horrors piece for the Democrats, warning them not to get too carried away with banging the bankers and by all means don't do anything or the stock market will go down. One interesting thing about the piece is it doesn't use any of the big banks or Wall Street firms. The great quivering economic intellect at the White House replies in the best empty political rhetoric:

"The policies that work out best over time are those that strengthen economic fundamentals, not try to influence day-to-day market movements," said Lawrence H. Summers, the president's top economic adviser. "The experience of the past 60 years is that not only working families but also businesses and markets have performed better during periods of progressive governance and sound financial regulation."

Larry's been in DC way too long.

Meanwhile the FT, shows they still don't quite get the colonies and how the game is currently played. The title is good "Nightmare persists for White House" and they do provide the money quote:

“Obama has to decide whether he wants to be a transformational president, which looks optimistic at this stage, or merely an effective president,” says Bruce Josten, head of government affairs at the US Chamber of Commerce, which has spent tens of millions of dollars opposing healthcare. “My advice would be that he pick up the phone and ask for Bill Clinton’s advice on how to recover from a situation like this.”

Ho, Ho, Ho, we couldn't possibly ask Mr. Clinton to do more to, I mean for, this nation than he already has. But, the Brits don't quite get the game and the rest of the article is "stiff upper lip" advise. Sack Geithner, sack Summers, and just as importantly get rid of Rahm. The FT is the first place I've seen lay the health care debacle squarely on Rahm, and the size of the blunder of the move fits. Rahm got to his position in DC by collecting money, he's a political knucklehead. If you're relying on Rahm for anything but making the trains run on time, you're in serious trouble.

Remember Democrats, as the fellow in the wheel-chair said, "The only thing to fear is fear itself."

events are in the saddle

Things are in the saddle,
and ride mankind.
RW Emerson

The last week sent an important signal to all who think things are going back to where they were. The Great Financial Panic of 2008 and 2009 has altered our political economy in ways it will take years to understand. Combined with the structural changes we've been ignoring for years, we have the recipe for great volatility, for a long period of time. Events are indeed in the saddle.

There's nothing like a few elected officials, or even one, losing office to set them on their own panic, and Democratic hysteria is growing. Each day, the White House mouths stronger opposition to the banks, and there is and has been absolutely no political downside for them on this. The Republicans remain incapable of even feigning opposition to Wall Street. However after a year, no one can say anything about this White House except watch what they do, not what they say. Just as importantly, it is the Congress that must legislate and our Congress remains firmly in the control of our corporatocracy. But, if you can lose in Massachusetts, you can lose anywhere. More Democrats are coming out against Bernanke, bringing down his confirmation would be a good thing. Chris Dodd is even issuing a financial apocalypse warning against opposing the confirmation.

To show Democrats are verging on full blown hysteria, Wall Street's own lap-dog, Chuck Schumer, is attacking the Supreme Court decision unleashing the corporate whip on our electoral system. I think the word for Mr. Schumer is chutzpah. There is no one elected official, and that includes Mr. Clinton, who more represents the capitulation of the Democratic party to Wall Street than Mr. Schumer. Senator Schumer has sixteen-million in the his campaign committee, over two million of that from the financial sector. When he headed the DSCC, Mr. Schumer made it reliant on Wall Street money, that way a Senator elected from South Dakota or New Mexico could be captured by Wall Street. All that hard work, wiped out by one Supreme Court decision, phew, now it's not even safe in NY when you're sitting on a pile of money.

I was reading John Hussman's weekly analysis of the financial situation and he ended with one of Doctor King's speeches from Birmingham in 1957. In the speech Dr. King references the historian Arnold Toynbee stating:

And Toynbee tells that out of the twenty-two civilizations that have risen up, all but about seven have found themselves in the junk heap of destruction. It is because civilizations fail to have sense enough to dim the lights. And if somebody doesn't have sense enough to turn on the dim and beautiful and powerful lights of love in this world, the whole of our civilization will be plunged into the abyss of destruction. And we will all end up destroyed because nobody had any sense on the highway of history.

I never read Toynbee, but it made me look him up. He has an interesting and extraordinarily relevant theory about the history of civilizations. It basically states every generation in a thriving civilization is met with challenges. When they step up to meet it, the civilization continues to thrive. Yet at certain point in each civilization's history, one generation shirks from the challenge and instead begins consolidating existing wealth, living off their inheritance, instead of providing for the future. That's where we are today. We are in the process of institutionalizing a Looting Class for the first time in American history. America's a very wealthy place and it can provide wealth, on an ever decreasing level, for decades, centuries. However, events are now defining, and many events are in motion because we failed to rise to the challenges of the last couple decades. The great thing about events defining the times is they do so with very clear demarcations. Do each of us rise to face the challenge or do we look simply to protect and consolidate what we have. Which side are you on?

Supreme Court lifts the ruse

This Court now concludes that independent expenditures, including those made by corporations, do not give rise to corruption or the appearance of corruption. That speakers may have influence over or access to elected officials does not mean that those officials are corrupt. -- US Supreme Court, Citizens United vs FEC

That might be the biggest punchline in the Court's chock-full of laughs decision removing the already limited restraints on corporate control of the election process. Never has the First Amendment been brought so low in service of the few trampling on the rights of the many. But that's what the Court's for, isn't it? We're going to hear much wailing from good government and campaign finance folks, but really, the Court did us all a favor. It removed the ruse. All you have to do is peruse Open Secrets for a few minutes to see how pervasive and powerful corporate money is in our political process. Or as Justice Stevens noted in his worth reading dissent:

So let us be clear: Neither Austin nor McConnell held or implied that corporations may be silenced; the FEC is not a “censor”; and in the years since these cases were decided, corporations have continued to play a major role in the national dialogue.

Over the course of the last century pretty much every effort to rein in corporate power has been a dismal failure. Today, political and economic power is concentrated in mega-corporations to an extent not reached even at the height of the Gilded Age. And one government institution, more than any other, has both created and protected corporate power, it is the Supreme Court. So, today's decision certainly has much precedent.

This republic and the modern corporate structure were birthed in the same era, and at the very best conducted an uneasy relationship. At the dawn of the first Gilded Age, the great grandsons of America's second president John Adams, Henry and Charles Adams would warn in their “Chapters of Erie”:

“And yet already our great corporations are fast emancipating themselves from the State, or rather subjecting the State to their own control, while individual capitalists, who long ago abandoned the attempt to compete with them, will next seek to control them. In this dangerous path of centralization Vanderbilt has taken the latest step in advance. He has combined the natural power of the individual with the factitious power of the corporation. The famous "L'Etat, c'est moi" of Louis XIV represents Vanderbilt's position in regard to his railroads. Unconsciously he has introduced Caesarism into corporate life. He has, however, but pointed out the way which others will tread. The individual will hereafter be engrafted on the corporation, democracy running its course, and resulting in imperialism; and Vanderbilt is but the precursor of a class of men who will wield within the State a power created by the State, but too great for its control. He is the founder of a dynasty.”

In fits and phases over the course of the next 150 years, the republic has tried to address the questions of corporate power, never with much success. The main obstacle being the question of corporate power requires a fundamental grappling with the basic structures of power. Questions that have for the most part been strenuously avoided for over a century, that is, since the corporations gained enough power to stifle debate. The real underlying question of corporate power has to do with fundamental political physics. Power is like gravity, it attracts. Once you create a mass of power, such as a giant corporation, it automatically begins attracting all the power around it. The only way to stop it is by breaking it up.

This was understood a hundred years ago in the anti-trust debates and the thinking of such people as Louis Brandeis. It was wisdom of the old republic. Democracy, any self-government, is inherently decentralized. Yet this notion was lost and no more so with the New Deal, which made an assertion that the power of corporations could be measured with an equal and opposite governmental force. But anyone without blinders can see clearly in 2010, this approach has failed.

The Court's decision allows us to have a more fundamental debate, one in which the power of our mega-corporations is put front and center. A debate that gets to fundamental issues of power across our society, and thus to the very question of what we call government. The US constitution was once a radical and visionary document on implementing self-government. After 200 years, it is now used to thwart those very ends.

Independent Volatility

It's the same of old tune, fiddle and guitar
Where do we take it from here?
Rhinestone suits and new shiny cars
It's been the same way for years
We need to change
-- Are You Sure Hank Done It This Way

Having won or lost, you can never tell when a politician has a clue to what happened. But last night, Scott Brown hit it on the head saying, "tonight the Independent voice of Massachusetts has spoken." That's the real story ripping at the heart of the false narrative perpetuated by the corporate media and the political class, the illusion we have a two party system, a choice between the party of tweedledee or tweedledum. Yet in the last fifty years, there's been only one consistent trend in party politics, the decline of both Democrats and Republicans, and the rise of Independents.

Massachusetts, despite all the malarkey of it being the "bluest of states," is really one of the most independent states. Registration in MA is 50% Independent, Dems in the mid-thirties, and the Reps far behind at just above ten. Massachusetts, which only a year before gave the Democratic nominee a 26% margin of victory, last night comfortably elected a Republican to the Senate. One thing unites Independents, they don't like either party. They'll vote for a Dem in one election and a Rep in the next, and it's creating increasing volatility.

There are no political parties in America, and for someone like me, who believes they are both necessary and useful, I don't consider that a good thing. The television was a technological tsunami across America's cultural, economic, and political landscape. It tore through politics, hollowing out the parties, creating mere hollowed-out shells. As the former/future Governor of California said some years back, the parties are just, "a postage stamp and a bank account." There is really only one party in America today, the party of the status quo, with a Democratic and Republican flavor. Every year our government more dysfunctional, the party benefits flowing to fewer and fewer people, they have our political system in a stranglehold.

The size of the Independent vote may have reached the point of creating extreme volatility in the election process, meaning swings from year to year become more and more violent. Despite the story being told by the media, that Independents are not some mythical "centrists," it's a very diverse group, whose uniting character, besides dislike for both parties, is they have even less political identity than the remaining party adherents, only adding to the volatility.

The idea that in November, the lot which calls itself Republican, through little fault of their own will gain back power in DC, just as the Democrats did in the past two cycles, through little fault of their own, is depressing, truly. As Kang, or was it Kodos, said, "Go ahead throw away your vote on a third party." But, the true wasted vote is perpetuating the charade, and that was the distressing message out of Massachusetts last night...."always twirling, twirling, twirling toward freedom" as Kodos said, or was it Kang?

Revolution of Values

You can't look around the world and not realize that we can be, and often are, extremely brutal and aggressive. And equally, we have inherited tendencies of love, compassion, and altruism, because they're there in the chimp. So, we've brought those with us. So, it's like each one of us has this dark side and a more noble side. And I guess it's up to each one of us to push one down and develop the other. -- Jane Goodall

The question of the entanglement of violence and civilization is as old as history, and as Ms Goodall insight-fully posits, it is prehistorical. Civilization is the antithesis of violence. Civilization is the means of human interaction beyond the physical intimidation of the fist, sword or gun. Nonetheless, if in part, you define civilization as order, violence remains a cornerstone of every civilization across history. Beneath the thin veneer of non-violent civilized interaction inevitably lurks the thick pillars of violence. Removing civilization from its violent underpinnings remains one of history's great acts of revolution. The 20th century was unprecedented in recorded history for bringing forth thought and action on civilizing civilization -- recognizing and extracting its violent content.

Nonviolent politics is always a social construct, comprised of millions of individuals, but four 20th century figures represent and helped define this civilizing movement, providing us with a glimpse of a path for the 21st century. These figures are Mohandas Gandhi in India, Martin Luther King in the United States, Mikhail Gorbachev in Russia, and Nelson Mandela in South Africa. Literally representing the four corners of the globe, these figures revealed the underlying violence of their respective cultures in an attempt to build anew upon a stronger foundation. All would come to conclude in the words of Dr. King, what was needed was a "revolution of values."

Ye are the light of the world. A city that is set on a hill cannot be hid. Neither do men light a candle, and put it under a bushel, but on a candlestick; and it giveth light unto all that are in the house. Let your light so shine before men, that they may see your good works.

We can begin with Gandhi, who became a great figure in the politics of nonviolence by helping lead the Indian independence movement from Britain. Gandhi began his politics in South Africa at the turn of the 19th and 20th centuries. South Africa, as India, was under the rule of the British empire. Asians, such as Indians were second class citizens, as were the native Africans. Using nonviolent tactics, Gandhi helped organize against the most egregiously racist of British laws. He would return to India and for four decades fight for Indian independence from the British. The great lesson of Gandhi was that all oppression held a component of violence. Time and custom blended this violence into the background. The key aspect of political nonviolence was to bring the violence of the system to the forefront and then no longer bow to it. This is done by no longer following the established custom, forcing citizens to take a public blow, thus revealing the system's underlying violence. Gandhi was a sublime character and maybe no more so than for his faith in humanity. Anyone who could publicly say he was relying on the underlying humanity of the English, despite all proven evidence to the contrary, was quite extraordinary.

Ye have heard that it hath been said, An eye for an eye, and a tooth for a tooth: But I say unto you, That ye resist not evil: but whosoever shall smite thee on thy right cheek, turn to him the other also. Ye have heard that it hath been said, Thou shalt love thy neighbour, and hate thine enemy. But I say unto you, Love your enemies, bless them that curse you, do good to them that hate you, and pray for them which despitefully use you, and persecute you.

Martin Luther King would take Gandhi's practices and thought and help turn them into one of the most powerful democratic forces in American history. The Civil Rights movement saw a population only two and three generations removed from the shackles of slavery, stand-up, revitalize, and redefine the words and principles of one of history's few republics. The American republic -- the fount for defining much of what came to be known as self-government in the modern era -- had two centuries before been birthed in the violent and abhorrent institution of slavery. The abolition of slavery was accompanied with the rise of state-sanctioned segregation, politically and economically disenfranchising most of America's black population for almost another century.

The nights in jail, beatings, the dogs of Bull Conner, and the murders were all in response to the black population actively rejecting Jim Crow, thus publicly revealing the violence at the system's foundation. Despite all proven evidence to the contrary, MLK had faith in white America. In the last year of his life, Dr. King developed a "Poor People's" campaign. It was a beginning to the rejecting the violence of poverty. He stated,

I am convinced that if we are to get on the right side of the world revolution, we as a nation must undergo a radical revolution of values. When machines and computers, profit and property rights are considered more important than people, the giant triplets of racism, materialism, and militarism are incapable of being conquered.

Violence remains the great invisible hand beneath much of our economics. It needs to be brought to the surface if we are to civilize our economy.

Why beholdest thou the mote that is in thy brother's eye, but considerest not the beam that is in thine own eye? Or how wilt thou say to thy brother, Let me pull out the mote out of thine eye; and, behold, a beam is in thine own eye? Thou hypocrite, first cast out the beam out of thine own eye; and then shalt thou see clearly to cast out the mote out of thy brother's eye.

The third figure is Mikhail Gorbachev. Unlike Mr. Gandhi and Mr. King, Gorbachev never claimed adherence to nonviolence, yet he undertook one of the greatest and most unprecedented acts of nonviolence in human history. He allowed the peaceful disintegration of the Soviet Union. When protests in Eastern Europe gained steam in the late 80s, they were not met with violence to keep order. Twenty-years ago as the Berlin Wall collapsed, Mr. Gorbachev had a half-million troops in East Germany, they remained in their barracks. Despite all proven evidence to the contrary, Mr. Gorbachev had a great faith in humanity. His lesson remains particularly relevant for the United States.

Therefore whosoever heareth these sayings of mine, and doeth them, I will liken him unto a wise man, which built his house upon a rock: And the rain descended, and the floods came, and the winds blew, and beat upon that house; and it fell not: for it was founded upon a rock. And every one that heareth these sayings of mine, and doeth them not, shall be likened unto a foolish man, which built his house upon the sand: And the rain descended, and the floods came, and the winds blew, and beat upon that house; and it fell: and great was the fall of it.

Finally, there is Nelson Mandela. Mr. Mandela is another who never professed nonviolence. The ANC, which he was a member, fought a very bloody war for decades across southern Africa. For most of that time, Mr Mandela was imprisoned, the time he regarded as "wasted life." In the early 90s, as the apartheid regime was in their last days, the government sent Mandela a letter asking him to renounce violence, then they would release him. Mr. Mandela responded wryly saying his present position under the forceful hands of the state allowed him to take no such position.

But, it was upon his release and his ascendancy to the presidency where Mr. Mandela would add a new chapter to the lessons of non-violence. He was both forgiving and non-vindictive, incredibly so. Nothing can be so violent and brutal as righteous vengeance, and the vast majority of South Africans had justice on their side. I recently saw Invictus and highly recommend. Someone told me, "It's not a good sports movie," and I replied, "No, it's not, but it's a very good political movie, considering Hollywood doesn't do politics well." Despite all proven evidence to the contrary, Nelson Mandela had faith in white South Africa. The power of forgiveness might be the most extraordinary of political weapons, yet forgiveness cannot begin until power is held accountable, an unjust system overturned, and the violence of power upended.

Civilization ends where violence begins. We are a long way from civilizing our civilization. We in America are a long way down a failed path of trying to secure our standard of living through violence. We would do well learning some important lessons from the last hundred years.

on money -- IV

For the worst of all conceivable systems(apart from the abuses of a fiat money which has lost all its anchors) is one in which the Banking system fails to correct periodic divergences, first in one direction and then in the other, between investment and saving. – JM Keynes

The American economy has undergone a dramatic shift over the past three decades, call it the financialization of the US economy. This has been disastrous for the overall political economy, centralizing power and gain in a very small segment of society. Wall Street gained greater control over every aspect of Americans' daily lives by indebting the nation. A free people are never an indebted people. The financialization process has mutated the monetary system, devaluing the dollar both domestically and internationally. It raises great questions about the monetary system for the future.

The financialization of the American economy was birthed in the 1980s, gained speed in the 90s, and reached hyper-velocity in the first decade of the 21st century. If one wanted to pick a somewhat arbitrary, though nonetheless significant starting point, it would in 1980, the Congress removing usury laws controlling interest rates. The removal of the usury laws gave a green light to the financial sector that more money could be made on money. This led to the promotion of debt and the infamous financial innovations initiated with the destruction of financial regulation in place since the 1930s New Deal.

Financialization is a money game, adding little value, and I would argue more accurately, no value to the real economy. It distorts the accounting of real value. Most importantly, it is simply a private tax on the rest of society for the profit of a small oligarchy. The true costs remain hidden until the system is inevitably forced into crisis.

The financialization numbers are simply staggering. In 1950, manufacturing represented 30% of the US economy, today it is down to 8%. At the same time, the financial sector rose from 10% of the economy to 20%. Even more shocking is corporate profits for the entire financial sector, including insurance and real estate, went from 10% of the economy to 45%, while manufacturing profits dropped to 8%.(Kevin Phillip, Bad Money)

Financialization is the creation of debt, and boy did Wall Street create debt! As wages stagnated and were replaced by debt, US household indebtedness rose from $2 trillion dollars in 1984 to $13 trillion twenty years later. The last leg of financializaton was the housing market. Mortgage loans went from 30% of bank loans in 1985 to 65% in 2005.

The creation of debt is the creation of money. With so much money flooding the system, Wall Street, being the clever folks they are, grabbed the opportunity to make more money on money using "financial innovation". Two of the greatest of these innovations are securititaztion and derivatives. Securitization is taking existing debt and piling it into new debt “products”, so it can be sold again. The other great innovation was derivatives, which are simply bets placed on all existing debt and financial transactions. You don't need a stake in the debt or transaction to place a bet, a true casino, where the house – Wall Street – makes money on each bet.

The FDIC reports annual mortgage securitization went from $110 billion in 1985 to $2.7 trillion in 2005. Meanwhile, the Bank for International Settlements states in 2008, derivatives represented $684 trillion in positions, on a global economy of $60 trillion. In its quarter-century of exponential growth, debt, depending on which sectors you choose, expanded by factors of anywhere from the tens to hundreds. While the US economy grew only 2.5 times larger, though this is a misleading figure as it accounts much, though not all of the financial bubble. What financialization has created is a massive money bubble on top of the real economy, which for various reasons doesn't filter completely into the real economy. As Keynes writes,

But the volume of trading in financial instruments, i.e. the activity of financial business, is not only highly variable but has no close connection with the volume of output whether of capital goods or of consumption-goods.

Total debt in the US is somewhere over $50 trillion, which means compared to fifty years ago where each 1.5 dollar of debt represented a dollar of economic activity, it is now close to five dollars of debt for each dollar of activity. This whole process of greater indebtedness is a burden for the vast majority of the economy. Its massive profits are only realized by a few. Today, six institutions account for over 60% of the financial industry, which taken together with the growth of the financialization means a concentration of power unprecedented in American history.

The question is what does this mean for money. If we used Keynes' arbitrary categories, we see a massive rise in Money of Account, which greatly distorts General Purchasing Power to a degree not yet quite understood. It has debased the monetary system as any sort of standard by which general economic activity can be accounted and valued. The easiest example of this is housing prices, but this butcher accounting and mis-valuation are both ubiquitous across the economy.

Now, the off-book, that is the true accounting of money has been in part brought onto the books due to the panic of the financial elite in the fall of 2008. Through the agencies of the Fed, Treasury, and Fannie Freddie, trillions of dollars of private debt has been transferred to the public books. In addition to this, the public sector has also created new debt, adding to the overall debt burden. Yet, there remains a tremendous amount of worthless debt, unaccounted losses, or dead money, on the banks books, government books and across the entire economy, which will hinder and distort future economic activity. We now have a massive debt load, continuing to devalue the monetary standard and as the dollar is the de facto global monetary standard, the distortion of economic value, that is, the monetary bubble has now spread across the globe.

the banksters

This may be the year when we finally come face to face with ourselves; finally just lay back and say it – that we are really just a nation of 220 million used car salesmen with all the money we need to buy guns, and no qualms at all about killing anybody else in the world who tries to make us uncomfortable. - Hunter S. Thompson, Fear and Loathing on the Campaign Trail, 1972

The Good Doctor was a prescient s-o-b. While not many understood the above thought in 1972, almost forty years later, it might as well be inscribed on the flag. If you watched the Financial Commission yesterday, you couldn't escape the feeling you had walked onto a not very reputable used-car lot. Lloyd Blankfein is one of those guys who look you in the eye, by no means squarely, to see how much of his bs you are buying. Lloyd's a used-car salesman in a nicer suit.

Little old lady, "Well Mr. Blankfein it seems like its a very nice car, but I've never heard a clanking coming out of an engine like that."

Lloyd: "Oh, that was a feature on this model. That clanking let's you know the engine's running well, when you don't hear it anymore, then you know you're in trouble. And, we have this little insurance policy, fifty bucks a week, we'll come pick you up wherever you are when...err I mean if, the clanking stops.

Lloyd was feeling his oats so thoroughly by the end, he had this to say, "The derivatives market worked better then we had a right to expect, it was lucky." Yeah Lloyd, you could even say it was god damn fortunate that your predecessor at Goldman, Hank Paulson, was Treasury Secretary and could shovel 13 billion of taxpayer money to Goldman to pay-off AIG's derivatives. Lucky indeed!

Oh Bubba, ain't we better than this? Football season is almost over, and that marks five years since the Good Doctor quit making rounds. He his missed. If you paid too much attention to the political class over the last few decades, the Doctor was a great reality check. He never averted his eyes from the maladies and diseases gone hyper-malignant in the American body politic, and that's dark dark stuff. Self-medication, humor, and action were the Doctor's prescriptions. He was an increasingly rare breed. He was a remnant of the old republic and I can count on one hand the others I've met over the years. He was a citizen. Back when the hippies were turning on, tuning in, and dropping out, he ran for sheriff of Pitkin county Colorado. The incumbent sported a crew-cut, so Hunter shaved his head so he could refer to him as, "my long haired opponent."

"Don't be greedy." Those were the words scratched on the pad on his desk. In his last piece, Shot-gun Golf with Bill Murray, he talked about taking in a round of his new game -- shot-gun golf. You're opponent tries to pitch onto the green, while with a shot-gun you try blasting it off. Ho, Ho, Ho Bubba, remember the Good Doctor's prescience. Do as he did, look straight into the darkness, and rage, and act!

If you can't think of anything else, run for office, any office.

The Value of Nothing

Nowadays people know the price of everything and the value of nothing.
-- Oscar Wilde

Last summer, a friend, Raj Patel, sent me a draft of his new book, The Value of Nothing: How to Reshape Market Society and Redefine Democracy. The book is out now, and I couldn't more highly recommend it. The Value of Nothing is a good critique of our present political economy and gives an incisive look of how it came to be, where we are now, and begins most essentially to look at some ideas and practices on how we begin to evolve a more sustainable and satisfying political economy.

We are in need not of revolution, but of reformation. When a ruling doctrine becomes ubiquitous across a society, it is difficult for members of the society to imagine any alternative. The doctrine comes to define all aspects of life, and facts are interpreted not for what they may say, but how they support the ruling doctrine, even if they don't. The Value of Nothing offers an excellent historical look at how "free-market" doctrine and institutions came to dominate our lives. From Adam Smith to Karl Polanyi, Patel shows how "free market" philosophy came to redefine human culture, and that the doctrine of laissez faire relied totally on government to be instituted.

The pinnacle of free market thought was reached in the last several decades with efficient market theory, which led to the retreat of even minimal government oversight in the affairs of mega-corporations. This, as Patel points out, led to the recent financial disaster, which in the halls of power, that is in the vestibules of our free market temple, has yet to lead to any serious rethinking. An interesting point Raj brings up is how the top of the system, Wall Street, is now inundated with data in the belief this gives them knowledge. He writes, "Data pelting down monitors is what the masters of the universe on the global financial exchanges stare at, their eyes darting from screen to screen, trying to see through the world and profit from it."

This made me think how our present circumstances are much different from the 1930s. In Keynes', Treatise on Money, he is constantly lamenting the lack of data available being a hindrance for making any definitive judgment on his equations or theories.(As an aside, this should give rise to great skepticism on what people today say they learned from the data poor 30s.) What The Value of Nothing reveals is that it isn't the data that is problem today, but it is the categories, equations, and theories we are plugging the data into.

What The Value of Nothing shows is markets and market theory have run ramshackle over every other social institution. We no longer have the ability to value anything outside market terms, because the institutions and social constructs to do so, have all been eliminated or subverted. We are Patel states simply "homo economicus", looking and acting only from this perspective. We are not simply mis-pricing but devaluing some of the most basic necessities of homo sapiens, most importantly food and the environment. It is not us or flawed markets that are the determinant of these values, but mega-corporations who hold the most influence, and corporate power is not a factor in our ruling economic theory.

How do we become more fuller human beings is the essential and necessary question of The Value of Nothing. And at a time where the most fundamental tenet of industrial capitalism, unlimited growth, is meeting its limits and causing havoc with the practice of unbridled consumption, Patel offers food for thought, "The opposite of consumption isn’t thrift - it’s generosity."

The Value of Nothing provides examples in the developing world, which are in the midst of overturning their old institutions thus values, and replacing them with the institutions and pricing of free-markets. It gives examples how people are standing up, and maybe it will be from the global south, where we evolve new institutions and thought to cope with the realities of the 21st century. "The Value of Nothing" shows we must reform and evolve our institutions. Our democratic infrastructure, be it government, political, or social institutions have been quashed or are in disrepair. The solution to our economic problems is not better economic theory, but a democratic revival, a revaluation of value.


Don't miss Raj on the Colbert Report tonight, he has a wonderful sense of humor, should be great fun

breaking the barrier

Last week, the Move Your Money campaign was launched by a coalition of folks including the Roosevelt Institute and Institutional Risk Analytics. It's an important step in creating a coalition capable of standing up to the money interests that run DC. Thus, it's expected to hear people questioning its value, as most people in this country feel completely politically disenfranchised. However, other opposition clearly comes from defenders of the status quo and listening to their arguments against, can provide some lessons on how to move an effort for reforming our political economy to the next level.

Case and point was the Post piece yesterday arguing for citizen futility. It comes out of the Post's internet magazine Slate. Now, if you know the history of Slate, you can understand from where the piece comes. Slate represents a warning to all who value the Internet as a democratic revitalizing tool. It can be used just as well to continue the status quo. Founded by Microsoft and then sold to the Washington Post, Slate is the political class on-line. Cleverness, cynicism, and effete elitism pass for astute political analysis, the piece entitled "Ordinary Citizens Lack the Power to Hurt Big Banks" drips with all three.

The second paragraph brings our political class' favorite belittlement of all economic reform -- it's populist. It then goes through a bunch of circular arguments that the banking system runs one way, and you can't change it, because, well, it wouldn't run that way anymore. I worked in the energy world for many years and this was a favorite argument of the utilities. "Well you can't do that, this is how the system operates." Umm yeah, that's why it's called changed. It seems an obvious point, but I've found it needs repeating endlessly, the only way you get change is by changing.

But the highlight of the piece is referencing Bloomberg's Felix Salmon that changing your bank is just too hard. It's downright inconvenient. Which reminds of that great story from World War II, where General Bradley walks into Ike's office a couple days before D-Day and says, "Well General, I've been talking to the men about this plan, and well they think this storming the beach thing, well...it's just damn inconvenient. Better, they think, staying here in England, throwing back a few beers, and getting that new Betty Grable movie."

Oh America! When did it become, "Give me convenience or give me death?"

Now the real insidiousness of this piece, call it propaganda, is it feeds the general feeling of dis-empowerment and disenfranchisement drowning the American body politic. I can't more highly recommend Lawrence Goodwyn's "Breaking the Barrier" about Poland's Solidarity movement, for an understanding of the difficulties for political action when general disenfranchisement pervades a society. It becomes the greatest barrier to enacting political change. That is where we stand, or more appropriately sit, in America today.

Move Your Money is one example of a campaign that can start breaking the barrier. Chris Whalen of IRA will tell you the big banks remain very weak, and thus much more susceptible to pressure from actions of this sort. Move your money and get five friends to move theirs, it will be the first step to standing up and reclaiming your citizen power. It will provide the organizational impetus for a movement that can then demand reform. Understand one point, despite the propaganda of the political class, change will be gained no other way.

on energy

We watched the financial system help bring down the economy, but the fact is all finance remains a sideshow to the what is really the main event of modern life -- energy. It is the harnessing of fossil fuels for human use that pretty much allows much of what we deem modern. And no nation on the planet has been more proliferate in its use of energy than the United States, thus America for the past hundred years has been equated with modernity. The most important fossil fuel for American modernism has been oil, more accurately cheap oil, and that is becoming increasingly problematic.

America first became aware of its oil dependence back in the 70s, but has done little about it except build its military in attempt to secure the remaining resources. The simple accounting fact is the finding of new sources of oil peaked back in the mid-1960s and has been pretty much a straight line decline every year some. Over the last decade, it has been struggle for the oil industry to even keep discoveries equal to existing use.

The United States most recent oil program was the occupation of Iraq, and we will not be gone from Iraq until we solve our oil addiction. Stuart Staniford of The Oil Drum has an interesting piece about the redeveloping of Iraq's oil industry and the Iraqis claim they can eventually pump 12 million barrels a day. This is very hard to believe for many many reasons. It would mean the Iraqis increasing total global production by over 10%. But, let's say they're right. It would be good news for the world only in the sense that as Staniford piece points out it gives the world more time to transition away from oil. However, there is no sign of this happening anywhere, particularly in the US, and of course China is going full bore in building their own oil dependence -- call it modernity.

Thinking about energy gives a whole new meaning to the term post-modern. Every idea about future economic health needs to be tied to a transition away from oil. The good ideas don't for the most part include present bio-fuels, particularly the turning of food-stuffs into transportation fuels. The American ethanol program is plain and simple immoral. But there's other problems with many bio-fuels and the Post has good piece on the problems of increasing bio-fuels with more forest materials.

Energy remains the foundation of any discussion on the economy and it's future health. One easy way to think, burning isn't a solution. For America, it means conservation and efficiency foremost, and our waste is of such a horrendous magnitude there's plenty to gain. The other is the sun and after many years of procrastinating, we seem finally to be getting serious about it. And that's much better news that any increase in Iraq oil production.

currency waves build

As I pointed out a couple months ago, Ben's bet, in short Mr. Bernanke's policy of devaluing the dollar to fight a deflationary economic environment, would require time in understanding its full implications. It is an unprecedented move in devaluing not simply the global reserve currency, but in effect, the global monetary standard. If for example, there was a gold standard, it would not simply be devaluing a currency in relation to the standard, but the standard itself. The most immediate impact on this move is to drop the prices of two of the largest manufacturers on the planet, the US, and because the reminibi is tied to the dollar, China, which is causing headaches for the rest of the world.

The countries on the receiving end of the head bashing are beginning to express their anguish. On Thursday, Japan's new Finance Minister, called for a weaker Yen, as the FT points out:

The Japanese economy suffered a plunge in exports last year after the global financial crisis, a fall accelerated by a sharp rise in the yen, particularly against the US dollar. In contrast to the yen's surge, the won in South Korea, one of Japan's competitors, has weakened, making Japanese products less competitive overseas.

The Korean Won has been appreciating in the past year, though it remains almost 50% less against the Yen pre-crisis, and 25% lower against the pre-crisis dollar:

``With the United States keeping its key interest rate at zero, investors have incentives to sell dollars to buy other currencies. This leads to a weak dollar and the resultant strong won,'' Woori Investment & Securities economist Lawrence Kim said.

This is not good news for Korean exporters such as Samsung Electronics or Hyundai Motor, which would see the dollar-denominated prices of their products rise.

``Outbound shipments will be negatively affected due to the strong won and the current account surplus is expected to substantially shrink throughout the year,'' Kim said.

Over in France, Sarkozy is complaining louder about the dollar's devaluing:

“We can’t increase the competitiveness of our businesses in Europe and have the dollar lose 50 per cent of its value against the euro,” Mr Sarkozy said. “When we produce in the eurozone and sell in the dollar zone, are we supposed to just give up selling?”

While yesterday the Venezuelans announced a devaluing of the Bolivar:

“This is to boost the productive economy, to reduce imports that aren’t strictly necessary and to stimulate exports,” Mr Chavez said during a televised meeting with ministers.

In the in the early 30s, in what became known as one of the policies of beggar-thy-neighbor, nations raced to devalue their currencies, adding to global economic problems. That was traditional thought anyway. Mr. Bernanke believes currency devaluation to be an anti-deflationary tool. He claims it would best be done in coordinated effort, though he hasn't mentioned that publicly in his dollar devaluing, in fact he and the Treasury Secretary deny he is facilitating devaluation. It looks like we are in the process of an uncoordinated global currency devaluation, in completely unregulated and untethered global currency markets susceptible to violent and destructive swings. Ben's bet is a big one.

on money - III

Monetary theory when all is said and done, is little more than a vast elaboration of the truth that “it all comes out in the wash.” -- J.M. Keynes, Treatise on Money

The question, what is money, is coming to the forefront of public attention due to the global financial situation. It is a question that reoccurs throughout history, getting put forth in times of great change and social disruption. It is a question that has no fixed answer. For in the end, money is the ultimate social construct. Thus, the underlying definition and value of any currency is derived from the structure, wealth, and stability of the society. Thus, changes in the American monetary system over the last several decades reveal not only changes in money itself, but of our entire political economy.

As a foundation for a more detailed discussion on money, I'm going to loosely utilize the categories and definitions provided by Keynes in his Treatise on Money, which if you're interested, provides much food for thought and was the foundation for much subsequent monetary postulating. However, I don't claim to be providing a strict interpretation of Keynes thought, nor arguments on his reasoning, I'll leave that to our economic clergy. Rather, I hope to provide a foundation for the general public to look into an issue for which they've had no eduction. An issue that exerts tremendous power over every facet of their daily lives and society as a whole. An issue events reveal necessitates a new resolution for the benefit of both our immediate and long term collective futures.

Keynes begins his Treatise with a simple one sentence definition, “Money-of-Account, namely that in which Debts and Prices and General Purchasing Power are expressed, is the primary concept of a Theory of Money.” He then proceeds to take two volumes to discuss what exactly he means by that. When most of us think of money, we think first of our paper currency, that is the medium of exchange. However, this is a relatively small part of the money total. As Keynes makes clear, an understanding of total money is Money-of-Account, which would include all savings and debts, that is all accounts in the banking system, and in our present circumstances, the shadow banking system

Money-of Account is comprised comprised of a multitude of components determining the value of money. Understanding how price impacts money value is relatively straight forward. For example, if you are holding a $100 and the price of the goods you want to purchase rise to $120, you now really have 20% less money. The same works in reverse, if prices fell $20, you'd have 20% more money. Debt makes matters more complex and General Purchasing Power is an idea of much greater complexity. Keynes' definition is simply, “We mean by the Purchasing Power of Money the power of money to buy the goods and services on the purchase of which for purposes of consumption a given community of individuals expend their money income.” His more detailed explanation of this shows how General Purchasing Power is based on everything from commodities to labor, that is, the wealth of a given society in general. All of which becomes much more complex when you look at not simply a closed national system, but a global system, such as we have, where individual currencies are nationally based, but through trade constantly interact with other nationally based currencies.

So, basically the value of money is derived from the society itself, in a complex back and forth interchange that includes supply, debt, prices, and the wealth of the economy as a whole.

In our American system, money can be created two ways, either by the government or through the banking system. In a fiat currency system like ours, that is not based any any specific commodity or any other specific value, there is in theory no real constraint to how much money can be created. With the banking system, one constraint on money creation is holding reserves on each loan it creates. While for the government, money creation in the end comes down to a matter of faith, both of it's people and the rest of the world. The value of money is never simply based on quantity, but also quality.

OK, hopefully, this has provided a few general terms and my simplifications will not be met with too much contention. Now, I'd like to divide money into two classifications which will help shed some light on the problematic situation we currently find ourselves. Money can be used for two things, investment or consumption. The latter of course is easier to define, as it simply means the purchasing of goods and services to consume. While investment, in theory, uses money to create future wealth for consumption, but this has become a much more complex affair over the last few decades.

One point Keynes hammers home again and again is investment needs to be tied to the rate of savings. He writes,

According to my own definition “sound credit conditions” would, of course, be those in which the market-rate of interest was equal to the natural-rate, and both the value and the cost of new investment were equal to the volume of current savings.

Over the last several decades in America we've seen a complete untying of the correlation between investment and savings. The savings rate has dropped through the floor, while “investment”, and here I mean the entire financial system, has risen through the roof. Now there's plenty of reasons for how this came about, but I will argue this fundamental disconnect along with fundamental changes in the American economy have led to a incredibly unstable global currency system.

Next: The Financialization of the American Economy or How to Revalue Money

Democrats follow Krugman to irrelevance, maybe vice versa, or simply in tandem

The opinion writing Nobel Laureate at the NYT is warning after having fixed health care, he's going to be writing about fixing the financial system. Remember, last spring Mr. Krugman was taken to a dinner at the White House and was told the fix was in, the Fed's throttle was full open, asset prices would rise, the banks were pretending and extending, and all was well on the financial front. "Health care Paul," that would insure Democrat rule for the future. So, Mr. Krugman quit writing about finance and started writing about a topic he knew even less about.

But now finance is back up front, because he and the Democratic leadership, such that is, are worried health care reform, such that it is, ain't going to add to Congressional majorities in November, as those dirty "populists" are quite upset. A White House in the pocket of Wall Street and a Congress drowning in Wall Street money is provoking their ire. So, says Mr. Krugman, it is not only in the national interest but the interest of all good Democrats to pass some sort of sham financial reform and as the good Democrat he is, Mr Krugman gets right to the party line promoting "consumer protection." Mr. Krugman also has a bridge in Brooklyn, if you're interested.

Being the astute economist he is, Mr. Krugman has located the source of the last bubble in the banking sector. He even uses the term bubble, which has no recognized value in ruling Nobel economic theory. But he catches himself and says, nothing can be done about bubbles, we need to work on alleviating the damage from popping. Maybe, he's looking to be next Fed Chair? Well Paul, how about the mid-1930s to 1980s, no bubbles in the American system. Think there was a reason?

Our economic clergy doesn't do well with history, but a dose might certainly help the rest of us. The Populists were one of the great small "d" democratic movements of American history, right out of the prairie. They were the yeoman farmers who were the foundation of this republic for a century. The Populist movement of the 1870s through 1890s was comprised of hard scrabble dirt farmers fighting the encroaching power of bankers, Wall Street, and the burgeoning mega-corporations. They had a discussion not just on who controlled money, but had the audacity to question what money even was. They lost, and the bankers, Wall Street, et al never forgave them, making sure populism was slandered for over a century. After all, the resolution of the money question served the bankers and Wall Street just fine. No need to go over that terrain again, no value there! Nonetheless, almost every valuable economic and financial reform enacted for fifty years after the Populists' defeat had been birthed in their movement.

Today, I hear "well" educated and comfortable members of the political class, slander with upturned noses, "populism," no doubt completely and proudly ignorant of its historical origins. In an era where Mr. Krugman represents the stultification of thinking on political economy and Democrats offer no alternative to Republicans, we could use a few more populists.

Geithner and AIG

You make me feel ashamed, acting attitudes
Remember ridicule
It should be clear by now, clear by now
Your words are useless, full of excuses
False confidence
Someone has used you well, used you well
Memories

Bloomberg has good piece on how then New York Fed chief Tim Geithner orderd AIG to withhold information that it was paying off its derivatives exposure using public money dollar for dollar. Prevaricating public officials are nothing new, yet when it is caught it should, in a functioning system of self-government, be dealt with strongly. We know the close to $200 billion put through AIG was simply a backdoor bailout for the banks, Goldman for example received 13 billion. Yves Smtih and Ed Harrison have good write-ups.

To show how fraudulent this whole exercise is, the FT reports that Chinese company Haisheng which was suing Morgan Stanley on currency derivatives exposure settled the case for basically twenty-five cents on the dollar. This is important not only to show how the American bailout continues, but also that the currency derivatives would be cataclysmic if currency markets begin to wobble.

Extending and pretending has brought some short-term stability to global markets. Yet it cannot forever, though how long is certainly the question, paper over the fact we have a very very rickety global financial structure, that increasingly obscures rather than provides accurate judgment to trends in the underlying economy. We have to get rid of much of the worthless paper in the system and that means writing down debt or a debt jubilee, call it what you will. Make no mistake, that's no free-ride for anyone, it will cause short-term discomfort necessary for long term health.

Perplexing

What's it mean when the head of the largest bond fund in the world adopts the political position you've been hawking for almost two-decades. Well for me it's a little bit of a suspicion and lot of amazement. Bill Gross of Pimco has his outlook for 2010, he writes:

Question: What has become of the American nation? Conceived with the vision of liberty and justice for all, we have descended in the clutches of corporate and other special interests to a second world state defined by K Street instead of Independence Square. Our government doesn’t work anymore, or perhaps more accurately, when it does, it works for special interests and not the American people. Washington consistently stoops to legislate 10,000-page perversions of healthcare, regulatory reform, defense, and budgetary mandates overflowing with earmarks that serve a monied minority as opposed to an all-too-silent majority. You don’t have to be Don Quixote to believe that legislators – and Presidents – often do not work for the benefit of their constituents: A recent NBC News/Wall Street Journal poll reported that over 65% of Americans trust their government to do the right thing “only some of the time” and a stunning 19% said “never.” What most politicians apparently are working for is to perpetuate their power – first via district gerrymandering, and then second by around-the-clock campaigning financed by special interest groups. If, by chance, they’re ever voted out of office, they have a home just down the street – at K Street – with six-figure incomes as a starting wage.

I wonder if Mr. Gross will be told he's cynical? Welcome to the effort Mr. Gross.

Then comes suspicion. Now, I've pointed people to Mr. Gross in the past because I think he's a smart guy, but more importantly he's very powerful. His piece on 2010 is well worth reading, foremost it has a nice explanation to what the Fed has been up to over the past year, understand the TARP was the least of the programs implemented by the Fed and Treasury to help the financial sector. Mr. Gross points out PIMCO was a recipient and beneficiary of this largess. But that was in the short-term, while over the long term PIMCO now holds a lot of government paper and if inflation kicked in a big way, it would put a big dent in PIMCO's net worth.

The greatest way to insure there is no inflation is to stop the government from adding more money to the system. After Mr. Gross explains what's been done, he not so subtly hints how it must be undone, and sooner rather than later, making the very patriotic point that there's lots of other countries with sounder balances to invest in, though it does raise the question can we really all put our money into Deutsche Bonds? Going to be an interesting year.

Bring Out Your Dead

Dodd, Dorgan phew! The exodus of incumbent Democrats from the Congress gains steam and the new year's just started. It's getting to look like the scene in Monty Python's Holy Grail, "Bring out your dead." More than a few members should lean over and poke their colleague and see if they're moving. No doubt, they'll get a few, "I'm not dead yet." Of course if you've seen the film, you know the answer to that, " Yes he is, it won't be long."

Chris Dodd of course is a perfect example of what's wrong with our politics. Nice enough fellow no doubt. He first got elected in 1974, probably one of the most infamous classes of Congress in American history. It delivered into Congress, the new young-turk post-New Deal Democratic generation. They were an historical accident. The Republicans were laying the foundations for what would be their three decades rule, but in '74 briefly self-destructed under the leadership of Mistah Nixon. After two cycles, the Republican march would continue pretty much unabated for the next several decades, with the Clintons sneaking in under the largess of Mr. Perot, and then in the last two cycles meeting its demise with the complete exhaustion of the American people with Republican rule.

Chris Dodd was a Democrat in Republican times, part of generation that repudiated their past. The Democratic class of '74 will go down as a particularly loathsome bunch. It was they who opened the party coffers to the quick and addictive fix of corporate money, and it was they who capitulated to the Reagan revolution, not for any particular public policy benefit, but simply electoral self-interest. They were the first generation of the professional political class -- money and image is all that matters.

The piling of Democrats on the cart of dead is hard news for those thinking the last two elections were the foundation for a new decades long rule by the Democrats. But look at it this way, Rove thought he had ushered in a new 50 year reign for the republicans and it lasted just six, and really, if the Democrats weren't the completely inept lot they are, they could have taken out Bush in 04. But again, it gets to the point, this is where we are, switching one broken party for another. We don't have the decency to put one or both parties out of their misery, continuing to spend billions of dollars every two years putting on a charade and seemingly disappointed when we keep finding out it makes no difference.

the politics of political economy

The American political process is about as broken as the financial system.
-- Paul Volcker

I like Zero Hedge, it has some informative stuff. Couple days ago, they wrote a good piece on Fannie and Freddie, except it was political poison. It fell into the bankrupt political categories of the past three decades. Basically, "See the whole financial mess was the government's fault." Matt Taibbi wrote an excellent response, and I can't recommend it more. Taibbi does an excellent job of showing the despicable partnership between Wall Street and DC in looting the American economy. The nut:

This GSE story is a big one, but if it gets used as a path back to a “The Market Reacted Rationally” version of history, we’re screwed. It has to be looked at as an important part of a diabolical whole, a symbiotic scheme in which the banks and the state were irreversibly intertwined in an enterprise that on both sides was never about market economics, but crime. Because otherwise… the diversionary notion that one side or the other is wholly to blame is part of what makes the whole scam possible.

Jesse's Cafe Americain riffs on Taibbi's piece and gives it a little historical perspective:

Out of all of this will come something different, and most likely something unexpected. Its an old story, one that replays over and over. The remedy is sound reason and the Constitution, but these forces have been in retreat for the past ten years at least. Reform and justice have few friends while the looting of a generation is in progress.

And speaking of looting, Greider has a good piece at The Nation on the looting class' attempt to pry open the last public vault, Social Security.

If we are going to reform our politics and economy, we're going to have transcend many of the political categories of the past several decades, even a few of the last century. Our political class, be it Democrat or Republican is firmly in the hands of Wall Street and other entrenched interests, who, make no mistake, are looting the rest of us. Stopping this is going to take a lot of hard work, and dare I say, sacrifice. If you want to talk about politics over the next few years, it's about political economy, if you don't get that, it will get you.

Ben's Bet

Financial bubbles are certainly interesting phenomena, though it's very difficult to predict when they will pop. For the last two and half decades, the American financial system was systematically deregulated and we faced various bubbles. Each one progressively larger, each popping met pretty much the same way, increasing debt through the largess of the Fed and blowing up a new bubble in a larger sector. The popping of the securitization, derivatives, and real estate bubbles led Chairman Bernanke to vigorously blow the largest bubble yet. This bubble grows across global currency and other financial markets. When it pops and what the ramifications will be are the only questions.

Doug Noland at the Asia Times has a very good piece on the bubble as it expands across the globe. He writes:

I will suggest that 2009 marked a historic inflection point in global finance. I have argued that years of policy mismanagement led to the breakdown in the dollar reserve "system" - that for more than 60 years worked (with varying success) to restrain global credit expansion. This year saw key inflationary/reflationary biases move decidedly from the "core" (the US) to the "periphery" (notably China, Asia, Brazil, India and the "emerging" markets). Importantly, a discredited dollar and the prospect of ongoing US policy-induced currency devaluation created a backdrop of extraordinary market accommodation for "periphery" credit systems.

Bloomberg has a very good extensive piece on the specifics of the Chinese housing bubble. While, John Auther's is back at the FT and has nice piece on the question of the renminbi and the dollar. A devaluing renminbi and a devaluing dollar are going to cause great concern in global markets, particularly for those reliant on manufacturing exports. However, it's going to also create problems in financial markets and the FT has a piece saying the bond boys are beginning to get nervous. "The world’s biggest investment funds are cutting exposure to US and UK government bonds amid fears that rising public debt and the withdrawal of central bank support for their economies could scupper the global recovery."

In his Treatise on Money, Keynes made a strong differentiation between a monetary crisis and the more traditional investment crisis or what is commonly referred to as the Credit Cycle. Keynes wrote:

Moreover there is a further characteristic of great importance which differentiates monetary disturbances(whenever, that is to say, the monetary change is of a quasi-permanent nature) from investment disturbances; namely that the former represents a passage from one equilibrium price-level to another, whereas the latter(even when the investment change is of a quasi-permanent nature) is an oscillation about an approximately unchanged price-level.

I'm going to write more on money, but in short, Ben's bet has forced the issue and we are now in a monetary situation and in the end it will require a new equilibrium in global price-levels. The question is going to be how we get there, for the most alarming factor is global currency markets that evolved over the past four decades, under the same failed market theory that we deregulated the rest of the financial markets, are completely untethered from any stop points or breaking, that is, they are very susceptible to wide and violent swings, for example if we were to get another panic, this time in currency markets as occurred last fall amongst the global financial elite. Such an event would serve no one well, though no doubt in Keynes' words represent a passage from one equilibrium price-level to another.