Pushing on a String

On February 19, 2010, in Background and Research, by Joe Costello

Pushing on a String

Marriner Eccles is a figure too little known to American history. He was a banker in Utah, who became Fed Chief under Roosevelt. In Feb of 1933, Mr. Eccles gave what might be one of the greatest Senate testimonies in history. The St. Louis Fed has it here, and it is essential reading. Eccles, before Roosevelt was even sworn-in lays out the intellectual, economic, and pragmatic rational for much of what would become the New Deal. No Keynes or economic priesthood, just a Mormon banker with some years of banking experience–the radical pragmatism that has always been this republic at its best. Again, I couldn’t more highly recommend reading Eccles testimony.

What little that is remembered about Eccles is his remark of a few years later. In an entrenched deflationary environment, monetary policies eventually become useless, simply flooding more money into the system is the equivalent of “pushing on a sting”. The question is if our present Depressionary historian/Fed Chief has ever read anything about his predecessor, or if in his monetary indoctrination, Mr. Bernanke was taught to disregard Mr. Eccles.

Today the FT reports:

The prices of US goods and services, excluding food and fuel, fell last month for the first time since 1982, as aggressive measures to stimulate economic growth failed to inflate the cost of living.

A year ago, someone said to me, “Well, everything Bernanke is doing is inflationary, right?” I replied, “Well,

that’s certainly what Mr. Bernanke hopes.” I think we’ve learned a lot about hope over the last year.

So, as Cato the Elder took to ending every speech “Carthago delenda est,” Jefferson ended his letters, “Divide the counties into wards,” we need say, “Debt needs to be written down.”

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Monetary Relativity — On Money – V

On January 27, 2010, in Corporations, by Joe Costello

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

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Time is Running Out for Big Ben

On January 26, 2010, in The Public, by Mary Bottari

Opposition has been mounting to the reconfirmation of Ben Bernanke as Federal Reserve Chairman. In recent days, Senators Barbara Boxer (D-CA) and Russ Feingold (D-WI) and John McCain (R-AZ) announced that they would vote no. If Bernanke does not get a vote this week, before the formal end of his first term, it would send shock waves through Wall Street.Although he was named Time’s “Man of the Year” due to his handling of the financial criisis, Boxer and Feingold reprise a bit of forgotten history. “Dr. Bernanke played a lead role in crafting the Bush administration’s economic policies, which led to the current economic crisis. Our next Federal Reserve chairman must represent a clean break from the failed policies of the past,” said Boxer.

“Under the watch of Ben Bernanke, the Federal Reserve permitted grossly irresponsible financial activities that led to the worst financial crisis since the Great Depression. Under Chairman Bernanke’s watch predatory mortgage lending flourished, and ‘too big to fail’ financial giants were permitted to engage in activities that put our nation’s economy at risk. And as it responds to the crisis it helped to usher in, the Federal Reserve under Chairman Bernanke’s leadership continues to resist appropriate efforts to review that response, how taxpayers’ money was being used, and whether it acted appropriately,” said Feingold in a statement.

McCain told Face the Nation that Bernanke “was in charge when we hit the iceberg” of the recession, thus his confirmation to a second term should be weighed carefully. “I think that he should be held accountable.”

These Senators joined a bipartisan group of their colleagues who placed a “hold” on Bernanke’s reconfirmation in the Senate. The group includes Senators Bernie Sanders (I-VT.), Jim Bunning (R-KY), Jim DeMint (R-SC) and David Vitter (R-LA.). A vote cannot take place until these holds are lifted.  According to the Wall Street Journal, 17 Senators are voting no. Forty-one are needed to block a vote in the Senate.

Many Senators are back in their districts this month getting an earful on the state of the economy from their constituents. Others are paying close attention to last week’s  crushing victory by Republican Scott Brown in the Democratic stronghold of Massachusetts. As we reported, Brown rode a populist wave of anger against the bank bailout and the state of the economy to seize a U.S. Senate seat long held by Democrats.

But some in the Senate greeted the rising tide of citizen discontent with disdain. Senator Judd Gregg (R-NH) told CNBC: “There’s a lot of populism going on in this country right now, and I’m tired of it.”

Although originally appointed by Bush, Bernanke was nominated to a second four-year term by President Obama in August. His first term ends on January 31st. Although Obama has been talking tough with Wall Street lately, he appears to be standing by Wall Street’s man. White House adviser David Axelrod said Sunday on CNN that Obama remains “confident” that Bernanke will be confirmed.

Axelrod should know better. Obama cannot talk tough on Wall Street one day and change his tune the next. Let others make the case for failed Bush policies and left-over Bush appointees.

There is still time for the Obama team to change course and embrace a new direction in its Fed policy. Call your Senators now and tell them its time for Ben to go or contact them at A New Way Forward. The clock is ticking.

Cross-posted from PRWatch.org

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The new sport: Bernanke Vote Tally

On January 25, 2010, in Current Leadership, by Tiffiniy Cheng

We started with one senator holding, now there are 17. Wall Street Journal is doing a vote tally on Fed Chief Bernanke’s reconfirmation to a second term. They’re doing this because more and more senators are putting a hold on his confirmation, see here. We helped to make this happen with our petition for “No Bernanke in My Name!”

This is certainly the beginning of much needed reforms and changes to the Fed. Whether or not they exist as an entity doesn’t matter to me in particular, but more that we have a system that keeps the banks from growing so big they have so much power. See here at A New Way Forward, we think about process more than particular programs or institutions — what kinds of processes or reforms can transform the amount of power any individual can have, especially when they have none or very little?

I, thus care deeply about corporate domination and collusion with the federal government. The Fed seems to be the worst of that now.

If you think that we need a democratization of our central bank, rather than allowing it to remain as the feeding trough that it is, please sign the petition that has helped to start the restructuring. We think that the Fed needs to be democratically elected, without bankers leading the helm, and have transparency and accountability to the public good, jobs, and our savings. So, sign the petition to start democratizing the Fed and stop the confirmation of bankster chief #2, Ben Bernanke –No Bernanke in My Name.”

Want one reason why he shouldn’t be confirmed? The central bank of all places, and the Fed chief of all people should know that his fixes continue to starve the real economy and aren’t helping to fix them either. “Credit card delinquencies at big banks masked by paynent holidays & other modifications” as reported in “Large-Cap Banks: Dec. Trust Data: Losses Headed Up?” (unavailable without subscription).

Simon Johnson points out the disservice taxpayer-paid Bernanke has done to the American people, “As Fed Chairman, Bernanke allowed Goldman Sachs and Morgan Stanley to become financial holding companies during the financial crisis in October 2008 [which qualified them for massive taxpayer bailouts], and then to continue to engage in massive amounts of proprietary trading, just as they had done previously.”

Lastly, I have been noticing Andrew Jackson’s work when he was president — he stood with the people on economic matters. And that is inspiring because he was able to work with the people and make huge changes to the system. And Simon pointed out that, “FDR’s favorite president was Andrew Jackson.  The White House might like to read up on why – Jackson confronted, ran against, and ultimately defeated, the specter of concentrated financial power.  President Obama needs to do the same.”

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Events are in the saddle

On January 22, 2010, in Current Leadership, by Joe Costello

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?

On Money – IV

On January 17, 2010, in The Public, by Joe Costello
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.

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