On April 13, 2010, in The Public, by Joe Costello

Here’s three good views of political economy. The first (tx Alternet) is by the Matt Ryan, the mayor of Binghamton, New York, who is making the connection on the bankrupting of the economy with America’s military misadventures:

In doing so, he’s joining a growing chorus of mayors, including Chicago’s Richard Daley and Boston’s Thomas Menino, who are ever more insistently drawing attention to what Ryan calls the country’s “skewed national priorities,” especially the local impact of military and war spending.

The second is a speech by Rich Trumka, head of the AFL-CIO. Trumka’s speech is an excellent look at the growing inequality of the American economy and sets forth some good principles. Unfortunately, it also points to Labor’s weaknesses these days. Mr. Trumka’s view of the economy is very mid-20th century, if not 19th. We have to be much more creative in looking at where we are today, this is not 1933. Trumka’s speech highlights what has been missing from Labor in its decades long inglorious decline. In Labor’s youth, when it was vital, it was a movement of the greater public good. In it’s last couple decades, it has simply become another special interest.

Finally, Doug Noland at Asia Times has a piece exploring the transference of the financial bubble to money itself. What does this mean? Well only one thing, it’s not good. How does it play out? That’s

the question. How long can the money bubble go? Well, bubbles tend to last a lot longer than you think they can. The latest pump recipients were the Greeks, another week, another bailout.

Local government, equality, and money are three pillars of any reform movement.

Cross-posted from Archein: 3 Views

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On Money VI

On February 10, 2010, in Background and Research, by Joe Costello

on money VI

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. – JM Keynes

Over the last forty-years, money was untethered from any objective value and became another product to trade. Money became, in many respects, simply another trade in the entirety of a financialized economy. One component of the definition of financialization is “to make trade-able”. However, a monetary system, and even more so an economy, which become entirely trade-able, are prone to instability and catastrophic volatility. Unless you’re purely a speculator, instability is the exact opposite of what you want from a sound money system.

Previously, I explained Keynes very helpful notion that, in part, money is valued through its constant interaction with the rest of the economy. Money gains value from an economy’s wealth, debt and prices. He placed the various valuing mechanisms into the categories of Money of Account and the General Purchasing Power of money. Again, for this exercise, it’s not necessary to go into detail on Keynes’ definitions, for as he remarks in the Treatise:

The fundamental equations of Chapter 10 are in themselves no more than identities, and therefore not intrinsically superior to other identities which have been propounded connecting monetary factors.

Phew, what trouble such honesty could cause our economic priesthood today! However, the point to be made is, at all

times, money constantly interacts with the whole financial system and economy to gain its value. When an economy becomes completely financialized, that is trade-able, and money is removed from all fixed standards, you allow traders to gain too strong a hand in valuing money, thus increasing volatility.

The so-called “financial innovations” of the last three decades have added further to this instability. Financial innovation was a way to make money more trade-able by adding layers of “swaps” and “obligations” on top of the real assets. This process let the entire banking system carry less reserves – money in the vault – allowing more money, liquidity, into the system. Innovation meant formerly illiquid stores of money, such as long-term mortgages or government bonds, became trade-able, all adding to the overall volatility and instability of the system.

Thus a system in which everything is trade-able, demands a greater volume of money to keep things liquid, literally becoming addicted to greater liquidity, which, as Keynes notes in the opening quote, does not necessarily impact the real economy. What helped along the great elite financial panic in the fall of 2008 was a fall in liquidity, instigating a fall in inflated prices. Suddenly with no excess cash to keep inflated asset prices afloat, the entire system began a major contraction, racing to reach what would be more realistic levels in a system that was not so trade-able, that is liquid.

However, the Fed, other central banks, and governments stepped in to boost “liquidity”, flooding market with dollars, euros, et al, not allowing a deflation in prices and thus transferring the inflated values of assets and the layers of “financial innovations” on top of them, into the currencies themselves. An aside, a better outcome would have been gained by allowing the deflation of financial assets and instead the government flooding the real economy with money to first and foremost keep unemployment from steeply rising. But Ben rolled the dice and how this eventually plays out will be interesting to see, but volatility is increasing in currency markets and as Keynes noted:

…this tendency towards sympathetic movement on the part of the individual elements within a banking system is always present to a certain extent and has to be reckoned with…in the case of the world as a whole, the tendency to instability by reason of sympathetic movement is a characteristic of the utmost practical importance.

In a global monetary system that is hyper-trade-able and currency value is derived in a great extent from trading, volatility combined with what Keynes termed “sympathetic movement” can create great instability.

What we need to begin to do is re-tether money, make it less trade-able. This can be done various ways, for example by keeping mortgages on the originating banks’ books, making it much more difficult to trade such things a municipal bonds, or tying certain money or amounts to fundamental commodities like grain or oil. The question of how to solidify excessively liquid money is quickly gaining the utmost importance.

Next: Tethering Money

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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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Debt and the Politics of Stagnation

On January 25, 2010, in The Public, by Joe Costello
debt and the politics of stagnation

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.


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 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.

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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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