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Back to the Future

by ChrisCook
Wed Dec 21st, 2011 at 09:39:43 AM EST

Asia Times were kind enough to publish a 'thought piece' of mine today. This will be 'up' until the New Year with other similarly chunky pieces to help people sleep off seasonal excesses.

So it's a long article - but hopefully a constructive one- which pulls together many of the threads I have written about in recent years, and at a time when the global system is, in my view suffering the turbulence of a 'phase transition'.

Enjoy: or get Angry; or Perplexed; or simply Ignore.

21st Century Problems cannot be solved with 20th century solutions

Martin Hutchinson wrote an interesting and entertaining article 'Back to 1693' (Asia Times links disabled because of malware issues) in which he suggested that we must go back to 1693 in order to find solutions.

He advocated not only a return to the Gold Standard, but also to a system of 'free banking' where private banks would create gold-backed credit - without interference from Treasuries or Central Banks - in order to re-base and re-boot our economy.

It was stirring stuff, and in my view he was right to suggest we look for solutions prior to 1693, but not necessarily the ones he proposes.....

Economy 1.0
The first economic paradigm -  Economy 1.0, where buyers and sellers were physically present in the market - was decentralised but disconnected. The price of corn in one town's corn exchange would have been different to that of the next town's corn exchange, never mind corn exchanges in other regions or countries.

An intellectual battle is currently raging among economists, historians and even anthropologists in relation to whether this Economy 1.0, which existed for thousands of years, involved primitive forms of credit or whether it was based upon barter transactions.

The answer is that both mechanisms were in use.  Firstly, units of currency - objects of value - which were accepted in exchange because they were perceived as a store of value which would be accepted in turn by others. Secondly, credit was routinely extended by sellers who created - in exchange for value provided - obligations by counter-parties to provide in return something of value in exchange.  

Forms of currency developed which were mutually acceptable forms of value or money's worth such as standard amounts of silver and gold, but other forms of value have been generally accepted over the years from cowrie shells to copper, and from cigarettes to salt (hence the word salary).

Governments provided standardisation, so that currency became understood as a pricing reference or unit of account; and also quality control, in the case of gold and other precious metals, by assaying, weighing, and minting coins as a standard unit of currency.

Credit Instruments
The first form of credit instrument or IOU was the tally stick.

A tally stick was a wooden stick, marked with notches which recorded the value of a transaction.  It was split  lengthways, and part of it - the 'stock' - was given to a creditor who had provided value in exchange.  The debtor retained the 'counter-stock' or 'foil', and undertook to provide value in exchange when the stock was returned to him for redemption by whoever held it - ie the bearer.

In order for 'stock' to be generally acceptable in payment, it had to be issued by a creditworthy counter-party. This would typically be a merchant of good standing (hence merchant banker), or an institution like a temple which levied tithes on the population, or a sovereign who levied and collected taxes.

Economy 2.0
The second economic paradigm, which evolved over a period of several hundred years, is the present centralised but connected economy, where transactions take place at a distance, through middlemen ie intermediaries who aim to make transaction profit and put capital at risk to do so.  

The development of regional, national and international trade was driven by the growth of generally accepted and trusted currencies and documentary credits and from the Middle Ages, the innovation of double entry book-keeping and accounting.

The second great innovation was the creation of the Corporate body, which enabled productive assets to be owned over generations, and was initially developed by the Church and by municipalities - such as London's City Corporation.  Such corporations eventually came to be created for commercial purposes as an enterprise agreement between individuals with a view to profit.

The first of these 'Joint Stock Companies' in which individuals shared risk collectively - but not, as with partnerships also individually - was the British East India Company in 1600 - but the Dutch East India Company was the first to issue 'Stock' to raise investment. This was a credit instrument which gave permanent rights of asset ownership and to the fruits of ownership, and which was typically divided into 'Shares' denominated in the national currency..

Private Credit
There were essentially two sources of documentary credits.  Firstly, traders who deposited their bullion and coins on 'bancs' in goldsmiths' vaults for safe-keeping began to use the goldsmith's receipt as currency instead of the gold itself.  The goldsmiths - realising that the gold they held was rarely withdrawn - began to create additional receipts and loan them for a period of time at interest.  This essentially fraudulent practice of private credit creation formed the basis of modern-day banking, and was subject to a breakdown in confidence in the bank - 'runs on the bank' - and hence bankruptcy..

The second form of documentary credit was the issue of 'bills of exchange' by merchants, which began to be accepted by third parties through an endorsement or assignment, often many times over, before the bill of exchange found its way back to the issuer to be exchanged for value.  Trust in the issuer was key.

These forms of credit enabled the flow of goods and services to take place, oiling the wheels of commerce, and were essentially based upon the capacity of people, individually and collectively to provide goods and services.

Public Credit
The historic role of public credit has been almost forgotten.  From the 12th century onwards the Exchequer of UK sovereigns would pledge the sovereign's credit -against value received - through the issue of Stock which was later returned by the eventual holder in payment for taxes.  The very phrase rate of return alludes to this long forgotten practice of returning Stock to the issuer for cancellation.

The important role of Stock in UK public finances may be gauged by the fact that by 1694, when the Bank of England was privately incorporated, more than £17m worth of government Stock in the form of tally sticks were still in circulation, at a time when the cost of running the government was £2m to £3m per year.

But by this time, the Exchequer had also - in order to finance public expenditure, particularly military - begun to issue Stock in documentary form.  Issue of interest-bearing perpetual annuities, also known as Stock, met a need for a 'risk free' investment bearing a reasonable return.  In order for interest to be paid, registers of entitlements were usually kept, although some documentary instruments carried coupons which could be detached and presented to collect payment of interest.

Privatisation Begins
The Bank of England was a private UK Joint Stock Company incorporated by Royal Charter and it began to create and provide credit on the basis of gold deposited with it. The Bank of England began to finance the UK government by purchasing its interest-bearing Stock and annuities and indeed had a monopoly on this activity.  

In 1705, the remarkable Scottish gambler and adventurer, John Law, proposed in Scotland a form of money backed by land rentals, which came to nothing, but his proposal contained some remarkable insights as to the nature of money and credit.  By 1716 Law had become the trusted adviser to the French Prince Regent, and after many successful economic reforms in France as Controller General he created the Banque Générale.

The credit created by this private bank created the first modern day bubble, which was not directly in land value but in the shares of the French Mississippi Company, which had a monopoly on trade in the French territories which then formed almost a third of the modern US land-mass, right up to the Canadian border.

The collapse of the Mississippi Bubble ruined the French economy, and a very similar bubble in shares of the South Sea Company, which collapsed in 1720, and had been fuelled by credit from the Bank of England,  caused similar widespread ruination in the UK.

Twin Peaks
Since this time, the Twin Peaks of finance capital - investment through Joint Stock Companies and debt created by private banks - drove the development of the modern industrialised world, assisted by further innovations such as the privilege of free limited liability for Joint Stock Company investors in 1855.

In the mid 19th century a number of failures/bankruptcies of private Free Banks - who had issued their own bank notes, but were unable to provide gold when these were presented for redemption - led to the Bank of England being given a monopoly on bank note issuance, which at that time was a very significant part of credit in circulation.

A sophisticated system of wholesale and retail banking has since evolved, central to which is the relationship between the Treasury and the Central Bank, and a vast pyramid of credit was built upon a tiny base of gold.

In 1971, even the technical ability to demand gold was dispensed with, and the present day system of public and private financing and funding reached its final form, at the heart of which is a Black Hole.

A Very Secret Agent
The myth underpinning virtually all schools of economics is that the Treasury has a banking relationship with the Central Bank.  The pervasive belief is that the Central Bank lends money to the Treasury and is therefore a creditor of the Treasury.  

This is a myth.  The Central Bank is actually the fiscal agent of the Treasury, and it creates credit on behalf of the Treasury either in note form or by crediting clearing bank accounts with new fiat currency.  

The truth of this is demonstrated in the US by the fact that a few million US Treasury Notes  (credit issued by the US Treasury) still circulate alongside Federal Reserve Notes (credit created by the Federal Reserve Bank) and they spend exactly the same.  US Treasury Notes are to all intents and purposes modern day US paper Stock, since they are accepted by the Treasury in payment of taxes.

So what is actually going on, and it is a continuation of what the Bank of England began in 1694, is that private banks create credit on the basis of a cushion of capital specified by the Bank of International Settlements in Basel, and this credit created out of thin air is exchanged for interest-bearing Treasury debt.

In this way private bank credit - which carries an overhead of substantial salaries to management and handsome returns to shareholders - has come to replace public credit.

This reality is actually obscured by deceptive language in the balance sheets of central banks who describe both undated demand deposits - of cash held by the central bank as custodian - and dated term deposits, of cash loaned to banks at interest for a period through a sale and repurchase (Repo) agreement as liabilities.  These are two completely types of liability: the first is an ownership obligation -a credit instrument - while the second is a debt obligation/instrument.

This misrepresentation leads to further myths in respect of how the system operates in reality, and these in turn feed completely mistaken economic policies and political rhetoric to justify them.

Fractional Reserve Banking
This is a myth.  In the modern banking system , bank deposits are not, as most people suppose,  money which is taken in and then lent out. The creation of new credit/money by private banks is no longer constrained by reserves of cash deposited with the Central Bank, since clearing banks may obtain deposits by borrowing from other banks.  The only constraint on credit creation is now the capital cushion which banks must hold to cover defaults by borrowers and operating costs.

Tax and Spend
Another myth.  Tax has never in 800 years in the UK been collected and then spent, and the tally stick system is the evidence.  

Public spending on credit came first, and when stock was returned in payment of taxation this credit/money was retired.  This is also true of all modern economies using a privatised fiscal and monetary architecture centred upon a Central Bank, but that fact has been obscured.

What actually happens is that Treasuries first spend - using central banks as fiscal agents - and then fund that expenditure through the unnecessary  issue and sale of interest-bearing debt to private banks, and through taxation, which is the only way that either public or private credit may be retired and extinguished.  

The truth of it is that tax-payers' money has never been anywhere near a tax-payer.

Peak Credit
In or around 2007 the financial system reached a point of Peak Credit at which the debt obligations taken on by populations exceeded their capacity to pay.

This occurred because banks began to outsource credit risk, and free their capital for further lending, to 'shadow bank' investors:

(a) Totally - through securitisation and sale of debt;

(b) Temporarily - through credit derivatives ie time limited guarantees;

(c) Partially - through credit insurance eg by AIG or Ambac;

(d) Toxic cocktails of these, such as Collateralised Debt Obligations (CDOs); CDO squared and so on

The result was a series of massive bubbles in property prices which imploded from 2007 onwards, and led to  a breakdown in trust in the banking system so that banks ceased to lend to each other.

I believe that the collapse of Lehman Brothers in October 2008 will come to be seen as the definitive end of the centralised, but connected, Economy 2.0 paradigm operated by and for the profit of middlemen.

Economy 3.0
The direct, instantaneous connections of the Internet make possible direct people-based (Peer to Peer) credit relationships between individuals and direct asset-based (Peer to Asset) credit relationships between individuals and productive assets.

On the face of it, it could be expected that such dis-intermediation - which I term Napsterisation, after the music file sharing phenomenon - would be resisted by banks as credit intermediaries.  But in fact, the opposite is true.

Inflation Hedging
In parallel with the credit innovation which eventually led to the point of Peak Credit and the collapse of the banking system, there has been a parallel series of innovations in new legal vehicles for investment in productive assets, involving trust law and partnership law, rather than company law.

From 1995 onwards, beginning with the Goldman Sachs Commodity Index fund, a new breed of funds was created which took on commodity risk - initially through holding long term positions in the futures markets -with a view to 'hedging inflation' and a decline in the value of commodities relative to the dollar.

From 2005 to 2008 these funds grew rapidly and began to inflate commodity market prices as producers began to lease - through sale and repurchase agreements - commodities to the funds in return for a loan in dollars.  The outcome was to enable oil producers to literally monetise oil stored in the ground, in tanks or in pipelines, and the flow of dollars into funds led to the bubble and collapse in oil prices in 2008.

The Federal Reserve Bank addressed the collapse of Lehman Brothers by reducing dollar interest rates to zero, and by creating dollars which were used to buy Treasury Bills - so-called Quantitative Easing.  

At this point, through 2009, the flow of inflation hedging dollars became a flood as banks queued to launch new funds and to set up the necessary support and trading operations.. Commodity and equity prices became completely detached from the underlying reality of physical production and consumption, and of flows of profits and dividends, as funds took ownership -  through purchases or leases - of commodities and equities purely as an alternative to holding dollars.

Since the credit market is essentially dead, or at least on life support, the reason banks flocked to sell funds to clients is that market risk is not with the banks, but with investors. Banks need relatively little capital to be service providers to the funds, and are able to make substantial profits in very short term trading on behalf of the funds.

The banks have knowledge in respect of the ownership of market inventory which is not known to other market participants. These are the merchants who buy and sell physical commodities, and speculative financial traders such as hedge funds or even risk-taking individual investors, who attempt to make transaction profit.  Through such information asymmetry, and the use of new trading tools such as High Frequency Trading which provide often dubious liquidity, high profits may be  made on minimal capital.

The Adjacent Possible
The point is that - as capital became scarce after October 2008 - banks evolved their business model to the adjacent possible of marketing and operating new quasi-equity instruments. They transitioned from an intermediary role to a service provider role because it was and is profitable to do so.

But these instruments, and the presence in the markets of investors who aim to avoid loss rather than make profits, have now led to what are essentially two tier and false markets.

In my home turf of the oil market, all the signs are that in the absence of massive new flows of QE dollars from the Fed, and/or substantial cuts in oil production, especially from OPEC, there will be a collapse in oil market prices in the first quarter of 2012.  Indeed, some market participants have already taken option positions in the oil market in anticipation (or in fear) of a fall in the oil price as low as $45 per barrel in 2012.

The coming collapse in commodity prices will lead to the next great regulatory scandal of mis-selling, when the risk averse investors who bought these funds from the banks make massive market losses to which they never realised they were exposed.

At that point the way will be open to go Back to the Future - to the next adjacent possible - which is direct people-based credit and direct asset-based credit.

P & I Clubs
People-based credit is not the direct Peer to Peer interest-bearing credit provided by companies such as  Zopa.  Instead, trade credit is extended directly from trade sellers to trade buyers, within the kind of mutual risk sharing agreements which have existed for thousands of years.  To this day, mutual 'P & I Club' insurance of shipping and other risks still takes place in the City of London, and these mutual Clubs have been managed by the same service provider for 135 years.

In a mutual 'credit clearing' system within a P & I Club risk sharing agreement - or Guarantee Society - buyers and sellers would pay no interest on credit but would pay for the use of the system, and would also pay a guarantee charge or provision into a pool in common ownership to guard against defaults.

21st Century Stock
21st century issues of Stock will enable direct credit creation not only for short term/high risk development financing but also when productive assets are complete, for long term/low risk funding.

Owners of productive assets simply create and issue undated credits/units which are redeemable in payment for the use of the asset. For example $1.00's worth of rental revenues pre-sold for 80c will give an absolute return of 25%, but the rate of return depends - literally - upon the rate at which units of Stock may be returned to the issuer and redeemed against use.

Instead of debt fragmented by date and rate of interest, there will simply be single classes of Stock, and even if financial investors do not buy Stock for investment, users of productive assets such as occupiers will always buy Stock at a price less than face value in order to redeem it against use.

The fact that the issuance of Stock is as possible for assets in public ownership as it is in respect of assets in private ownership opens up simple but radical new options for public financing and funding.  

Open Capital
Stock may in fact be seen as currency sold forward at a wholesale discount, and I think of such undated credit as open capital, to distinguish it from closed and proprietary forms of debt and equity finance capital.

My vision of a 21st century Open Capitalism is of new forms of stock based upon land rentals which will come to be what are essentially networked land-based national currencies created literally from the ground up.

Other forms of stock, some locally acceptable, others internationally, will be based upon the intrinsic value of energy, such as stock redeemable in payment for carbon fuels; electricity, and even heat.

These currencies will change hands 'Peer to Peer' against goods and services with the backing of a mutual guarantee based upon the capacity of individuals to provide such goods and services.

Finally, the reference point or pricing benchmark against which transactions will be made will logically be an absolute amount of energy, and the global economy will go onto an Energy Standard for exchange, thereby enabling the transition to a low carbon economy.

(Published by kind permission of Asia Times)

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Really nice to have your thoughts laid out thoroughly like this. Do you think Economy 3.0 can simply emerge, or will there have to be some sort of regulatory/legislative push?

Vencit omnia veritas.
by Luis de Sousa (luis[dot]a[dot]de[dot]sousa[at]gmail[dot]com) on Wed Dec 21st, 2011 at 05:07:15 PM EST
The point about what is going on in the markets right now, which I write about towards the end, is that what is driving financial dis-intermediation is the fact that it is actually in the interests of the middlemen themselves, because they need less finance capital as service providers.

My thesis is that an architecture which does not involve the payment of something for nothing - ie rent; accounting profit; or compound interest (money purely for the use of money) - will out-compete one that does.

So we are seeing capitalism consuming itself and it will re-merge in a non-toxic form.

In simple terms, Ethical is Optimal.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Dec 21st, 2011 at 05:23:03 PM EST
[ Parent ]
Chris, as usual your posts leave me wondering for several days.

I think the final outcome of your thesis, what you call Economy 3.0, is relatively peaceful. Interest in general works only if either monetary mass or money velocity constantly increase to support it. Using different terms and coming from a different perspective (my formal education in Economics is thin) I believe I previously identified the end of Economy 2.0.

But while you see the Commodities "bubble" as a consequence of the end of Economy 2.0 I see it as a cause. The monetary system that prevailed since the end of WWII (further deepened in 1971 and in 1985) was itself a product of a period of biophysical economic growth without parallel. This sort of growth is not possible anymore and hence many of the financial mechanisms born out of it have become dysfunctional.

From this perspective I cannot see a transition to Economy 3.0 as a certainty. From a Keynesian perspective, Economy 3.0 will come out of investors realizing they have to push their portfolios to less liquid assets (e.g. stock) as the sole way to retain wealth, since high liquidity, interest bearing assets will become ever more risky. In this process there is least the danger of investors opting for even more liquid assets and completely killing the Economy.

Vencit omnia veritas.

by Luis de Sousa (luis[dot]a[dot]de[dot]sousa[at]gmail[dot]com) on Mon Dec 26th, 2011 at 05:30:12 AM EST
[ Parent ]

We reached a point of 'peak credit' in or around 2007 at which the claims manufactured by the banking system upon individuals exceeded the capacity of these individuals to meet them.

Conventionally such bubbles have been addressed by quantitative means: either defaults (cutting the number of claims) and depression, or inflation (increasing and distributing the number of claims).

But the bubbles experienced have been on such a scale, and purchasing power is concentrated in such few hands that neither is possible.

The former is politically impossible because the 1% can no longer impose themselves to the necessary extent on the networked 99% which now includes the middle classes. The second requires politically impossible fiscal means ie systemic tax reform from people-based taxes to to taxes on privileged property rights, plus helicopter drops.

I am essentially proposing a change in the basis of money from deficit-based credit issued by intermediaries to people-based (P2P) and asset-based (P2A) credit based directly upon the capacity to provide goods and services, and the use value of productive assets, respectively.

I think of this debt/equity swap as 'Qualitative Easing' and economists such as Buiter, Taleb and Michael Hudson have already suggested that the need is for something similar, although they have no idea as to the mechanics.

But my case is that the transition from Economy 2.0 to Economy 3.0 is already well under way, because it is in the interests of banks as (essentially bust) credit intermediaries to become service providers, since their capital requirement is minimal, and the return on capital substantial.

When the system of credit collapsed - and it is not coming back - mainstream banks joined the pioneers (eg Goldman) in switching to new direct forms of investment (quasi-equity) in commodities and stock markets.

In other words they moved to an 'adjacent possible' which 'worked' for them to make profits, by passing market risk to risk averse customers completely unaware of the true risks they are running. These customers were motivated by inflation hedging, but perversely caused the very inflation they aimed to avoid, and a temporary transfer of wealth to producers.

These bubbles are about to collapse, and when they do, banks will once again be looking for a new 'adjacent possible' business model and market instruments. This time the adjacent possible is 'stock' - ie undated credits - as I outline.

But once this occurs - and there is no going back - they will find that the economy is now in an optimal "Economy 3.0" form where it is actually in their interests to act in a non-toxic way, because collaboration and transparency will be more profitable for the people involved. There will be no conventional shareholders left - they will have exchanged economy 2.0 shares and unsustainable debt for economy 3.0 'stock' units.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Dec 26th, 2011 at 07:09:02 AM EST
[ Parent ]
But my case is that the transition from Economy 2.0 to Economy 3.0 is already well under way, because it is in the interests of banks as (essentially bust) credit intermediaries to become service providers, since their capital requirement is minimal, and the return on capital substantial.

You're describing the transition from commercial to investment banking (i.e., from banks as credit providers to banks as underwriters of financial transactions with no credit risk).

Who, in the new economy, is going to take the credit risk?

And, is the distinction between credit risk an equity risk a tenable one?

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Mon Dec 26th, 2011 at 07:17:03 AM EST
[ Parent ]
Nope. There is nothing equitable about conventional equity.

I'm looking at a return to the very old form of credit/equity instrument which was routinely in use for hundreds of years by sovereigns - ie Stock

Let's take a private example of land-based stock.

A property has an initial rental of £10,000 per year, and this is set to vary against an index of local market rentals.

The owner/custodian issues (within a suitable framework agreement) undated credits or Stock redeemable in payment for (say) £1.00 of rental value.

He sells 100,000 Units (10 years' worth) for £80,000 and this gives an absolute return of 25%.

But the RATE of that return is limited by the rental, which depends on whether the property is occupied, the level of rental, and whether the rental is being paid. As rentals rise (or fall) with local rentals this means the demand for units by occupiers increases/decreases.

An investor will either be an occupier - in which case he has bought 10 years' worth of rent forward, or an investor, who will sell his units at the market price either to another investor or - if his are the lowest priced units on offer - to occupiers who will constantly be in the market looking for the most discounted units of Stock.

The very phrase 'rate of return' - which we take for granted - is actually derived from the way in which stock could be returned to the issuer for cancellation.

So in fact there is no credit risk as we know it, because this is a form of equity, not debt.  The main risk is a pure liquidity risk - that there will be no buyers of units of Stock. Another risk is the monetary risk of over-issue, which requires transparency and suitable management by a trusted third party manager (aka a bank).

The risk/reward calculus changes.

For debt, the higher the risk of non-repayment > the higher the risk premium demanded > the more unaffordable the cost of funding > the less likely it will be paid >...........a vicious circle.

But for stock, the more affordable the rental > the more likely it will be paid > the lower the risk > the lower the return demanded> the more affordable the funding......a virtuous spiral, and as pools grow, the liquidity increases, and risk decreases.

Of course there is a limit: a zero return is infinitely affordable, but note here that at the zero bound there are gazillions of dollars looking for solid real returns - any real returns. This is why Network Rail were able to sell 0% long term index linked bonds to pension funds.

This is also why tens of billions of dollars have rushed into the commodities and equities markets and completely detached them from the underlying reality of production/consumption and value/dividend flows, respectively.

Public Stock issued by governments would essentially be currency issued wholesale at a discount.  I advocate a Euro Stock solution for the €.

It's not Rocket Science, but it can be too simple to understand for people used to complexity.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Dec 26th, 2011 at 08:12:53 AM EST
[ Parent ]
You forget that debt (and the charging of interest) is as much an instrument of social domination as a financial instrument. The Sovereigns used to issue stock because they could coerce their creditors into lending to them in terms chosen by the sovereign borrower. When the borrower is weaker than the lender the lender gets to dictate terms and the vicious cycle
For debt, the higher the risk of non-repayment > the higher the risk premium demanded > the more unaffordable the cost of funding > the less likely it will be paid >...........a vicious circle.
is simply a way to make the enslaving of the weak by the strong look lika legal consequence of the weak's moral turpitude.
It's not Rocket Science, but it can be too simple to understand for people used to complexity.
Economics is politics by other means, and both are about power. Complexity is just a convenient way to obfuscate the scam.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Mon Dec 26th, 2011 at 09:05:56 AM EST
[ Parent ]
You are forgetting that the profit motive drives everything.

That is why this transition is already happening, and the bubble in commodity and equity prices is evidence.

When this bubble collapses - which it will, and sooner rather than later - the market will move to the next adjacent possible ie 'what works'.

This is classic emergence: in my view, the next and final 'adjacent possible' - the Last Big Thing-  will be a return to 'stock'.

The payment of something for nothing - eg rent; profit in excess of cost; money just for the use of money - is sub-optimal, and those who practise it will be at a competitive disadvantage to those who do not.

The market is about to transition to the optimal, as it will always tend to do, and Capitalism will devour itself to re-emerge in an open and non-toxic 'win/win' positive sum game.

The last 300 years of increasingly centralised and complex equity/debt financing and funding have simply been an aberration. The Internet interprets Private=Rentiers and Public=State as damage and routes around them.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Dec 26th, 2011 at 10:11:48 AM EST
[ Parent ]
This resonates with what David Graeber writes in Debt: the first 5,000 years about medieval economic organization, especially in Islam, as well as with his idea of cycles of credit money vs. coinage (buillon) in which he suggests we may be exiting a centuries-long buillon-based period and going back to a credit economy.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Mon Dec 26th, 2011 at 10:17:51 AM EST
[ Parent ]

Stock is a form of public credit that has been airbrushed almost entirely from economic history for ideological reasons, in a not dissimilar way to Georgism.

MMT economists like Randy Wray have more recently picked upon it, and this explains why they get fiat money the right way around - as the credit instrument it is, rather than the debt instrument supposed by everyone else - and therefore are able to make meaningful economic predictions.

What is now needed is a Modern Fiscal Theory to complement MMT and enable a rational fiscal basis for fiat money.(which I see as increasingly irrelevant for other reasons)

The reason why we would need an MFT is that if we were to move to state creation of money as MMT advocates then unless the fiscal base were to move primarily to land there would be massive strains and distortions.

This is because the basis of two thirds of privately created money is land, while the basis of most taxation and hence public credit is - directly or indirectly - Labour.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Dec 26th, 2011 at 10:30:22 AM EST
[ Parent ]
I should expand that a little and say that Greed and Fear drive everything.

The banks' greed led them to exploit investor fear, and this inflated the bubbles causing a temporary transfer of wealth between consumers and producers.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Dec 26th, 2011 at 10:20:24 AM EST
[ Parent ]
Your emergent view of this transition vis a vis the anarchist/occupy/masters of the universe stance is what makes it so appealing to me. Certainly the social asymmetries are there but these are also emergent features, not the product of some great conspiracy. The conspiracy is the way the human brain works.

The issuing of energy stock as a replacement to feed-in tariffs, for instance, is something that can probably be made without much trouble.

Vencit omnia veritas.

by Luis de Sousa (luis[dot]a[dot]de[dot]sousa[at]gmail[dot]com) on Mon Dec 26th, 2011 at 12:30:52 PM EST
[ Parent ]
attractions of Chris' theory. First, a thorough look at any historical event with more than one witness almost drives an analyst to an anarchistic perspective. Charles Wright Mills and Bill Domhoff (among others) convinced me a long time ago that there are almost no real conspiracies. Even military discipline cannot suppress subjective response, whether merely griping or seriously mutinous. That is, it is not far-fetched to believe that technologies and personalities and events are so intertwined that cause and effect are not discernible.

Secondly, energy stock is so obvious. Anyone can see the equivalence of some number of watts of power, whatever the source.

The one thing about Chris' theory that worries me, however, is it sometimes sounds too much like the 'invisible hand of the market' will overcome all ills. I think that there are still a few bad actors who will need to be curbed, no matter their karma.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Mon Dec 26th, 2011 at 07:34:54 PM EST
[ Parent ]
And Paul, the public will always be offended by mere money-changing, in the Temple of the Bank, or elsewhere.

Think about hourly exchanges, where the plumber charges an hour, in return for an hour of gardening. Where is the acceptable mechanism for convincing the public that the CEO of Goldman Sachs is worth a thousand time what they are?

The revolution ain't over. It's not begun.

Align culture with our nature.

by ormondotvos (ormond no spam lmi net no spam) on Wed Dec 28th, 2011 at 08:38:49 PM EST
[ Parent ]
Thanks Chris, for another encyclopaedial exposition of the history of debt/credit relationships. You always lose me a bit towards the end when you speak of the inevitable transition to economy 3.0 because it is in the interests of the masters of the universe themselves to move from risk bearing to service provision models of business - partly because in the next breath you speak of disintermediation which presumably cuts out these financial middlemen at least in some degree.

I tends towards a more Marxist view that the interests of the financial institutions are inimical to the common good, and that looking to the masters of financialisation for innovations that will overturn the increasing flow of wealth from the poor to the wealthy is a search in vain. Marx's view was that the development of capitalism inevitably leads to ever greater inequality and that political processes were required to overturn that pauperisation process - whether it be by violent overthrow of financial elites or by democratic polities asserting themselves vs a vis financial elites.

That the financial elites are beating political processes hands down at the moment seems increasingly self-evident and without some amazing reassertion of political sovereignty by people either through popular resistance or democratic mandate it is difficult to see the victory of financial elites being reversed.

Your analysis appears to be an extreme form of economic determinism - the interests of financial elites will increasingly correspond with the common good - whereas I can see no chance of that happening without a pretty extreme form of political determinism overriding the economic interests of the elite and enforcing greater governance for the common good.

Dramatic historical change can come in any number of ways - wars, revolutions, bubbles bursting and other economic depressions and catastrophes - and also by peaceful democratic evolution. But your analysis does not appear to allow for any political processes whatsoever: it assumes a beneficial outcome from trends in credit/debt relationships driven by credit creators acting in their own interests...

True paradigmatic change tends, in historical terms, to come with the overthrow or supecession of whole systems and the dominant classes associated with them, not by the innovation of even more abstracted financial instruments. I cannot see the beneficial outcomes you appear to predict coming without a radical change of political consciousness and action - nothing short of the defeat of neo-liberal political parties throughout the western world. And that is not going to happen in Q1 2012...

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot dotty communists) on Wed Dec 21st, 2011 at 08:04:08 PM EST
Frank, the reason there's a commodity and equity bubble right now is precisely because the masters of the universe have flocked wholesale in the last couple of years - and I am merely observing it - to flogging 'Peer to Asset' quasi-equity investment as the next adjacent possible to the deficit-based credit which they no longer have the capital to create.

When this bubble collapses, and this has IMHO already started, they will go to whatever works - ie the next adjacent possible, because those who do not do so will be at a competitive disadvantage to those who do.

And at that point capitalism will meet its Waterloo, without even realising it was in a battle.

The Last Big Thing will happen with a whimper, not a bang, and it will spread virally.

We are going beyond politics here. We are talking about a 'reality-based' process, where people simply act pursuant to consensual agreement, and while everyone is analysing what they've done, they act again, in a fractal process, each time via an adjacent possible.

In the future, the Party will no longer create the Policy: the policy will create the Party.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Dec 21st, 2011 at 08:35:20 PM EST
[ Parent ]
I don't think that Chris has to write about the political aspect, because it's essentially automatic. However, it would be 'riskier' to predict the particular political mechanism than to suggest a major reduction of the price of oil in Q1, 2012 (which, I think, is a bit premature).

In Marxist terms the seed of destruction is already sown in the capitalist system. Speaking as a true-believer, I think that events, the 'responses' of the ruling class(es), and public recognition of causes are developing in that direction - much more so than in my 50 previous years of paying attention.

What will be birthed in the destruction is the open question for me. I'd like to see Chris' system as much as, or more than, anything else that I can imagine.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Wed Dec 21st, 2011 at 08:43:17 PM EST
[ Parent ]

I could give you chapter and verse on the reasons why I think the oil market is in the process of collapsing.

2008 is repeating itself - or at least - rhyming.....

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Dec 22nd, 2011 at 05:30:27 AM EST
[ Parent ]
The early Marx certainly came from a Hegelian Background, but the later Marx certainly didn't assume that a collapse of capitalism would "automatically" lead to a socialist paradise. Otherwise there would have been no need for political action or parties whatsoever. I am probably more "economically deterministic" or "reality driven" (as opposed to idealist) than most but still am reluctant to assume that anything good will automatically happen just because it is in the interests of the powers that be that it should. A critical aspect of any positive transition for me is a reassertion of power by sovereign states acting in consort against the power of global corporates - a reassertion of the political against the economic - as manifested in the form of Tobin taxes, corporate taxes, wealth taxes, and restrictions on corporate lobbying, and the development of pro employment as opposed to pro profit state led policies.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot dotty communists) on Thu Dec 22nd, 2011 at 09:49:18 AM EST
[ Parent ]
'Socialist paradise' is not automatic - nor is paradise a likely social construct. Life is struggle to some degree or another - as I see it anyway.

Political agency is necessary for the kinds of changes that we espouse here. To me we're just working through the approach - hopefully with a lot of other agents.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Mon Dec 26th, 2011 at 07:39:46 PM EST
[ Parent ]
War IS politics, and the USA's ELITES are consensually moving to screw the public, which they regard as a herd of cows, or sheep, to be butchered or shorn for profit.

The real flaw in the analysis is its rationality.

Align culture with our nature.

by ormondotvos (ormond no spam lmi net no spam) on Wed Dec 28th, 2011 at 08:44:20 PM EST
[ Parent ]

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