Thursday, December 11, 2014

A Tale of Two Countries

Suppose there is a world consisting of only two countries, one rich and powerful and the other relatively poor and not very powerful, but with many natural resources. The powerful country has been calling the shots for some time due to its power and wealth. All trading has been done in the currency of the powerful country, but most of the consumer goods produced are made in the poor country where they can be produced much more cheaply. The rich country also has a sizeable gold hoard which used to back its currency, but not longer does. The poor country has accumulated a lot of the currency of the rich country, which it has used to buy bonds issued by the rich country in their currency. Along with the consumer goods purchased from the poor country is a sizeable quantity of natural resources needed to support the lifestyles of the people in the rich country.

Things seem to be working out okay, the poor country is prospering from the trade and the interest on the bonds and slowly getting richer, while the rich country enjoys the cheap goods manufactured by the poor county and its natural resources power the lavish lifestyle in the rich country. But, then the bottom drops out of the interest on the rich country’s bonds. So the poor country decides to take the payments for its resources and goods in gold rather than currency, gold being a very thin market, but nevertheless required for some critical manufacturing processes and is highly sought after by affluent people in the rich country for jewelry and art objects. All of a sudden gold becomes the medium of exchange (indirectly, see how below) rather than the currency of the rich country. The demand for the rich country’s currency tanks relative to the demand for gold. Over time the gold hoard in the rich country diminishes and piles up in the poor country. So how does this scenario end? Is war the only alternative for the rich country? Maybe the rich country only slaps sanctions on the poor country. Or do the countries stop trading with each other and become isolated? Or do they develop a mutual respect for each other and work something out?

Now consider that the rich country is the West and the poor country is the BRICS, led by Russia and China. So how could this happen? The US will only pay for what it buys in its own currency. So that’s what the BRICS accept. But they turn around and buy gold with it on the open market, driving up the price of gold and driving down the price of the dollar. China has already said they’re not going to buy any more US bonds. The BRICS have already come to some agreements to trade in their own currencies, possibly using their values in gold to arrive at an equitable exchange rate. Russia is already replacing purchases of Western goods with purchases from other BRICS countries. China has worked out an agreement to buy oil and gas from Russia. If the West were to refuse to buy oil and gas from Russia the price of these commodities would skyrocket since the Russian supply is absolutely needed to meet world demand.

So, in the long run, who is in the drivers seat here, the countries with the natural resources and a pile of gold or the consuming West with their paper currency. This is already happening. See the link below. I’ve posted or sent this link before, but no one in the West seems to get it. Or, they do get it and keep quiet about it, realizing their jeopardy, hence their sabre rattling and attempts to destabilize Russia and eventually China and the rest of the BRICs.

http://futurefastforward.com/images/stories/financial/GrandmasterPutinG%C3%87%C3%96sGoldenTrap.pdf

Sunday, October 19, 2014

Inequality, Why and How to Fix it

When most of the rewards of productivity go to a few people they control the economy for their own benefit. They create a labor surplus to drive to wages down by offshoring and mechanizing production. There would be nothing wrong with offshoring and mechanization if the benefits were not going to just a few people. With wages down for the great majority of people, demand is reduced and the economy tanks. With excess wealth at the disposal of capital owners and managers, and little wealth available to the great mass of people, the owners and managers of capital can buy the government through lobbying and campaign financing. It’s a vicious circle that can only be turned around by direct steps to reduce inequality.

So, how can this be done? Right now the efforts to make changes are thwarted by too many different proposals: increased government regulation, changes in the structure of taxation, subsidizing low wage and impoverished people, etc. There are too many ideological elements in all of these proposals.

Instead, only two simple proposals need be implemented initially: increase the minimum weekly wage and shorten the work week. Raising the weekly minimum wage would put more money in the hands of working people and shortening the work week will employ more people, creating a greater demand for labor.

Once the demand is up, more money will flow into the pockets of labor and less into the pockets of the capitalists, reducing inequality and providing more resources for the great mass of people to influence their government, taking power away from the owners and managers of capital.

This solution is largely market driven, taking subsidies, welfare, and government size out of the argument. The only thing that must be recognized is that government has a role in protecting the general welfare of the people.

Once the people again have control of their government, changes can be made in other aspects of government, like balancing domestic and military spending, creating a fairer tax system where taxes on labor and capital are more uniform, etc. It’s just a matter of giving the great mass of the people a larger voice in their government through increases in their wealth relative to that of the owners and managers of capital.

Sunday, April 20, 2014

Are Americans losing control of their country?

After watching a president I voted for twice, I have to conclude that Obama is the Democrat's version of George W. Bush. Both are weak presidents who don't have the experience or temperament for the job. Both have knuckled under to entrenched Washington interests that have been around through several administrations, Bush to Cheney and his neocon crowd who are bent on the US dominating the world, and Obama, first to the Wall Street and corporate oligarchs determined to increase their stranglehold on the control of the economy, and now to the same neocons supported by the guy he defeated to become president, John McCain.

Not much has changed and there is not much hope that it will.

The US still opts for military might as a foreign policy cudgel to throw its weight around in the world and domestic surveillance and militarizing of the police to ensure that any attempt by the populace to counter its moves is kept in check. The use of drones and sanctions is war by other means to send a message to the world about who is in charge. Sanctions only work for a country whose currency is the world reserve currency, and use of them is an abuse of the trust the world has placed in the dollar as the world reserve currency.

We truly are living in troubled times where the government is no longer responsive to rule of the people. It has taken on a life of its own to serve the interests of an elite few who are consolidating their hold on the countries resources and an entrenched old Washington guard that has been around through several administrations urging the use of covert subterfuge and military power to achieve hegemonic ends. I see nothing on the horizon that will restore the country to the greatness it achieved in the fifties and sixties when inequality was at a minimum and people pulled together to land a man on the moon.

Thursday, December 26, 2013

What is “MMT”?

In some of my posts on Facebook, Progressive Policy Digest, The Soap Blog, or in my emails I have referred to "MMT". I usually get no questions or inquiries about it, which seems to reflect a lack of knowledge of the subject. Basically, MMT prescribes a path that would have had us at full employment long ago, and from a federal debt perspective, is the exact opposite of the austerity currently being pushed by both political parties, so it's very important. In spite of it's name, it's not modern, not exclusively monetary, and certainly not theory. It's an explanation of how economics and banking works in a country with it's own currency. It's understood by all good economists at the Fed and think tanks around the country that are not wedded to an ideological agenda. But, it can't seem to penetrate the Washington Consensus, the mainstream media, or the lay public, who continue to think the federal government must operate like an individual or a state that only uses the currency, which is the exact opposite of the way it works.

The macroeconomic literature provides the evidence for the validity of MMT, but is beyond the understanding of lay people. "What is Modern Monetary Theory, or “MMT”? by Dale Pierce is a lay explanation by a non-economist of the basics of MMT. For background and an historical perspective explore the three part series on MMT at New Economic Perspectives by the same author.

Friday, December 20, 2013

Here’s where I stand. Where are you?

Have you noticed that the MMTers (Mosler, Wray, Kelton, etal) are getting more exposure in interviews on the internet and some main stream media? By the time the next election rolls around the jig will be up for the austerity dummies. I've digested all the MMT (Modern Money Theory) stuff and am convinced that most of the other economists are in a time warp, or just being outright political to maintain their research funding. It's so simple, we just need the government to get a jobs program enacted and start spending again on infrastructure, education, and research like we did in the fifties. 

In the long run we should have government health insurance, public financing of infrastructure, education and basic research, and publicly funded retirement programs for all, so people don't have to worry about these things and can spend their income to maintain demand and enjoy life. That is a legitimate role for government as demonstrated by most enlightened developed countries around the world. We need to catch up.

We also need to harness the corporations and the few that own and run them, so they can do what they do well, and not run the country into the ground to satisfy their own greed. But, it's very hard to do when all the politicians and the electorate are acting like we're still on the gold standard. Guys like Pete Peterson, Simpson, and Bowles are engaging in false advertising. They're totally in the pockets of the oligarchy.

Beyond that we need to stop the warring, snooping, and international belligerence and join the community of nations instead of trying to sanction or rule them, while agitating for another cold war. And, that includes dissolving the dependent relationships with the Saudis and Israelis and their lobbyists in Washington.

It will be up to the Democrats to do all this, because the Republicans are at present a hopeless cause. They are trapped in the Ayn Rand propaganda. Democrats will have to start discovering what is important and what is not and re-prioritize their objectives and actions. Rehashing Republican ills is just free advertising for Fox News. Keeping issues in the limelight is what gets the public started thinking about them. And, in my opinion, the important issues are the ones I've just enumerated. The Dems won't be successful until they ditch the alliance with Wall Street and corporate America. We already have one party that is totally dedicated to that bunch. We don't need two. We need one party that is smart and is the champion of the people, so the people have a voice in what legislation gets enacted. It may take a couple election cycles to accomplish it, buts it has to be done to get the country back on the right track.

The one thing individuals you can do is keep these talking points alive in the circles they travel in, and vote for what is right, not what is expedient or compromising to win elections. That will only maintain the status quo.

And, this is not being negative! It's positive. Being negative is going along to get along, while half the country suffers in poverty or near poverty.

Do your part and tell your family and friends to do the same!

Thursday, December 12, 2013

Reconciling MMT and the Current Legal Finance System

Modern Money Theory (MMT) explains the way finance works in a country with its own currency, when many self imposed legal constraints are removed. Currently existing legal constraints in the United States include the following:

1) a national debt limit

2) the Treasury can only mint coin

3) the Federal Reserve bank (Fed) can issue paper money and credit Treasury and private reserve accounts in payment for notes, bills and other Treasury and privately issued financial assets it buys in the open market. The Fed cannot buy Treasury securities directly from the Treasury.

3) the income earned on assets the Fed purchases is paid to the Treasury

4) the members of the Fed Board of Governors are appointed by the President and approved by the Senate.

In these legal constraints we see and attempt to make the Treasury and Fed somewhat independent, but also subject to government action in the final analysis. This is probably due to the time period when these laws were enacted, when the country was on the gold standard. We are no longer on the gold standard now,  so some no longer apply, as we are now a country with a fiat currency. If held strictly to the current legal constraints, the country is treated like an individual or state which must use tax collections or borrow in it’s own currency to finance its operations.

The contention between MMT advocates and its critics largely revolves around the independence of the Fed from the Treasury. In practice, over the years the Fed and Treasury have acted jointly on the vast majority of matters, for example, in Fed provided loans to bring reserve accounts up to the required level and in purchasing Treasury notes and bills from member banks to lower the interest rate the Treasury needs to pay on them. MMT economists tend to treat the Treasury and Fed as a consolidated unit. Critics sometimes do not. Both have a point and the difference is not likely to be resolved any time soon.

The downside of the current stalemate serves to reinforce the commonly held premise that the federal government needs to be treated like and individual or state that is a user of the currency and not like the issuer to the currency that it is, which leads to policies that are the exact opposite of what is needed when the country is in a recession or near depression and unemployment is high. The current emphasis on cutting spending and limiting debt, when fiscal stimulus or reduced taxes are needed to increase demand is an example of this case. When the country is prospering and at full employment taxes need to be increased or federal debt repaid to avoid inflation. These necessities, and the need for changes in the law to accommodate them, are obscured by the lack of understanding of the underlying principles that MMT  seeks to reveal .

Monday, December 09, 2013

Government has a Role in the Economy–Get Over It!

The mindset of the right is wrong. The federal government is not like an individual or a state. It is the issuer of the currency. Individuals and states are just users. They must borrow to spend beyond their means. The government doesn’t. When the private sector saves, but the savings are not invested, the government must run deficits to provide the vehicle to absorb the savings, i. e. government bills and bonds. It’s a mathematical identity that many economists, politicians, and think tanks don’t understand.

The public must understand that the federal government has a major role to play in providing infrastructure, in the form of roads, bridges, power grids, research, education,  health insurance, retirement benefits, and a living wage job guarantee to eliminate unemployment.  Worker skills and attitudes deteriorate when workers are unemployed. When the individuals and private businesses have to provide for these benefits through savings, it reduces spending, which sustains demand and maintains a healthy economy.

To harness the capitalistic drive for innovation, entrepreneurship, and monetary success reasonable government regulations are required to prevent an unequal distribution of the rewards of productivity growth, maintain a healthy middle class, and keep people from falling into poverty and becoming a drag on the economy.

If we continue to think that capitalism is a self regulating wonder and people are self sustaining individuals that don’t need to cooperate in their endeavors we will continue to be a society struggling for answers and living with cycles of economic bubbles that destroy the spirit and will of the country.

Sunday, November 17, 2013

Restoring the 1950s Economy as a Solution to the Financial Crisis

The economy needs demand and investment to produce goods and services. Demand and investment come from the same source, income. If more income is saved, there is less available to create demand and vice versa.

At this time savings need to be reduced to increase demand. The usual means to do this would be to lower interest rates. But rates are already near zero, and this hasn't caused savers to start spending. So what is the mechanism to do this? Tax the savers, and reduce the taxes on spenders, to zero if necessary. If need be, let the government issue the funds to provide the infrastructure, free health care, education, and retirement benefits to the spenders, so more of their income can go to spending.

This is essentially what was done in the decades immediately after WWII, when the highest marginal tax rates were near 100% and the government was spending on roads, education, the GI Bill, and Social Security and Medicare had been implemented.

Instead, what we have done since the 1980's is reduce the highest marginal tax rates and taxes on capital gains, allow offshore tax havens, privatize education, let our infrastructure deteriorate, bust unions, and deregulate business to allow almost all of the rewards of productivity to go to savers. And, now the austerity advocates are on a path to destroy Social Security and Medicare.

Isn't it clear that we have to restore the balance between spending and saving that existed the fifties and sixties?

Tuesday, November 05, 2013

Simplifying Econospeak

The following paragraph is an example of how to talk to the average voter about how the economy works, could work, or should work without resorting to economic jargon.

“The federal government is the people's agent, and they have authorized it to issue money so they can have a convenient way to buy things and pay their taxes. Taxes can be viewed as reimbursement for infrastructure, education, research, and defense projects the government has undertaken on behalf of the people. If the economy is so weak that people cannot find employment or resources are being underutilized, the government can either lower taxes or issue more money. If the economy is so strong that production of goods and services cannot meet demand, the government can increase taxes or stop issuing money. That's how the economy can be stabilized.”

Implicit in the above description of the economy, but not required to get the point across, is the fact that government is the sole issuer of money, taxes are not collected and then used, but instead the government can issue money to pay for what has been legislated to be done and then collect taxes after the fact to reflect what goods and services the people have received. In times of a weak economy the government can reduce taxes and defer reimbursement for services rendered, or in times of an overheating economy, the government can accumulate taxes it will need for future projects to take some steam out of the economy.

The federal government is not like an individual, a company, or a state. The federal government is the exclusive issuer of money. Any other entity is only a user of the money. To get money they have to engage in economic transactions, or borrow the money from an entity that has money to lend or grant. If they borrow, it results in debts that must be paid off later.

Any money the government issues increases the money available to the private sector to save or spend. If the private sector elects to spend, it will increase demand for goods and services, which could exceed the economic resources of the country. This will result in a rise in the prices of assets, consumer goods, or labor. At this point the government must increase taxes or stop issuing money to bring demand back into line with supply.

The fact that federal deficits and debt are not mentioned reflects their lack of importance in the scheme of things. The "national debt" is not a debt owed to anyone. It can be viewed as the net amount of money the government has issued over time. It may fluctuate up and down, but it is not something that needs to be paid off or compared to GDP. To think of it that way is to think that football teams need to pay back the scores they have run up in a game.

Over time, the population increases and the economy grows. This requires more money in circulation so it is up to the government to provide it. If it doesn’t, the economy will stagnate.

To the extent that the government issues money to further foreign interests or which results in foreign claims, the amount of money issued in that way could arguably become an important issue.

The average voter doesn't want to hear about economic theories or jargon that only an economist or economic analyst would understand. They just want to know how the economy is supposed to work. If economic concepts are explained in a simple, but factual way, people will start to accept them and turn away from the propaganda and misinformation that currently pervades the national economic conversation, much of which is only applicable to countries that don’t have their own money, or whose money is backed by a commodity like gold or silver.

Saturday, November 02, 2013

Occupy Should Work Within the Democratic Party

Trying to work around the two major parties in the US is a fools errand. The grassroots effort of Occupy should be directed at informing workers where their interests lie and organizing them to change the government.

The Democrats under FDR used to represent middle and lower class workers. Since the advent of the DLC and the Clinton administration, the Democrats have moved into Republican territory by accepting Wall Street influence. That is not their natural constituency. They have been able to do it only with the help of the main stream media, which is driven by money. The great mass of the electorate resides in the middle and lower classes. Now they rely mainly on the main stream media for their information, which is selling them a bill of goods on behalf of the 1% and the Washington consensus. To organize them around their real interests requires a door to door and internet media campaign to take over the Democratic Party and move it back to where it was under FDR.

The Republican Party is in disarray, and there is already a strong progressive element in the Democratic Party that is for reducing inequality, single payer health care, minority rights, environmental protection, a safety net, and a place for government in the economic landscape. People like Bernie Sanders and Elizabeth Warren are examples of the type of people that can be elected to national office. People like them can be recruited to local and state offices. The only problem now is voter reliance on the mainstream media and the political advertising propaganda it presents. A sustained grass roots effort on a personal level can turn that around. It's just a matter of personal contact to educate workers where there interests lie. This is the only way to overpower money in politics.

The demonstrations in the seventies around civil rights and the Vietnam war were ruthlessly handled by police and the military, which do what the government tells them to do. The same happened to the current Occupy movements in New York and elsewhere. The only way to give the middle and lower class workers a voice is to inform them of their real interests and organize them to change the government.

Sunday, October 13, 2013

What if all the money disappeared tomorrow?

Consider the case where everyone woke up tomorrow and all money in all forms, coin, currency, bank account balances,  etc had disappeared? No one would be able to buy food, farmers would not be able to grow food since they wouldn’t have the money to buy seed or fuel for their tractors. All production would stop because no one would have money to buy the goods produced or to pay for the raw materials and labor that went into the goods. It would be a matter of once again living off what nature provides, bartering with the goods available, or introducing some form of money as a way to hasten the recovery.

Clearly, reintroducing money would be a faster means of recovery than the other two. It would boil down to everyone starting to print their own money (IOUs) or the government printing coin or the Fed printing currency to prime the pump and get economy back on track. Most people would feel safer taking government money they had always used rather than personal IOUs in exchange for purchases.

To get the money into circulation the Fed could simply restore the balances everyone had in their accounts at their banks or the Fed the day before the money disappeared.

Since the Fed printed the money, what form of debt did it incur doing so? None. The balances held in treasury notes and bills at the Fed could simply be replaced with reserve account balances of the same amount. So the national debt would disappear unless the government decided to accept reserves for government issued notes and bills again.

So what is this national debt we keep talking about? What’s to keep the Fed from printing all the money it needs to buy up the national debt? All the interest accrued on the government debt the Fed holds is remitted back to the government treasury anyway.

The national debt is nothing more than the government providing a secure way for the private sector to save and for foreign governments to supply goods to Americans. Foreign businesses selling those goods to Americans convert the dollars they get for the goods into the local currency to pay for the labor and materials that went into them. The dollars the foreign government receives from the suppliers in exchange for the local currency it provides ends up in it’s reserve account at the Fed. They usually buy treasury notes and bills since they pay interest.

The only way for foreign governments to cash in their dollars held at the Fed is for them to buy American goods or assets, and we can decide if we want to sell those goods and assets to them depending on what we want our balance of payments and exchange rate to be.

At this point in time the only threat from the national debt seems to be that it can be used by a minority of Americans to blackmail the majority into accepting their ideology as the governing mandate.

Wednesday, October 02, 2013

Why should we pay interest on the national debt?

Why should the government pay interest on the national debt? People hold it because it's better than holding other assets. China holds it to finance their trade surplus. It's our money. We can print whatever we need to sustain full employment if we spend it wisely on the infrastructure, education, and research we need to sustain the economy and don't create more demand than we can support with the population and resources we have at our disposal. Doing the latter would cause inflation, so that's really the only limit there is on printing money. The debt ceiling is just a self imposed constraint that is used to deflate the economy and cause political instability. The easiest way to reduce the debt is to stop paying interest on it, and just print whatever money is necessary to sustain the economy, without overheating it. Think about it. Read about it. It's not a new idea.

Thursday, June 20, 2013

Why Inequality is Increasing

As long as half the population sees some gain in wealth, they vote to enable the rich to impoverish the poor. This explains the current politics of the country. In the chart below the problem lies in in center of the distribution where the gains in wealth are small. These people identify with the people at the very top and are more concerned about handouts to the poor than handouts to the wealthy and corporations in the form of tax breaks and loopholes, so they vote to dismantle unions and squeeze the working people that are losing wealth. As long as the wealthy elite that run the country can continue to throw this middle group a bone to keep them voting in the interest of the wealthy, inequality will continue to increase.
share-total-wealth-1983-2009

Sunday, April 07, 2013

Right Wingers Still Run the Country.

 

It's a Right vs. Left divide, not Dems vs. GOP.  Many Democrats represent  conservative, not progressive districts. If 15 Dems in the Senate would vote their party platform, gun control would pass.

If so many Dems weren't conservative, the Iraq war approval wouldn't have passed, Guantanamo would be closed, Wall Street crooks would be in jail, Bibi Netanyahu wouldn't get 22 congressional standing ovations, the war on terror and drone attacks would be winding down, civil liberties would not be threatened, austerity wouldn't be on the table, etc. etc. No wonder the GOP wants to vote by district instead of state. It's why the GOP has moved even farther to the right and the Dems have moved across the center line.

The GOP has Fox News promoting their ideology. The Dems have MSNBC, but MSNBC represents the conservative wing of the Democratic party. There's nothing on there that's progressive. They love the new Obama sellout on Social Security. They still think austerity is wonderful. Who in the main stream media speaks for progressives? Only the polls indicative some progressive sentiment.

So, what does it look like for 2016? Another Clinton that voted for Iraq, loves sanctions and hegemony, loves Bibi, hates Iran, likes Wall Street and globalization. Hardly a progressive.  Even Ron Paul is further left than the Democratic Party on foreign policy and military entanglements. It looks like more of the same for a long while.

Read this link and see the evidence that right wingers still run the country.

The Democratic Party Transformation

People know the GOP has gone hard right in pursuit of its ideology. The Democrats used to have an ideology, instilled by FDR and the Great Depression, which embodied keeping capitalism regulated, limiting the power of elite financial interests, preventing extreme inequality of wealth and income, using government to do what it must do to promote the general welfare and secure a stable society, promoting a strong middle class, and providing a safety net for people struggling to maintain a decent living, including retired and disabled people on limited incomes.
The Clinton administration and the Democratic Leadership Council changed all that. They compromised with Republicans in dismantling welfare programs, promoting globalization, and relaxing regulations on Wall Street and corporate America. Since the Clinton administration the Democrats has become largely driven by politics to regain and consolidate power. This has been possible became a sizable contingent of the Democratic base has become affluent in the last several decades and now are part of the investor class that is sympathetic to capitalist dogma. The media and the current administration are classic examples of this contingent.
The principle remaining ideology in the Democratic Party is its fight against discrimination on the basis of race, gender, and sexual orientation. The DLC contingent now largely shares the GOP ideology on globalization, deficits, war, and global hegemony. It is likely to cause a schism in the Democratic Party similar to what has occurred in the GOP.

Tuesday, April 02, 2013

Buy this Book

This is an excerpt from the book to show why this book is the best explanation of the financial crisis and its causes.  You will be hearing much about it in the future. Get it now and see for yourself. Paul Craig Roberts is an economist who was Assistant Secretary of the Treasury during the Reagan administration. His website is here.

Roberts, Paul (2013-02-24). “The Failure of Laissez Faire Capitalism and Economic Dissolution of the West” Atwell Publishing.

An Introduction by Paul Craig Roberts

Note to reader: This book was first published in the German Language in July 2012 by Weltbuch Verlag in Germany, Austria, and Switzerland under the title, Wirtschaft Am Abgrund. A Chinese language edition is forthcoming from SDX Joint Publishing Company in Beijing, China.

The collapse of the Soviet Union in 1991 and the rise of the high speed Internet have proved to be the economic and political undoing of the West. “The End Of History” caused socialist India and communist China to join the winning side and to open their economies and underutilized labor forces to Western capital and technology. Pushed by Wall Street and large retailers, such as Wal-Mart, American corporations began offshoring the production of goods and services for their domestic markets. Americans ceased to be employed in the manufacture of goods that they consume as corporate executives maximized shareholder earnings and their performance bonuses by substituting cheaper foreign labor for American labor. Many American professional occupations, such as software engineering and Information Technology, also declined as corporations moved this work abroad and brought in foreigners at lower renumeration for many of the jobs that remained domestically. Design and research jobs followed manufacturing abroad, and employment in middle class professional occupations ceased to grow. By taking the lead in offshoring production for domestic markets, US corporations force the same practice on Europe. The demise of First World employment and of Third World agricultural communities, which are supplanted by large scale monoculture, is known as Globalism.

  For most Americans income has stagnated and declined for the past two decades. Much of what Americans lost in wages and salaries as their jobs were moved offshore came back to shareholders and executives in the form of capital gains and performance bonuses from the higher profits that flowed from lower foreign labor costs. The distribution of income worsened dramatically with the mega-rich capturing the gains, while the middle class ladders of upward mobility were dismantled. University graduates unable to find employment returned to live with their parents. 

The absence of growth in real consumer incomes resulted in the Federal Reserve expanding credit in order to keep consumer demand growing. The growth of consumer debt was substituted for the missing growth in consumer income. The Federal Reserve’s policy of extremely low interest rates fueled a real estate boom. Housing prices rose dramatically, permitting homeowners to monetize the rising equity in their homes by refinancing their mortgages.  

Consumers kept the economy alive by assuming larger mortgages and spending the equity in their homes and by accumulating large credit card balances. The explosion of debt was securitized, given fraudulent investment grade ratings, and sold to unsuspecting investors at home and abroad.  

Financial deregulation, which began in the Clinton years and leaped forward in the George W. Bush regime, unleashed greed and debt leverage. Brooksley Born, head of the federal Commodity Futures Trading Commission, was prevented from regulating over-the-counter derivatives by the chairman of the Federal Reserve, the Secretary of the Treasury, and the chairman of the Securities and Exchange Commission. The financial stability of the world was sacrificed to the ideology of these three stooges that “markets are self-regulating.” Insurance companies sold credit default swaps against junk financial instruments without establishing reserves, and financial institutions leveraged every dollar of equity with $30 dollars of debt.  

When the bubble burst, the former bankers running the US Treasury provided massive bailouts at taxpayer expense for the irresponsible gambles made by banks that they formerly headed. The Federal Reserve joined the rescue operation. An audit of the Federal Reserve released in July, 2011, revealed that the Federal Reserve had provided $16 trillion--a sum larger than US GDP or the US public debt--in secret loans to bail out American and foreign banks, while doing nothing to aid the millions of American families being foreclosed out of their homes. Political accountability disappeared as all public assistance was directed to the mega-rich, whose greed had produced the financial crisis.

The financial crisis and plight of the banksters took center stage and prevented recognition that the crisis sprang not only from the financial deregulation but also from the expansion of debt that was used to substitute for the lack of growth in consumer income. As more and more jobs were offshored, Americans were deprived of incomes from employment. To maintain their consumption, Americans went deeper into debt.  

The fact that millions of jobs have been moved offshore is the reason why the most expansionary monetary and fiscal policies in US history have had no success in reducing the unemployment rate. In post-World War II 20th century recessions, laid-off workers were called back to work as expansionary monetary and fiscal policies stimulated consumer demand. However, 21st century unemployment is different. The jobs have been moved abroad and no longer exist. Therefore, workers cannot be called back to factories and to professional service jobs that have been moved abroad.

Economists have failed to recognize the threat that jobs offshoring poses to economies and to economic theory itself, because economists confuse offshoring with free trade, which they believe is mutually beneficial. I will show that offshoring is the antithesis of free trade and that the doctrine of free trade itself is found to be incorrect by the latest work in trade theory. Indeed, as we reach toward a new economics, cherished assumptions and comforting theoretical conclusions will be shown to be erroneous.  

This book is organized into three sections. The first section explains successes and failures of economic theory and the erosion of the efficacy of economic policy by globalism. Globalism and financial concentration have destroyed the justifications of market capitalism. Corporations that have become “too big to fail” are sustained by public subsidies, thus destroying capitalism’s claim to be an efficient allocator of resources. Profits no longer are a measure of social welfare when they are obtained by creating unemployment and declining living standards in the home country.  

The second section documents how jobs offshoring or globalism and financial deregulation wrecked the US economy, producing high rates of unemployment, poverty and a distribution of income and wealth extremely skewed toward a tiny minority at the top. These severe problems cannot be corrected within a system of globalism.

The third section addresses the European debt crisis and how it is being used both to subvert national sovereignty and to protect bankers from losses by imposing austerity and bailout costs on citizens of the member countries of the European Union.  

I will suggest that it is in Germany’s interest to leave the EU, revive the mark, and enter into an economic partnership with Russia. German industry, technology, and economic and financial rectitude, combined with Russian energy and raw materials, would pull all of Eastern Europe into a new economic union, with each country retaining its own currency and budgetary and tax authority. This would break up NATO, which has become an instrument for world oppression and is forcing Europeans to assume burdens of the American Empire.  

Sixty-seven years after the end of World War II, twenty-two years after the reunification of Germany, and twenty-one years after the collapse of the Soviet Union, Germany is still occupied by US troops. Do Europeans desire a future as puppet states of a collapsing empire, or do they desire a more promising future of their own?

Roberts, Paul (2013-02-24). The Failure of Laissez Faire Capitalism and Economic Dissolution of the West  Atwell Publishing.

Get it now!

Monday, March 18, 2013

High Noon in America

The Republicans have demonstrated over and over again that they want to dismantle the safety net and deregulate the economy so wealth can be concentrated even more in the hands of a few. Supposedly, the Democrats stand for maintaining the safety net, regulating the economy, preserving the hard fought gains of the new deal, and reducing inequality.

Once Republicans took over the Congress in 2010, Obama's main goal was obtaining a compromise with Republicans. How did that work out? Now there has been an election where the people of the country reelected Obama, a signal that he should fight for Democratic Party principles. So what does he seek now? More compromise.

What we have here is one party that is standing by its principles, however wrong they may be, and another party whose main goal appears to be compromising with a party whose principles they disagree with. Has the Democratic approached worked? You be the judge.

There comes a time when nothing is gained by trying to be the lite version of the other party. It's time Obama and the Democrats learned this. They have to relearn the lessons that FDR taught them. They must stand on principle, call out the Republicans, and make the case for their own supposed philosophy of governing.

It's high noon in America. What we need is a showdown between the two parties, standing on the principles they espouse in their platforms, not a stand on principle by one party and an attempt at compromise by the other. May the best party win!

Sunday, March 03, 2013

Countering Private Bank Money Creation

In the last post we discussed how banks create new money from debt to augment their income. The problem with this is that private entities are allowed to make investment decisions which may not result in a better outcome for the country as a whole, but  simply augment the wealth of their investors and executives, resulting in a concentration of wealth and asset bubbles that destabilize the economy.

There are two ways to counter this to create an outcome that is more in the interest of all the people. One way is to simply tax away the income and use it to fund more productive uses that are more in line with long term stability, such as improving infrastructure, education, health care, retirement security and income tax breaks or income augmentation for those who have been damaged by the concentration of income from the private bank decisions. Another way, advocated at the Positive Money site in the UK, is to adjust reserve requirements and separate transactional money requirements from investments involving risk.

Requiring banks to meet higher reserve requirements will allow some of the money creation to occur as base money creation and not private money creation, with that portion of the income from the debt going to the government where it can be applied to more productive uses and counter the inherent wealth concentration of purely private money creation that leads to economic instability.

The details of the Positive Money proposal are available in a video here and summarized in text here.

A Problem With Our Monetary System

There is a major problem with our monetary system that few people, even financial experts and economists, either don’t understand or refuse to confront.

The principle creators of our money are private banks that have incentives to act in their own interest, not the public interest. The overwhelming percentage of our money is created through the issuance of debt, unconstrained by anything but a lack of eligible debtors. And, even that doesn’t stand in the way when wins can be privatized and losses socialized.

Essentially free money is available to fund debt that need not even contribute to productivity, but instead can be used for unproductive speculation, if the return is greater. There is no need to take the risks involved with financing new productive ventures when loans can be collateralized with valuable assets like real estate.

It’s a prescription for endless bubbles and crashes that continue to distribute income to a wealthy elite from the most needy of the population. When money is created from the issuance of debt, the holders of the debt will always be the most needy and the interest will always accrue to those with the wealth to fund the debt. Attempts to correct the problem will lead to more debt and an accelerating cycle of increasingly severe crises.

The problem is not a new one. It was addressed decades ago by people like Hyman Minsky and others, but current so-called financial experts, economists, and political leaders have forgotten history and plunge ahead toward certain catastrophe.

To understand the details of the problem watch this short video describing the problem, this series of short videos describing the details of the problem, or spend a couple hours watching the free film, “97% Owned”. This is the British version, but the U. S. is directly comparable.

Tuesday, February 26, 2013

Government Spending and Economic Stability

A very simple way to look at government spending is that the government is just another consumer and producer of useful services like the private sector. In fact, it constitutes about 20% of GDP, so when it cuts back on spending it's just like any employer or consumer cutting back, only with much greater effect. When the private sector is increasing its spending is the time for the government to cut back. When the private sector decides to save, it's time for the government to increase spending to make up the difference. If we want a stable economy, overall spending must increase at a rate comparable to the rate of increase in population. Government is not the problem. It's the solution in times of trouble in the private sector.

Monday, November 19, 2012

Soft Money Economics

The title of this post is similar to the title of Warren Mosler’s book.

Mosler, Warren (2012-10-25). Soft Currency Economics II (Modern Monetary Theory) (Kindle Locations 1003-1015). . Kindle Edition.

The Kindle addition can be purchased from Amazon for $3 and read on your Kindle, if you have one, or on your computer or smartphone if you don’t.

Even though the book is short, it’s not light reading for non-economists, so the intent of this post is to give Mosler’s conclusions only, along with the conclusions I’ve drawn from the work. 

The amazing thing is, the content of this book is common knowledge among many analysts at the Fed, which has issued its own publications on the same topic. Alan Greenspan and Ben Bernanke have made comments to congressional committees along the same lines. But, many economists, politicians,  press, and pundits either are not aware of it’s content, can’t get their minds around it, or refuse to acknowledge it to further their own agendas.

Mosler is only one of many economists who understand what goes under the acronym, MMT, Modern Monetary Theory,  these days. Others include most of the economic faculty of the University of Missouri, Kansas City and others in Universities around the world. The people who have done the most to publicize the misunderstandings of our current system, in addition to Mosler, include Stephanie Kelton, L. Randall Wray, Michael Hudson, Marshall Auerback, and William Mitchell. These individuals consult with governments around the world on the subject and have blogs on the internet in addition to their academic contributions.

The following is the Conclusion from Mosler’s book:

“The supposed technical and financial limits imposed by the federal budget deficit and federal debt are a vestige of commodity money. Today's fiat currency system has no such restrictions. The concept of a financial limit to the level of untaxed federal spending (money creation/deficit spending) is erroneous. The former constraints imposed by the gold standard have been gone since 1971. This is not to say that deficit spending does not have economic consequences. It is to say that the full range of fiscal policy options should be considered and evaluated based on their economic impacts rather than imaginary financial restraints. Current macroeconomic policy can center on how to more fully utilize the nation's productive resources. True overcapacity is an easy problem to solve. We can afford to employ idle resources. Obsolete economic models have hindered our ability to properly address real issues. Our attention has been directed away from issues which have real economic effects to meaningless issues of accounting. Discussions of income, inflation, and unemployment have been overshadowed by the national debt and deficit. The range of possible policy actions has been needlessly restricted. Errant thinking about the federal deficit has left policy makers unwilling to discuss any measures which might risk an increase in the amount of federal borrowing. At the same time they are increasing savings incentives, which create further need for those unwanted deficits.”

The following are my conclusions drawn from the work.

1. Any government with its own currency cannot go broke. The government does not need to borrow from the private sector or impose taxes to pay its bills. It simply uses keystrokes on a computer to debit and credit the appropriate accounts. Any limitation on the national debt can only be imposed through law.

2. Individuals and states in the US do not have their own currency so they do not operate under the same rules as the federal government. Hence, their budgets are constrained, whereas the federal budget is not constrained in the same way. Comparison of what individuals and states must do to what the federal government must do are erroneous.

3. Ignoring international transactions, when the private sector runs a savings surplus, as it is now, the federal government must run a deficit. It’s an accounting identity and has been proven by scientific observation of the spending and saving patterns.

4. Banks don’t take deposits and make loans from them. They make loans and then add to their reserves at the Fed from other funds on hand after the fact. If they don’t have funds on hand to increase their reserves, they borrow the money from the Fed or from other banks.

5. The main limitation that the federal government has in running up deficits and debt is the threat of devaluing the currency. This only occurs when the demand for goods and services exceeds the capacity of the country to produce them, not a condition that exists now. This condition leads to rising prices and devaluation of the currency. So, when the economy is booming and this condition occurs the federal government must impose additional taxes or retire federal debt to reduce demand to where it can be satisfied by existing productive capacity.

6. The statements made here are conditioned by international trade.  International payments can change the balance between federal deficits and private sector surpluses. So, there are actually three sectors that must be considered. We have not gone into the ramifications of the third international sector here to make the essential points without getting overly complicated.

Other posts in this blog have identified resources for further investigation.

Saturday, October 13, 2012

How Debt Stifles Growth and Employment

When people are using their income to service debt they are not using it to buy the goods and services that sustain demand and grow the economy. If we continue on the path we're on the small elite that have the wealth to make the loans will receive most of the national income. Inequality will continue to increase, spending on goods and services that drive growth will diminish, and the economy will go into another depression. It's really not that hard to understand. We need to reduce taxes on earned income and increase tax rates on investment income to rebalance the economy and strengthen the middle class that creates the demand and generates growth.

A productive economy that furnishes goods and services and employs people requires credit to finance capital formation that is necessary to accommodate the increase in population and the advancement of technology.

But, there is another kind of credit that is parasitic on the productive economy, namely credit that is used to bid up of the price of assets through speculation.

Credit is always accompanied by debt. If credit for investment does not contribute to productivity increases and employment of a growing population, its accompanying debt becomes a drag on the economy. If earnings are used to pay interest on debt and retire principal they are not available to buy the goods and services an economy produces. Only if the economy benefits more from the investment than it loses from this drag on the economy, is the investment valuable to the economy.

If  laws are enacted that advantage capital formation beyond what is necessary for productive investment, investors turn to speculation to sustain their return on investment. So there must be a balancing of taxes on income earned from investment and income earned from production of goods and services.

In the past several decades lower taxes on investment income have led to capital accumulation beyond what is necessary to finance production growth and investors have turned to speculation, primarily in real estate and stocks. As more loans are made to finance asset purchases at a lower interest rates, prices of assets like real estate and stocks are bid up. The increasing price trend reinforces this type of  speculative investment.  Investors use increasing leverage to take advantage of the opportunity until a point is reached where risks are being taken which jeopardize the entire enterprise. Finally, it comes crashing down, as prices stagnate and borrowers find themselves unable to service the loans. This is the financial crisis we have just experienced.

Sunday, September 09, 2012

Exploding Economic and Political Myths

One reason our political economy is so unstable is that there are many economic and political fallacies that are widely accepted in political circles and the press and continue to be propagated because they are challenged by only a relative few recognized economists and public policy advocates. Among these fallacies are the following:

1) Governments should behave like households regarding their budgets.

2) Deficits are bad, surpluses are good.

3) Government borrowing crowds out private investment.

4) Inflation is inherently bad.

5) Money for government spending must come from the private sector.

6) Government is the problem, not the solution.

7) Governments with their own currency can become insolvent.

8) The value of a country’s currency is an indication of its economic health.

9) The national debt can reach levels that can’t be sustained

10) Government debt is a burden handed from one generation to the next.

11) Unemployment is necessary

12) Unemployment is mainly a result of structural considerations, not lack of demand.

There are more, but I’ve gone on too long already.

My intent is not to write a tome on all of these fantasies but to present a few sources that introduce the reader to the nature of the problem. The first entries in the list are the most fundamental, later entries more verbose, detailed and complicated. The subject is complex, but getting into it slowly will ease the journey.

Seven Deadly Innocent Frauds of Economic Policy

New Sense, Common Sense

Modern Money Mechanics

Fifteen Fallacies of Financial Fundamentalism

Understanding the Modern Monetary System

And, if you don’t like to read . .

Thursday, August 30, 2012

The Government’s Response in the Case of a Financial Crisis Requiring a Bank Bailout

A prior post explained how financial crises develop and the need for a government bailout of banks to prevent a complete collapse of the economy.

There are two ways governments could respond to a financial crisis. One way is to take over failing banks and restructure them. This involves creating new healthy entities that can continue to operate with only loans that can be serviced, and putting loans that can’t be serviced into new entities that will enter bankruptcy where investors and lienholders will suffer the losses. The other is to give the banks money to continue to weather the storm over a long period of time by investing the money in other areas and using the income to deleverage and write off bad loans as they occur.

Political reasons have dictated the second course in the case of the current financial crisis. The financial sector has tremendous political power through contributions to politicians and influence with the national press. Both political parties are subject to this lobbying pressure and succumbed to it.

The bailout funds from the government and through the Fed’s buying of troubled assets has been used by banks primarily to speculate in foreign currencies and invest in productive assets denominated in foreign currencies that pay higher interest rates. Funds that are not invested in this way are simply left in reserve accounts at the Fed where they earn interest.

The government has done little or nothing to reduce overall debt in the private sector by forcing banks to accept losses on bad loans. Again, for political reasons, it has not embarked on any significant government programs to create demand in the economy. Instead it has chosen to allow the financial sector to use government bailouts to generate the kinds of income described above to slowly, over decades of high unemployment, to allow the deleveraging process to slowly bring the economy back to health.

To compound the problem, government  has done little or nothing to curb the excesses that caused the problem over the last several decades, in terms of reregulation of  banks and investigating and prosecuting fraud that occurred in the financial sector. The financial sector continues in much the same mode it did before the crisis, threatening the reinflation of the asset bubbles that caused the current crisis.

So what can be done about this dilemma? Stay tuned to this blog.

A Simple Explanation of the Cause of the Financial Crisis in the United States

Over the last several decades the private sector has taken on more and more debt, primarily in the real estate sector. Why has this happened?

The main reason is that many consumers don’t view debt as a problem as long as the servicing of that debt is within their budget. Furthermore, they don’t consider only their earned income when they assess their ability to pay service on their debt. They also consider the appreciation of their assets, and the possibility of refinancing these assets as their value increases to pull out money to service the debt. So asset appreciation becomes another source of income.

So, you might ask, are consumers really this smart that they can analyze their financial situation and come to these conclusions? The answer is that they don’t have to be. The financial sector will show them exactly how to do it.

The financial sector gets rich by making loans. As they compete to make loans they find ways to make them ever more accessible to consumers at lower servicing rates with schemes such as adjustable rate loans, balloon payments, securitizing the loans to hide risk, and pointing out to consumers that the appreciation of their assets will allow them to refinance over and over again to pull more money out of the assets to pay for servicing. This is the classic Ponzi scheme, paying servicing out of the appreciation of the asset, instead of out of earned income from a job.

The only problem is, eventually asset prices are bid up to way beyond their replacement value and the whole house of cards comes tumbling down as it did in the financial crisis. This can happen very quickly, but the cause builds very slowly, over decades. As more and more income is used to service debt, it is not available to create demand for consumer products. This results in businesses cutting back on expansion plans, research and development, and eventually leads to layoffs. The layoffs, in turn, lead to reduced ability to service debt, and a vicious downward cycle ensues.

Eventually, the financial sector gets in trouble as consumers default on their loans, or realize that their assets are no longer appreciating and income from refinancing disappears. This downward cycle accelerates and interlocking bank loans put the whole financial system in jeopardy. At this point the financial sector looks to government to bail them out, which it must, or see the whole economy come crashing down.

To be continued in future posts.

Tuesday, July 03, 2012

The Long Range Problem

We have become one world. Communication, transportation, and commerce have weakened national borders and culture.

Meanwhile, world population continues to increase.

The choice to be made is whether private enterprise or governments will be allowed to dominate world affairs.

If private enterprise is allowed to dominate the world will end up like countries that now exist where an elite exploits resources and labor for their own benefit at the expense of the mass population. This will result in a few living a life of luxury while the mass population exists at a subsistance level or below.

If governments can be organized to represent the interests of the mass population, resources and the rewards of productivity can be broadly distributed to the mass population. This will necessarily result in a lower standard of living for the elite few to afford a slightly higher standard of living for all.

As world population continues to increase resource shortages will reduce the standard of living accordingly.

So, the dilemma is how to contain world population to maintain a comfortable standard of living and how to create governments that act in the interests of all instead of an elite few. It’s the problem humanity has had since it came to dominate the world. But, previously it operated on a national basis, with some nations doing better than others in achieving these goals. Now it’s a worldwide problem the must be confronted on a worldwide basis.

Thursday, March 22, 2012

All About Apps and Intel’s AppUp Initiative

Back when there was no internet, cell phones, or other portable devices there was only hardware and software, computer programs that ran on the hardware.

As more software became available it became divided into categories: operating systems, drivers, utilities, and applications. Applications were programs that were designed to do a specific task like word processing, spread sheets, graphics, etc.

With the arrival of the internet a specialized application called a browser was needed to access all the sites on the internet.

When smart phones and other mobile devices arrived, the size of applications became important, both due to the size of the hardware devices and the processing power that could be incorporated in them. The device size limited the screen size so less information could be displayed and limited the storage that could be made available. Also, the use of mobile devices took on a different complexion. These devices were more suitable to the use of information than the generation of information, having no full keyboards or other suitable entry devices.

Since the mobile processors and operating systems were different from desktop systems, software designed for desktops wasn’t easily portable to mobile systems, and browsers had to be adapted to the small screen, limiting their utility for mobile use. As a result, specialized compact applications became the software of choice for mobile systems. The name was soon abbreviated to apps and online app stores opened to distribute the apps to users. These app stores were the brainchild of the mobile operating system companies like Apple and Google, rather than the hardware manufacturers. In the desktop world applications were sold by the developers directly to the customers, some at quite high costs. Mobile apps, in contrast, were mostly given away free or at nominal costs, the difference being recouped from advertising, since the users were individuals, prime prospects for directed commercial advertising on mobile devices.

So, you might ask, why isn’t there an app store and apps for PCs and Macs. Well, there are. You probably just haven’t heard much about them because it’s a relatively new phenomena. Where you previously had to chase around to different internet sites to find the maker of an application, you can now go to places like The Best Free Applications and Intel AppUp to find what you want. The former allows most Windows apps to be downloaded from a single internet site, whereas the latter is an Intel program for Windows PCs similar to iTunes for Apple apps. In this case apps are downloaded and maintained with the AppUp program.

Earlier applications for desktop computers were expensive but few in number compared to the app market, which is low cost and high in number. So you will find only a few apps out of hundreds or thousands that are useful to you, making app stores a better way to market them.

Looking ahead, the wide variety of devices and operating systems is causing a rethinking of the app market. Some industry analysts are predicting a move towards device independent apps. The applications development industry is already moving in that direction with operating system suppliers providing development kits to app developers to make it easier for them to develop applications that will run on any kind of hardware.

Microsoft is taking a big step with Windows 8 to bridge the gap between mobile and stationery systems. The new operating system will have versions that run on both mobile and stationery systems and with touch, mouse, and keyboard user interfaces. So, you might want to experiment with Intel AppUP to see how apps work with your current PC. You will find some very useful apps from suppliers like Accuweather and nNews that will save you from chasing around to internet sites. But, there are a plethora of apps that are only of interest to a limited spectrum of users. Intel has done a good job of categorizing the apps to guide you to what you need. Intel also has a blog that covers new activity in the AppUp world.

Tuesday, December 20, 2011

The World Economy is Out of Balance

Over the last several decades the rewards of productivity have gone to owners of capital, not labor. Automation has reduced the need for labor in manufacturing industries, driving down wages.  Producers have moved production offshore to reduce labor costs even further. At the same time, the financial sector share of GDP has tripled. This has happened not only in the US, but in other developed countries as well.

What has been forgotten is what Henry Ford knew at the beginning of the twentieth century, namely that a thriving middle class is the source of most of the demand in consuming countries. When wages stagnate as they have in the last several decades, middle class buying power is destroyed. This may be in the producers interest if they can find buyers in other markets. But, when it happens all over the world in developed countries that supply 70% of world demand, it results in a sustained decline in the world economy.

No amount of money sloshing around in the pockets of a few wealthy people looking for a place to invest it will solve the problem. The only solution is to rebalance world wealth and incomes to put more money in the hands of people who will spend it, not people who save to invest. Until producers realize that that they need the spending power of wage earners to create demand, they are planting the seeds of their own failure. It’s time to start paying workers that spend their income a decent wage to rebalance the need of demand with the need for capital. If producers won’t do it, governments need step in and increase taxes of capital and reduce taxes on labor.

Monday, December 19, 2011

The Underlying Cause of Depressions

There has been a lot of study of the cause of the Great Depression and now of the current Great Recession. But, answers are clouded by studying primarily what happens after banks get into trouble. This overlooks underlying causes which may be more important. Nobel economist Joseph Stiglitz and Bruce Greenwald of Columbia University have been studying the underlying causes. Stiglitz has presented the results in a recent article in Vanity Fair. It’s a good read.

The scenario goes something like this. Technology improvements take place which increase productivity. This, in turn results in less labor being needed to produce the commodity. Too much labor leads to low wages, lost jobs, and reduced demand. The rewards of increased productivity go increasingly to the providers of capital. As capital accumulates, the return on capital is reduced, so capitalists look for ways to increase it. This usually results in buying up assets that can produce a revenue stream. Asset prices escalate and seeing this, investors buy up more assets to take advantage of increasing asset prices. This is the beginning of a bubble in asset prices.

Seeing a chance to make easy money, more people start investing in the asset bubble. Financial institutions are making money hand or fist from the new lending and capital is freely available from increased productivity and asset investments. The opportunity seems a sure thing so leverage is increased to increase profits dramatically. These profits must be invested to earn income, so banks seek to place new debt with less credit worthy debtors, and so are willing to take higher risks, which they offset by buying credit default swaps, a form of unregulated insurance not fully backed by the assets. Eventually the bubble bursts when these risky investments start to fail and the whole economic system is put in jeopardy by the threat of bank failures.

Only now does the analysis of what happened start. The first place analysts look is why excessive risk was taken on and why not enough liquidity is available to prevent a collapse of the economy. Governments are looked to for bailouts of failing banks. And we know the story from that point on. It’s a battle between people who think government spending is needed to sustain the economy and people who think it all happened because people and governments were irresponsible and what is needed is austerity measures to teach the irresponsible a lesson. The underlying problem has been long forgotten in the process.

The Underlying Problem in the Great Depression

Prior to the banking problems in the great depression, the economy was largely based on agriculture. As technology advanced, farmers were able to produce more food with less labor and the same size farm, so farm commodity prices fell and fewer farmers were needed. But switching from farming to an industrial job was not easy. Most farmers had only an elementary school education, so they continued to do what they knew how to do, farm. With less income per acre, they needed more acreage and loans to buy the acreage. But, this just compounded the problem. More production meant even lower prices and now they had bigger loans to pay off. And a drought in many parts of the country made things even worse. So many of these farmers ended up losing their farms and ended up unemployed. The unemployment among farmers, a large segment of the economy at the time, meant reduced demand for products and service produced elsewhere in the economy, resulting in unemployment there. Banks foreclosed on the farms, but with more production than was needed, banks took losses on the loans. And, the excess of labor and lack of new projects to employ them meant a drop in demand for all goods and services, driving the economy into depression.

The Underlying Problem in the Great Recession

In our current recession the underlying problem was increased productivity in manufacturing, hence less required labor, and moving much of the manufacturing sector overseas where labor costs were much lower. Again the rewards of productivity increases went to capital and wage income stagnated. Capitalists, flushed with newfound wealth looked for places to invest. And consumers, whose wages had stagnated looked for other ways to make ends meet. Investment in land and construction soon supplied the answer.  Average homeowners soon saw the opportunity to increase their income by taking loans on the increasing equity in their homes, and banks, flushed with cash saw another opportunity to make a killing leveraging up on riskier and riskier loans and unregulated insurance. The rest is history, and we know who governments bailed and who is picking up the tab.

So, What is the Solution?

Stiglitz seems to think the solution is to put people to work by embarking on new projects to employ them and education to equip them for new jobs. Just as the war economy pulled us out of the Great Depression by creating new jobs for the unemployed, we can create new jobs for the current unemployed by investing in infrastructure which has deteriorated for lack of maintenance and in research on promising new transportation, communication, and energy technology. But, just as the war required massive government spending and increased government debt, we need to accept greater debt now to ensure a healthy future economy that can pay off the debt. And,  just as the economy after the war required higher taxes on those who could afford to pay them, the same will be required now from people who have profited handsomely from years of productivity rewards, the bubble and the ensuing bailout.

Wednesday, October 26, 2011

The Herman Cain Phenomena

People are wondering how a candidate with no previous political experience, no organization to speak of, and a series of conflicting messages can be leading in the polls. I think it’s perfectly understandable. People are sick and tired of professional candidates who adjust their message or say different things to different groups simply to get elected. They also are wary of the slicksters with a pocket full of money whose main aim is fame and fortune, but who can turn a phrase without ever making a mistake. Cain says it like he sees it, even if it doesn’t make much sense. And, he doesn’t attack people or get nasty. He comes across as a sincere, nice guy. That can be very attractive in a campaign where’s he competing with a bunch of old polls who play politics with everything that comes out of their mouths and have flip-flopped on many issues.

Democrats wonder how Republicans can be so interested in a guy whose policies seem so outrageous to them. Well, they don’t seem so outrageous to many Republicans, who vote their feelings on religion and other social wedge issues, not analytical or scientific constructs about the economy or the environment. Their judgment of the person’s character and his similarity to their way of thinking trumps a lot of policy issues.

Democrats should look at why candidates like Dennis Kucinich and Ralph Nader have gotten nowhere in their party. I would conclude it’s because they aren’t afraid to say it like they see it. They aren’t polished enough, or acceptable enough to the in crowd. Their pronouncements seem too far from the status quo promoted in the press. For this, they are marginalized.

If we still had a Republican president at this time, I think we would be seeing similar behavior from the Democratic Party that we are now seeing from the Republican Party. We are in a major economic and political crisis, and people are looking outside the box for new and more extreme measures to correct the problems. If it were the Democrats with a large field of candidates running against an incumbent Republican president, I think we would be seeing candidates like Kucinich and Nader leading in some polls against more establishment oriented candidates. And, the Republicans would be wondering how the Democrats could be so interested in them.

Tuesday, October 11, 2011

Occupy Wall Street to the Rescue

In the last post I was urging Bernie Sanders to run against Obama to force him to identify what he would do in a second term. Well, there is no longer a need for an opponent to do this. Occupy Wall Street has spread around the country is a good indication that many are disappointed with a system that defers to wealth and corporations while exploiting middle class workers. Mr. Obama will be as much a target of this movement as anyone else if he continues to try to finesse his way back in the White House by being the great compromiser. If there is one thing OWS doesn’t want it is compromise with those seeking to maintain the status quo.

If winter comes and the cold weather results in a retreat of the protesters to warmer quarters, Obama may think he doesn’t need to think big. But, he will be mistaken. The country is ready for deep reforms and any half measures will result in low turnout for progressives and a win for Republicans. On the other hand, if he embraces the discontent demonstrated by protesters and the many who share their discontent, and lays out a program of real reform, he could be on his way to another term. So far, he has been a disappointment as a leader and a man of vision. But, fortunately, none of his likely opponents seem well equipped with those qualities either. Obama has begun to talk the talk, but is it all election hype or the real deal? The OWS crowd and their supporters can help smoke him out and make him take a stand.

Sunday, August 14, 2011

Run, Bernie, Run!

I’m speaking of Bernie Sanders, the Senator from Vermont, of course. He can’t run in the Democratic primary because he’s an independent, not a Democrat. But, he probably won’t run in the general election either, because he caucuses with the Democrats and probably doesn’t want to become a political pariah like Ralph Nader. But, he should run. And, here’s why.

I predict the Republicans will pick Governor Rick Perry of Texas to be their candidate. He’s the perfect candidate for the Republican Party.  He’s religious, a southerner, has better looks and more charisma than the last Republican president, and can speak in complete sentences that his constituency understands. He's also very acceptable to the sane wing of the party, unlike most of the other contenders. And, he's not the recent Mormon governor of a blue state. What more could the Republicans ask of a candidate? If he is the candidate, his party will be energized and, unlike the Democrats and a lot of progressive independents, many of whom can't stand Obama and will sit out the election, will turn out for him in big numbers at the polls. In that situation, Obama, the Republican lite, will be toast.

Even if Obama were to win, do the Democrats really want four more years of Obama continuing to cave to the Tea Party agenda of austerity and no new taxes? Or would they be more successful as an energized opposition party? Look how successful the Republicans have been as the opposition party. With the distinct likelihood of another meltdown due to the austerity measures being pushed by both parties now, won’t the Democrats be better off laying it off on a one term Republican president as the Republicans are now doing with Obama?

If  progressive Democrats had a good spokesperson stumping for their progressive agenda including reducing wealth and income disparities, a single payer health insurance program, investments in education and infrastructure, etc. they would be on a good path to being a successful opposition party and have better prospects for winning in 2016. An energized progressive electorate would also get people to the polls to elect more of their constituency to the Congress.

Bernie Sanders is such a spokesperson. If you haven’t heard him, take a listen to him on the Senate floor here. There is no Democrat that comes close to him in stumping for the progressive agenda.

Monday, August 08, 2011

Why the Government has to Spend when the Private Sector decides to Save

What is necessary for a healthy, stable economy is a balance between savings to provide capital for new productive activity, and spending to sustain demand for goods and services. When these forces get out of balance instability happens.

If everyone decides to save more all at the same time, spending is reduced and economy goes into recession. If everyone decides save less at the same time, spending increases demand and prices go up. If the new spending is to buy assets rather than consumables, asset bubbles develop.

If the balance shifts to to0 much saving of capital, there is more capital chasing a limited number of investment opportunities, rates of return on capital drop, and owners of capital seek ways to stimulate demand for credit, or turn to leverage and speculation to increase returns. This is what happened prior to the current recession. Owners of capital turned to derivatives and leverage to increase returns. When that wasn’t enough, they turned to liar loans in the housing industry to stimulate demand for credit. As the housing bubble built, housing investors got the idea that the housing market could only continue to go up, and started using their home equity as a piggy bank for spending, driving themselves ever deeper in debt. This is what caused the housing bubble. When the loans could no longer be serviced as variable rates went up the bubble burst.

When the bubble burst, the piggy bank closed, the markets dropped, and the rush was on to deleverage and pay down debt. This required spending less and saving more by nearly everyone around the world. So we return to first scenario where there is too much saving and too little spending, and into recession we go.

The difference between this and milder recessions is that this time it happened to nearly everyone, even around the world, because of the strong linkage between financial institutions worldwide, due to the mitigation of risk through investment insurance like credit default swaps on collateralized debt sold as stock. Credit rating agencies were paid by the banks issuing the collateralized debt to give it a high rating so it could be easily sold around the world. All this was done to increase returns on capital because there was way too much capital for the investment opportunities that existed.

Instead of restructuring the banks that had issued the junk debt, allowing the owners and stock holders to take the hit, the government bailed out the banks and allowed them to keep the junk loans, now deeply devalued, on their books at face value rather than market value. So instead of destroying the junk debt, they put repayment in full on the backs of taxpayers. Now everyone is panicked, no one wants to spend, lend, or investment. This is what’s called a liquidity crisis.

Returning to the theme presented at the outset, when everyone in the private sector decides to save at the same time, the government is the only source of spending available to maintain the balance between spending and saving that is required to stabilize the economy. Instead, we now have a bunch of politicians who think they’re at a Tea Party and the government is just another private budget manager that needs to save like the rest of us. They don’t understand the basic need to balance spending and saving overall to stabilize the system. To make things even worse, they think that the wealthy capitalists who created the problem should be exempt from participating in the solution. In fact they think their taxes should be reduced even further. Until taxpayers and politicians understand the basics of how an economy functions, we will continue to be mired in the quagmire and things will only get worse.

Saturday, August 06, 2011

Some Long Range Consequences of the World Economic Crisis

It’s a sad day when a single company can cause world economic turmoil by downgrading the credit worthiness of the world’s only superpower. Standard & Poor’s, the same company that gave junk collateralized debt obligation a AAA rating to cause the current crisis, has downgraded the USA rating to a AA+, and the world goes along with it. This raises the question of whether or not the world has gone seriously off the rails.

How did we come to this point? How did the developed nations of the world become deeply indebted to an oligarchy of private financiers? How did the leading developed democratic nation in the world, the USA, become indebted to a developing authoritarian nation, China to the tune of several trillion dollars? The answer lies in letting wealth become concentrated in the hands of a few wealthy individuals and institutions and allowing a colluding central bank to create credit by simply making entries in its accounting journals.

The creation of credit and the abundant supply of cheap energy are the main ingredients that have lead to the rapid development of the developed nations in the  last several centuries. This has allowed the standard of living in these countries to advance way beyond that of undeveloped and developing countries. Accompanying this phenomena has been the emigration of labor from undeveloped to developing countries where this is possible.

But, advances in transportation and communication, and trade agreements in the last several decades, have allowed the free flow of goods and capital across international borders. This has directed the flow of private capital to countries with low production costs and away from developed countries. Businesses have become multinational, reducing the loyalty of their home countries and accelerating relocation to developing countries.

If international agreements were in place, this could have led to increasing the standard of living in developing countries to to the level of developed countries without reducing the standard of living in developed countries. But, instead, the way this has happened has been left mainly to private interests, resulting a decline of labor rates and employment, and increased debt, in developed countries while developing countries like China have become creditors. Instead of allowing the standard of living of  Chinese workers to rise to the level of developed countries, the Chinese government has accumulated the wealth from its development and used it to fund debt in the countries buying its products.

What remains to be seen is how this will all work out. In ancient times, wealth became concentrated in the hands of kings and their aristocratic cohort and debt in those outside the ruling circles. Periodically, there were Debt Jubilees, where debts would be forgiven and a new cycle of wealth and debt accumulation started. Since, in the modern world, wealth accumulates in private hands, and narrow private interests control government through contributions to politicians, there is no possibility of debt forgiveness.

All signs point to protecting wealthy private interests at the expense of working people. Eventually, debt service eats up all the resources that are needed to sustain productive enterprise and the system collapses. The question people should be asking is whether humans are smart enough to make corrections before the system collapses? The second ingredient of development, energy, may make the decision for us sooner rather than later. As fossil fuel resources decline and debt grows we face a double threat to the world economy and the standard of living of its citizens.

Monday, August 01, 2011

Obama, a Disaster for Progressives

Obama’s appointments and actions during his presidency have shown him to be a moderate Republican. His substituting of mediation with Republicans for leadership in fighting for progressive policy ceded the high ground to Republicans and caused the catastrophe that was the 2010 election. Since then he has ceded even more ground to Republican policy, including the disaster of cutting federal spending in the middle of a deep recession.

He has actually adopted Republican talking points in many of his speeches about the economy, buying into the false comparison between what voters should do in a recession, and what the federal government should do. As Obama has moved to the right in his policy decisions, the Republicans have moved even further to the right, until now Republican policy is essentially wacko Tea Party policy.

It is hard to see what he will do differently in a second term. It is not that he’s fought the good fight for progressive policy and been blocked by Republicans. He has actually agreed more with Republicans than with his progressive constituency. And, it is even harder to see how he will motivate progressive voters, which he needs to win, to the polls in 2012.

On the Republican side, if they win the presidency and both houses in 2012 will they continue their radical Tea Party policies when the results will be laid wholly to their doorstep? Not likely. Having a weak Democratic president that can be easily pushed around, and with their stated paramount objective being to make Obama a one term president, the Republican party has become radicalized. If they should win it all with a candidate like Romney, who is not a Tea Party wacko, they would likely return to a more responsible way of governing, especially if Democrats in Congress kept their feet to the fire and used the filibuster in the Senate the way Republicans have used it.

The time when a president can ignore his own constituency and get reelected has passed. Unless the Democrats field a viable candidate to oppose Obama in the primary, the energy on the Democratic side of the election will be so low it’s hard to see how voters will turn out in the large numbers needed to win. All the excitement will be on the Republican side of the election. If Obama were to win a challenging primary, that made him spell out how he is going to govern, it would give his constituency renewed energy to elect him. If not, it might result in a better candidate, or at least increase the turnout in the general election, which is necessary to maintain control of the Senate as a minimum.

Sunday, June 05, 2011

Natural Recovery Mechanisms

Since political gridlock in the country has precluded much government intervention to facilitate recovery from the financial crisis, we will have to rely on natural mechanisms to recover over an extended period, just as the Japanese have been trying to do for the last couple decades.

So what caused the crisis and what are these natural mechanisms that will allow recovery? For the economy to be healthy, there has to be a balance between saving and spending. Capital and labor are the ingredients for growth. The relatively few, more wealthy, people do most of the saving and middle class labor provides most of the spending. As I have previously discussed here, over the last several decades more of the rewards of productivity have been going to the savers. As the spenders are squeezed, demand wanes and there are fewer opportunities for investment, so the return on investment falls. This results in a search for ways to stimulate demand and increase returns, like easy credit, leverage, and creating derivative instruments that hide risk.

Eventually these mechanisms lead to bubbles of ever increasing asset prices and create a euphoria that perpetuates the growth of the bubble until it bursts, resulting in a financial crisis. First we had the saving and loan crisis, then the dot com bubble and now the housing bubble, which nearly brought the country to ruin. This has resulted in high unemployment, fear of further crises, and stagnated demand because the problem is really that the debt left over from the bubble never has never been addressed. Banks and their investors,  being the primary holders of the debt, have refused to take losses on their bad debts, and the government has stepped in to bail them out, increasing the public debt.

The solution lies in first reducing the debt overhang in the private sector because the private sector is the primary source of demand. Demand must be increased first because the revenue from increased growth is needed to address the public debt. Political gridlock will not allow the government intervention necessary to make this happen. So other mechanisms must be relied upon to correct the problem, stretching out the recovery over the decades ahead.

The primary means for addressing normal recessions is monetary policy, that is, lowering interest rates by increasing the money supply. Lower interest rates means less income is going to savers, and the spendable income to spenders increases because their debt service is reduced. Neither of these these things happen automatically. So it has fallen to the Federal Reserve to insure that low interest rates are maintained. This has not been an altruistic move on their part. Their main interest is in keeping the banks afloat by easing credit and pumping up asset markets, since the government has been reluctant to restructure them. But, a byproduct of the policy has been to ease the burden of homeowners and other private debtors. But, as interest rates approach zero, this mechanism is no longer effective.

The first natural mechanism the comes into play is private loan default. As homeowners and other private borrowers default on their loans, the lenders and their investors are forced to absorb the losses.  Those that don’t default are forced to continue paying off debt rather than spending their income, which reduces the demand necessary for recovery. This prolongs the recovery period. So, defaulting on private debt becomes a mechanism for reducing the recovery time. To the extent that artificial means and deception were used to induce borrowers to borrow, this is a just action and should be encouraged, rather than disparaged.

The second natural mechanism for reducing debt is inflation. As inflation occurs, debts can be paid off in cheaper dollars, erasing debt faster, and promoting a quicker recovery. Controlling inflation falls to the Fed in implementing monetary policy. To reduce the recovery time the Fed needs to allow more inflation in times of crisis, and usually does. The Fed has recently raised inflation targets for this purpose.

The final natural mechanism occurs when flight to safety and political pressure drives funding from institutional investors into public debt at low interest rates. This allows governments to reduce their debt service and spend to increase demand and reduce the burdens of unemployment. These latter two mechanisms are referred to as “financial repression” by savers organizations like the Pete Peterson foundation, who have the most to lose by it. It was practiced extensively after the second world war when large debts had to be liquidated in a timely manner.

It’s unfortunate that these natural mechanisms must be relied upon to get us out of the economic doldrums. They extend the length of the recovery process, when a positive restructuring  of debt by government would have shortened it. But, money is power and it talks in many ways, so we must suffer longer to appease those who refuse to take the hit on their bad investments.

Thursday, May 26, 2011

Historical Limits to Progress

A classic example of history limiting progress is exemplified by the mobile carrier industry. These old telcos have no incentive to innovate because they own the lines and charge by the minute. They all spend millions of dollars every day advertising in media all over the country, when there’s not a dime’s worth of difference between the services they provide. How is it that you can make unlimited free VoIP calls over the internet at speeds much faster than the cell phone networks which charge an average of $50 a month for the same service?

If it weren’t for the extreme hostility between government and industry due to free market ideology we could have had fiber and hot spots along ever interstate highway in the country now and data and VoIP calling services everywhere for little or nothing. Countries like Korea and Japan, where government and industry cooperate, are decades ahead of us.

If you compare progress in bandwidth and technology on the internet to cell phone transmission technology the gap is obvious. Now the telcos want to buy off the government to latch onto the new spectrum freed up by HDTV technology to waste it on their outdated network and retro development practices.

There are some signs that Microsoft, Google, and Apple aren’t going to put up with this much longer. They are getting interested in bidding on spectrum and have developed voice network technology. Google has Google Voice and Microsoft has recently purchased Skype at a very high price. Already, much of the traffic that would normally be on the cell network has moved to WiFi when phone users are near a hot spot or have a home network. You don’t even need a phone. I make free nationwide calls on my iPod Touch at any hot spot using Google Voice.

I’m not holding my breath for things to change because the cable companies and telcos own the Congress, but sooner or later we are going to seen broadband internet carrying the bulk of voice calls, as they are video calls now.