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Showing posts with label money. Show all posts
Showing posts with label money. Show all posts

Monday, 5 July 2021

Virtues, Vices, and Values

A Charter of Values?

 In 2013, when the Parti Québécois government was proposing a “Charte des valeurs”  I reacted, on this blog, with "outrage, shame, embarrassment, anger, frustration, fear."  Admittedly, by the time the  Coalition Avenir Québec introduced its  "Bill 21: An Act respecting the laicity of the State," a watered-down version of similar legislation, my reactions had mellowed.  (See The "We" Vote in Quebec.) Nonetheless, I remain distinctly uncomfortable whenever I hear a politician invoking "values" and, still worse, "our shared values."  We might expect the expression "our shared values" to be followed by a list of said values but it almost never is.  Upon hearing "our shared values," the white supremacist and the advocate of Black Lives Matter might both breathe a sigh of relief thinking "finally, one of us"--which explains politicians' love of this empty expression.

The Common Objects of a People's Love

In his inauguration speech, Joe Biden offered this list: "Opportunity. Security. Liberty. Dignity. Respect. Honor. And, yes, the truth."  But he didn't call them values.  Citing Saint Augustine, he referred to them as "the common objects" which define a multitude as a people, and this particular list as what defines Americans.  However, as some critics have pointed out, what Augustine was suggesting wasn't necessarily values or virtues.  



“If one should say, 'a people is the association of a multitude of rational beings united by a common agreement on the objects of their love,’ then it follows that to observe the character of a people we must examine the objects of its love.” — St. Augustine, City of God 19.24


The objects of a people's love could equally well be venal, could be vices.  The USA may be the "land of opportunity," whose "military-industrial complex" ensures its security, and whose constitution guarantees its citizens the liberty to have guns but not necessarily abortions or to use the girls' washroom if your birth certificate says you're a boy, but I've never thought of dignity, respect, honor (except for the spelling) and truth as being distinctly American. 

Deadly Sins and Heavenly Virtues

The more I have reflected on this topic, the less certain I've felt about what counts as a value.  In the Judeo-Christian tradition, the vices or "deadly sins" are clear:  pride, greed, wrath, envy, lust, gluttony and sloth.  The "heavenly virtues"--prudence, justice, temperance, courage, faith, hope, and charity--are more ambiguous. We might like to imagine that virtues and vices are absolutes, but it seems obvious that the difference between them is one of degree.  Moderate degrees of the vices seem desirable, while exaggerations of the virtues are equally undesirable.

Values and Valour

Invariably, we imagine our values are virtues and, conversely, we are likely to imagine that other people's values seem like vices.  In truth, few of us ever have to discover what our values truly are or if we have any.  The word "values" shares its underlying root with "valour"; that is, not just worth but strength and courage.  Our values are the principles that we have the strength and courage to maintain under stress and to act upon.  Still, even the most valourous among us can find themselves in a conflict of values, a no-win, double-bind situation which is the defining characteristic of tragedy.  (See The Double-bind Theory of Tragedy and Madness.)

Obedience to Authority:  Virtue or Vice?

Anomie, the absence of values, has long been the claimed condition of privileged, modern societies.  I am mindful of social psychologist Stanley Milgram's infamous Yale "Obedience to Authority" experiments which revealed that 65% of the test subjects would torture a victim to death using electric shock simply because someone who appeared to be in authority told them to.  Obedience is, of course, the most taught and enforced value in education.

What Are Your Values?

The webpage What Are Your Values? provides a list of 150 potential values, including obedience.  Looking at this list and every other list I have considered, I come away wondering:  are these really values?  The webpage offers a soft definition of values as "the things you believe are important." Sex and money don't make anyone's list of values, but I've met a few people who seem to think they are important.



The Central Bank:  God or the Devil?

I was drawn to Mark Carney's Value(s), in the first place, because of the title and because he was Governor of the Bank of Canada and Governor of the Bank of England.  To conspiracy theorists like my friend Henry Makow and members of the Zeitgeist Movement (not to mention bitcoin fans and fanatics), central banks are the spawns of Satan.  Against this foil, it was striking to read Carney's passionate prescriptions and earnest defense of central banks and a "sound dollar."  His sententious, Polyanna proposals for a better world are occasionally ponderous and left me wondering: would fat cats on Wall Street and in the Federal Reserve give two seconds of consideration to what he is recommending?

What's Good for General Bullmoose . . .

In Values, Carney comes across as a nice guy determined to be nice to everyone, even  Jamie Dimon, CEO of JP Morgan Chase and a member of the New York Federal Reserve Board.  However, in Plutocrats, Chrystia Freeland reports on the animosity between Carney and Dimon which exploded at a meeting of the IMF and the World Bank in Washington in 2011.  Freeland points out:

The battle between Carney and Dimon gets at a bigger and more contentious issue [than taxes and profits]:  Are the interests of the state and its big businesses synonymous?  If not, who decides? And if they do clash, does the state have the right--and the might--to curb specific businesses for the collective good?

As Freeland records, Dimon widely promulgated his position that the kinds of global banking regulations Carney was proposing were "anti-American." The Carney speeches Freeland quotes show that the genesis of Value(s):  Building a Better World for All is at least a decade old.  Carney himself traces its origins to his childhood in Canada.

Can values drive value?

Carney argues that:

Values and value are related but distinct. In the most general terms, values represent the principles or standards of behaviour; they are judgements of what is important in life. Examples include integrity, fairness, kindness, excellence, sustainability, passion and reason. Value is the regard that something is held to deserve – the importance, worth or usefulness of something. Both value and values are judgements. And therein lies the rub.

"Therein lies the rub" indeed.  Can we separate values and value, the dancer and the dance?  Or, on the other hand, are they in complete contradiction to one another?  Witness the paradox of The Antiques Roadshow.  An expert explains the values embued in an artifact, but the climax of every episode is the revelation of the dollar value of the object, which is based on the current market and only a tertiary result of beauty or craftsmanship, history or sentiment.

The fiat global reserve currency:  where's the trust, integrity and transparency?

Carney claims that the value of "fiat money is grounded in the values of trust, integrity and transparency." The US greenback, the fiat (non-gold/commodity-based) money that really counts because it is the "global reserve currency" and about which Carney has remarkably little to say, as we have seen, is backed by the threat of military intervention.  (See Petrodollar Warfare.)  Moreover, in recent years, as Kishore Mahbubani (Has China Won?) decries and Josh Rogin  (Chaos under Heaven) lauds, the US has been weaponizing the dollar. (See Analysing the Discourse on the USA-China Cold War.)  The US Federal Reserve was born in secrecy and, to this day, most people don't realize, as Carney confirms, that 80% of the money in the world is created by private banks.  (See The Truth About Money.)

How Many "values" are there?

Carney's orbit of values expands centrifugally to include, in his final chapters: "solidarity – fairness – responsibility – resilience – sustainability – dynamism, and – humility." Once again, I find myself questioning which, if any, of these stand as values.  Values are the principles we are prepared to uphold in the most challenging of times.  Logically, values spring from ethics.  The word "ethics" comes from "ethos," behaviour over time, often translated as "character," and contrasts with "pathos," the emotions of the moment.  In the end, I conclude "values" is a misnomer.  There is only one value: justice.  Those things we call "values" are details:  customs, habits, rituals, and allegories.  Justice must be based on ethics, and Kant's much-maligned "categorical imperative"--laws are moral if you accept them being applied to you--imperfect as it is, is as good an option as we have available to us.





Saturday, 26 December 2020

The Truth about Money: Money Good; Money Bad

What is money?

Anything can be used as money:  paper, tokens, clay tablets, seashells, tree bark, pixels on a computer screen, strokes on a ledger somewhere, even people.  Historically, not just slaves and cumal were used as money.  The Bible tells us a man can beat his servant because "he is his money" (Exodus 21:20-22).  As Jacob Goldstein reiterates throughout Money:  The True Story of a Made-up Thing:    "money is money because we believe it’s money."

However, some things become like money (a soft way of saying they become money) even when people doubt, question or just don't notice.  Silver, data, Modigliani nudes, and, most importantly, "commercial paper" have all become forms of money despite doubts, questions and ignorance.


                        In 2008, the day after the Lehman bankruptcy, this Modigliani

                        sold for $150 million (USD). Someone was shifting

                        currency from the stock market to the art market.

Money Good

Goldstein quotes Marco Polo who wrote that his readers would not believe this but  "the Great Kaan [of the Mongol empire] causeth the bark of trees, made into something like paper, to pass for money all over his country."  The result of the Kaan's "bark of trees" money was a unified, stable and prosperous empire.  When the Ming Dynasty attempted to return to traditional (money-less) ways in China, the result was three hundred years of poverty, deprivation and starvation.  Even today, world-wide, getting food from farmers' fields to the shelves of your local grocery store is facilitated by; in fact, dependent upon money.

Money is infinite

In the context of the Covid-19 pandemic, one after another, representatives of the US Federal Reserve announced that they could provide a limitless supply of US dollars to support American businesses?  Of course, it's obvious that money is a product of our collective imaginations and is therefore infinite (or at least only limited by our collective imaginations), but it was unprecedented for the Fed to publicly confirm this fact.   

Wealth inequality versus poverty 

Steve Pinker was quite right to point out the difference between wealth inequality and poverty in his tome Enlightenment Now.  What Pinker calls the "lump fallacy" is the mistaken notion that the economy is a "zero-sum" game:  "that if some people end up with more, others must have less."  On the contrary, if history shows, as Pinker claims it does, that we have all prospered over time--even if unequally--we have nothing to complain about.

Pinker's point is well taken, but I suspect that in this argument he might be confusing wealth and money, the real economy and the financial markets.   Money is infinite but the planet itself is finite, and its wealth/resources are similarly limited.  The real economy becomes very much a game of winners and losers when the biggest winners are willing to sacrifice the planet for short-term gain through, for example, global warming (which, as Pinker later argues, is the real and most threatening problem of our time).

What every kid should know about money

Perhaps I need to remind you, dear Reader, and myself that this blog is about education.  I really don't know what is being taught in grade schools and high schools these days, but shouldn't every middle-schooler know how money is created? 

Goldstein concurs with every other source that I have consulted on the subject: "Most of the money in the world is not just stored in private banks; it is created by private banks."  I found it reassuring that Salman Khan, founder of the Khan Academy, has a very straightforward explanation, directed at high-school students, of how private banks create money.  Khan displays the mathematical formula which shows that for every $1000 which the Federal Reserve introduces into the monetary system, private banks, using the fractional reserve system, create $10,000.  

The Federal Reserve was created at a "secret meeting"

As long as farmers are getting paid and the grocery store is getting paid and I have enough money to pay for groceries, who cares how the money was created?  Is it a problem that private banks create money?  To answer this question we would, of course, first have to acknowledge that private banks do create money. 

According to the "History" section of the Federal Reserve website, the Fed began with a gathering which included a senator, his secretary, an economist and three private bankers who met in November, 1910, on Jekyll Island.  (The name sounds like something from a Gothic novel, but the place does exist.  I played golf there once and even slept in the famous Jekyll Island Clubhouse which was pretty run down by the time I stayed there.)  The secrecy of the meeting is emphasized in the "Federal Reserve History."  Senator Aldrich . . .

went to great lengths to keep the meeting secret, adopting the ruse of a duck hunting trip and instructing the men to come one at a time to a train terminal in New Jersey, where they could board his private train car. Once aboard, the men used only first names – Nelson, Harry, Frank, Paul, Piatt, and Arthur – to prevent the staff from learning their identities. For decades after, the group referred to themselves as the “First Name Club.”

Despite the fact that the  Federal Reserve is a model for monetary systems all over the world (including in Canada, Russia and China), and there are widely available descriptions of how the system works, more than 100 years later, the shadow of secrecy still seems to hover over how the system works and how private banks create money. Consequently, as I outline in How Is Money Created, for conspiracy theorists, the Fed is part of a cabal of satanist bankers out to control the world while, for others, it is an altruistic gathering of civil servants.  Officially and perhaps most accurately, it is a mix of the private and the public.  However, which is the dog and which the tail, and who wags whom remains a matter of debate.

Commercial banks, investment banks and shadow banks

For most of us, a bank is a bank.  (However, if you googled "types of banks," you might be in for a surprise.)   As Alan Blinder explains in After the Music Stopped,

[ . . ] commercial banks do have deposits--that's why we call them banks.  Investment banks do not.  They fund themselves almost entirely by borrowing. Remember, with a 40-to1 leverage, capital constitutes a mere 2.5 percent of assets.  They must borrow the other 97.5 percent.
Blinder points out that "By most estimates, the shadow banking system was [in 2008]  far greater than the conventional banking system."  "The shadow banking system," as Blinder explains is "a complex latticework of financial institutions and capital markets that are heavily involved in various aspects of borrowing and lending."  The important takeaway here is that these shadow banks are non-banks and therefore not regulated as stringently as commercial banks.  Current estimates of the size of the shadow banking system put it at $1.2 trillion.

In a 2015 post, I reported estimates of the unregulated derivatives market as being between 710 trillion and 1.2 quadrillion US dollars.  At the time,  I remember thinking these numbers were too big to be believed.  How could there be an unregulated market that was 50 times greater than the GDP (the total value) of the US economy?  According to Investopedia the current (2019) value of the derivatives market is estimated to be over a quadrillion dollars or 10 times the GDP of the entire world.

Commercial paper is money

The mind boggles at the size of these numbers.  How are they possible?  What are the mechanics that allow such fantastically large amounts of money to be created? When I read that "financial institutions  . . . are heavily involved in various aspects of borrowing and lending,"  I interpret that they are creating money.   As Goldstein explains, the collapse of 2008 "is a story about money itself—a new kind of money that started flowing through a new kind of banking system that nobody quite knew was a banking system."  This new kind of money is "commercial paper."  It usually comes in denominations of $100,000  and is issued by commercial banks and investment banks on behalf of large companies seeking funding. 

Solutions

About having private banks create money, Goldman comments, "For nearly a hundred years, some of the smartest economists in every generation have said this is a horrible way to do money."  One solution, as Goldman describes, is "dazzlingly simple":

The root of the issue is that basic banks do these two, very different things. (1) They hold our money and make it easier for us to get paid and make payments. (2) They make loans. The dazzlingly simple argument from all of these great economists comes down to this: split those into separate businesses. Variations on this idea are usually called “100% reserve banking” or “full-reserve banking” (as opposed to the current, fractional-reserve banking system)  [. . . .]
Another solution now being debated and seriously considered, as Goldstein reports, is called "Modern Monetary Theory or MMT, for short."  The underlying principle is that the government should take over control of the creation and distribution of money to ensure full employment and sustainable development of available resources, reducing the money supply to prevent inflation when these objectives are met.  Oddly, much of what has been happening in the context of the 2020 pandemic, with governments distributing money directly to businesses and individuals, seems in line with Modern Monetary Theory.  We are in the process of discovering how the theory works in practice.

Whatever the future holds, it is inevitable, as Goldstein concludes:

that money will change. The way we do money will look as strange to our great-great-grandchildren as a world where banks print their own paper money with pictures of Santa Claus.

Addendum

In response to this post, one of my readers (Thanks D!) email a link to this Front Burner podcast on Modern Monetary Theory:  Never Mind the Deficit!


Monday, 24 February 2020

Do the Money Men Really Run the World?

Can't have a war without money

In Johnson's Life of London: The People Who Made the City that Made the World, Boris Johnson writes that NM Rothchild's "role in financing governments was so crucial that it was said that a war could not be begun without the consent of the Rothschilds."  It is an obvious fact of our time that the world runs on money.  No war can be declared, no university inaugurated, no church established, no hospital or bridge or building or monument built without money.  Nothing can be imported or exported, bought or sold without money.  Charities, volunteer organizations, political parties, families and individuals require money.  The health of your offspring and the attractiveness of your spouse will be affected by money.  It has never been more true than it is today:  if you want to understand the world, "follow the money."





Just because it's a conspiracy theory  . . .

The pursuit of this question led me to Henry Makow who, as it happens, was a friend of mine in graduate school.  Henry is a very smart guy.  In fact, he was a syndicated columnist and best-selling author at the age of eleven.  He has become, according to Tabetha Southey in the Globe and Mail, Canada's leading conspiracy theorist.  In Illuminati:  The Cult that Hijacked the World, Henry claims


The New World Order is a hydra-headed monster. The bankers work through many fronts such as Communism, Socialism, Liberalism, Feminism, Zionism, Neo conservatism and Freemasonry. Unknown to most members, these "progressive" movements are all secretly devoted to "world revolution" which is a euphemism for banker hegemony and Satanism.  




Should auld acquaintance be forgot?

Old acquaintances notwithstanding, Henry's rhetoric is obviously over the top and his claim that unnamed extant bankers are responsible for all the ism's Henry doesn't like is less than convincing.  Like all conspiracy theories, Illuminati is an eclectic cache of facts, observations and quotations.  The data isn't the question.  The question is how it is all woven together.  (As the linguist de Saussure observed, meaning [and therefore truth] does not reside in words or letters but in the spaces between words and letters--that is, how we connect one to another to create meaning.)


Conspiracy theory versus chaos theory

The world may obviously run on money, but "do money men run the world?" is a separate and different question.  We've been here before (see The Chaos Theory of International Trade):  the choice is between conspiracy theory and chaos theory.  Things happen.  Things that happen might even be predictable within a significant range of probabilities.  However, that Person X or Mr. Daddy-Big-Bucks banker made everything happen is a leap to another level of cause-and-effect determinism requiring another level of evidence.


How banks make money? (disambiguate "make")

However, the unrefuted fact is that the monetary system, which underpins the financial system and the economy, begins and ends with private banks.  Private banks (according to the Parliamentary web site I quoted extensively in Central Banks and the Bitcoin Experiment) create 80% of the money in Canada (and I surmise that this percentage is true for all money creation worldwide).  Private banks are legally empowered to create money out of nothing with a few clicks of a computer mouse.  So what?


So what!?

Do you or I have any reason to be concerned or care about how money is created and who is creating it?  This DW documentary offers a clear and succinct explanation of How the Rich Get Richer though  The Deluge of Money.  The general theme of the documentary is that the money-creation system which allows banks to exponentially create money is guaranteed to exacerbate wealth inequality.  As the economy is flooded with money, if you have a little bit of money, your money will lose value over time.  However, if you already have billions, you will be able to access billions more that the banks are creating at low-interest rates.  Risking little of your own billions, you will be able to buy real estate, businesses, factories and even billion-dollar companies.  The documentary offers specific examples but the common feature is that the money men aren't producing anything, they are simply making more money with these transactions in borrowed, bank-created money while degrading the condition of workers and the savings of the middle class.


To create money the government must sell a bond to a bank

The documentary follows a research project which demonstrates that most people, even some bankers, simply don't know where money comes from and how it is created.  Henry Makow quotes the inventor Thomas Edison who said "It is absurd to say our country can issue bonds and cannot issue currency. Both are promises to pay, but one fattens the usurer and the other helps the people."


The paradox of money:  a private bank created the money, so why am I responsible?

Most people (myself included until recently) believe in the illusion that our national currency is created by the government.  It is worth stopping to take note that every time a bank creates money, those dollars or euros or pesos create a debt owed by the national government to whomever holds the currency and a promise to pay which is ultimately the responsibility of you and me, the citizens of that country.  There is a fledgling group in Switzerland, as revealed in How the Rich Get Richer, campaigning to prevent banks from being able to create money and advocating a system in which only the government can produce a national currency.


Who's in charge here?

Back to the question:  do the money men run the world?  For Henry Makow and advocates of the Zeitgeist movement the answer is beyond obvious that an unnamed they/them fronted by the world's central banks are running the world, and what we typically call "world affairs" (politics, business and religion) are but smoke and mirrors. Boris Johnson notes that successive kings of England had to borrow money from Dick Whittington, and when the British Government wanted to buy the Suez Canal they had to borrow the cash from Lionel Rothschild.  However, Johnson writes that "Today a young Rothschild can still make the headlines with a knock-out yacht-based party on the coast of the former Yugoslavia.  But no one needs his permission to go to war."

Perhaps.  But How the Rich Get Richer concludes with the observation that Brexit and the election of Donald Trump promise even less regulation of private banks and an even greater flood of unregulated, low-interest, private-bank-created money.



Afterword

Two thoughts remained in my mind as I was writing this post.  I feared they were tangential to the question, but I have decided to include them as an afterword/afterthought.

It seems a predicable human tendency to always imagine that someone is in charge, a powerful someone is pulling the strings to make whatever happens in the world happen--the Wizard of Oz fallacy.   As I wrote this post, I kept thinking about a remarkable documentary I saw on CBC television in 1983.  Produced and directed by Allen King, it was promoted as an exposé on unemployment.  In fact, as an example of his proto-reality-show filming, King invited a number of unemployed participants to sit on a bleacher in front of a bank of television cameras.  The participants were given no instructions, and there was no script.  What emerged was a series of assumptions from the participants about the objective of the film, and vitriolic outbursts of blame and counter blame for whatever emotions the participants were feeling.  The show was entitled "Who's in Charge Here?"  Participants launched a court case to block the presentation of the production, but the injunction was not granted.

The second thought that kept coming to me was "Why am I writing about money again!?"  I started this blog, some years ago, thinking I know something about something (roughly university education).  However, over time it has evolved (or devolved) into a study of all the things I don't know--the things that make me wonder about the depths of my own ignorance, that provoke me to ask "How could I not know this?"  I'm not that modest, so I assume there must be a lot of people who don't know what I don't know.  Here is a list of my blog posts on money, just in case you want to follow the slow meandering process of my self-education on the subject:


When Should You Repay Your Student Loan? How about . . . Never!


How Did University Degrees Become Subprime Mortgages?


What Is Money?




















Wednesday, 23 October 2019

Central Banks and the Bitcoin Experiment

Money has gone digital

Money has gone digital.  Less than 3% of currency these days is in the form of cash (coins or paper bills).  I still struggle to understand bitcoin, but I have slowly come to realize that what I don't fully understand are the technological aspects of bitcoin.  To understand bitcoin, you must first understand blockchain. To understand blockchain, you need to know about open-source coding, algorithms and cryptography, then you need to know about hashing and CPUs in order to understand what "mining for bitcoins" means (although I get that "mining" means solving a math puzzle and allowing transactions to use your computer).  However, these lacunae in our technological knowledge notwithstanding, bitcoin is just like any other digital currency (keeping in mind that the US dollar, for example, is already 97% digital) with only one truly significant difference.  Every example of money that we accept without much thought is managed and manipulated by a central bank--bitcoin is not.


Countries and companies preparing their own digital currency

Most countries have their own currencies--197 countries use 164 different national currencies worldwide--but there are only eight [small] countries without a central bank.  The Financial Post reported a few days ago that  last year Stephen Murchison did a presentation to the Bank of Canada on "whether or not the bank should issue its own digital money."  China is preparing the launch of its own digital currency.  Facebook is planning the release of Libra, its own digital money.  The FP article reports that :
 Switzerland’s central bank started exploring the use of digital currencies for trading. Sweden and Singapore both have research efforts underway. [ . . . .]  JPMorgan is already using a digital coin and Vanguard is testing a blockchain-based currency trading system.
Although these reports create the impression of a definite distinction between digital and non-digital currencies; to reiterate, most of the money we use today is already digital.  Since this currency must be encrypted in order to transit over the internet, it can also be described as cryptocurrency.  What distinguishes bitcoin from the crypto, digital money that we accept unquestioningly into our lives is that bitcoin has no central bank.

Facebook, China and even JPMorgan provide a central bank to manage their digital currencies.  We Canadians who have been accepting Canadian Tire money since the 1950s should be at ease with corporations' producing their own money, and recognize that a company (the Canadian Tire Corporation in this case) can be a central bank.  The question bitcoin raises is:  "Do we need central banks?"

Central Banks:  God or the Devil?

Central banks are either God or the Devil depending on your perspective.  Few issues are more likely to spur conspiracy theories than discussions of central banks.  The claim that the Rothchild family has slowly taken over the central banks of the world regularly gets viral play.  Depending on your perspective the US Federal Reserve (the US central bank) either saved the American economy from total collapse in 2008 with 100s of billions in bailouts, or it protected the interests of wealthy bankers at the expense of American sub-prime mortgage holders.  Central banks are either a cabal of fat-cat bankers taking care of themselves, or they are altruistic, public-spirited individuals dedicated to serving the interests and welfare of their countries' citizens.  Individuals with connections to a central bank have insider knowledge not only of monetary policy but of the financial systems and decisions of their home countries.  These financial gurus tend to be in the wealthiest 1% of the 1%--which arouses suspicion.  On the other hand, they help to control inflation and unemployment by decreasing or increasing the money supply, cooling down or heating up the economy.  We barely note their existence until there is a major screw up, as there was in 2008.

What's the difference between the new money and the old money?

The average citizen doesn't understand bitcoin because the average citizen doesn't understand money.  I speak from the perspective of an average citizen.  Even though I have done two posts on the subject (What Is Money?  & How Is Money Created)  and I am an accredited professional in understanding works of imagination, I still struggle to grasp that money, that thing which hard-core realists consider the bedrock of modern existence and survival, what we get up and go to work for, and worry about going to bed, can be such an airy-fairy, shrouded-in-mystery product of imagination.

How the Bank of Canada creates money

I credit this Parliament of Canada website with providing a clear and succinct description of "how the Bank of Canada creates money for the federal government." The article also provides "Information about how private commercial banks create money." The first step is perhaps the most confusing.  The Government of Canada produces bonds and treasury bills, which the Bank of Canada sells to private banks and other financial institutions, but the Bank of Canada also buys 20% of the bonds produced by the Government. This first step is confusing because to the uninitiated (like me) the assumption is that the Bank of Canada is part of the Government of Canada, so it sounds like Canada is buying and selling to itself.  The process would seem to make more sense if the Bank of Canada was a private company, separate from the Government.  In fact, the Royal Bank of Canada was first created as a private enterprise in 1934 but was nationalized in 1938.

However, in the current Canadian case:

Since the Bank of Canada is a Crown corporation wholly owned by the federal government, the Bank's purchase of newly issued securities from the federal government can be considered an internal transaction. By recording new and equal amounts on the asset and liability sides of its balance sheet, the Bank of Canada creates money through a few keystrokes. The federal government can spend the newly created bank deposits in the Canadian economy if it wishes.
The entire process seems like a game of "let's pretend."  "Let's pretend" you are a bank and I borrow some money from you, then I deposit the money I borrowed from you in your bank.  There is no limit to how much money I can borrow from you, and it doesn't matter if you think I'm a good, reliable client or not.  When I spend the money I have deposited in your bank, you take the money out of my account.  Of course, you will never ask me to repay the money I've borrowed from your bank. Later, when I have depleted my account, I will just borrow some more money from you.  In more adult language:

 . . . the Bank of Canada's purchase of government securities at auction means that the Bank records the value of the securities as a new asset on its balance sheet, and it simultaneously records the proceeds of sale of the securities as a deposit in the Government of Canada's account at the Bank [. . . ]. No paper evidence of a bond, treasury bill or cash is exchanged between the Government of Canada and the Bank of Canada in these transactions. Rather, the transactions consist entirely of digital accounting entries.

Most of the Money in the Economy is Created by Private Banks

In the game of "let's pretend," the Bank of Canada only buys 20% of the Canadian government's loans, the other 80% is purchased by private banks and investment firms.

Private commercial banks also create money – when they purchase newly issued government securities as primary dealers at auctions – by making digital accounting entries on their own balance sheets. The asset side is augmented to reflect the purchase of new securities, and the liability side is augmented to reflect a new deposit in the federal government's account with the bank. However, it is important to note that money is also created within the private banking system every time the banks extend a new loan, such as a home mortgage or a business loan. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower's bank account, thereby creating new money [. . .]. Most of the money in the economy is, in fact, created within the private banking system.

As just described, with a click of the mouse, private banks have an asset (money in their accounts) and an equal debt owed to the Bank of Canada.  Why do private banks buy or even want Canadian government debt?  The answer has many names (some of which I have dealt with in What Is Money?  & How Is Money Created) such as "leverage" or "the fractal banking system."  The parliamentary website describes the system as "[t]he limiting rules, known as 'capital constraints,' [ . . .]."  What each of these expressions is telling us is that when you go to a bank to take out a mortgage, or a car loan, or an education loan, or if you use your bank's credit card to buy a cup of coffee, you are creating money.  The money does not exist until you spend it, and when you spend it you have created an asset--money in the bank's bank account.

The Ontology of money

What we are talking about here, in big words, is the ontology of money.  With most things that are borrowed, there is an assumption that they must exist in order to be borrowed--not so with money.  It's as if you go to the bank to borrow a cup of sugar, the bank has sugar, but the sugar they lend you doesn't exist--except that you still owe the bank a cup of sugar.  Guess what?  Now the bank is considered to have even more sugar because the sugar you borrowed is added to the bank's supply. What "leverage," "the fractal banking system," and "capital constraints" all indicate is that the bank is allowed to lend you 10, 25 or even 40 times the amount of money it actually has, depending on the "limiting rules" in place.  For a period of time, the banks in Iceland had no limit on the amount they could lend out and thereby created so much money for themselves that they had more money on their books than the entire GDP of the country.  Imagine you were a bank and the "capital constraint" leverage ratio was 4% and you had a hundred dollars in your pocket.  You could lend your friend $2500 (without touching the $100 in your pocket).  Once you had your first friend's IOU for $2500, you could lend a second friend 25 X 2500 = $625,000.  If you could find a third friend, you could lend him $625,000 X 25!  You'd be a multimillionaire.  Kinda makes you want to be a banker, doesn't it?

The Bitcoin experiment

I call bitcoin an experiment because it attempts to test (prove or disprove) a hypothesis in an empirical fashion.  The hypothesis is that it is possible to create money without a central bank, without a private banking system, in fact, without any of the middlemen who run the financial system.  The mere fact that bitcoin still exists (despite constant rumours of its demise) is proof that it is possible to have a monetary system, to buy and sell, lend and borrow, carry out transactions of every sort on a person-to-person basis, without a central bank and accompanying private banking system.


What's wrong with bitcoin?

As I have taken note, here and there, of what is said to be wrong with bitcoin, I have found the only substantially negative feature of bitcoin relative to other currencies is its volatility.  The value of a bitcoin can change dramatically because its price is based entirely on supply and demand.  The total supply of bitcoins has, by design, been limited to 21 million.  Bitcoin is comparable to gold in terms of its limited supply and consequent fluctuating value. Fluctuations in the value of bitcoins can be unnerving as you are trying to decide if you should save, spend or exchange them.  This forex volatility calculator rates bitcoin (BTC) at least four times more volatile than most currencies.  Today's financial news is full of references to bitcoin's dramatic fall to below $10,000 Canadian.  Of course, if you bought, mined or were paid in bitcoins six years ago, you would still be up over $9000 per coin.  Central banks generally work to reduce the volatility of their countries' currencies, but they can also manipulate them to serve national economic interests in the global market place.

Much is made of the potential use of bitcoin to avoid taxes or for criminal activity.  As such bitcoin is a more technological, efficient replacement for cash, gold, jewelry, and artwork--all common currencies for tax-evading criminal activity (not to mention offshore banking, of course).  The real risk to and of bitcoins is that countries will and have been moving to protect their own central banks and banking systems by banning the use of bitcoin.  China is a leading example.  The second bitcoin risk, and perhaps this is the greatest one, is the competition from countries--like Canada, as the Murchison presentation suggests--when they create their own versions of bitcoin using the blockchain technology which would allow the government to track how every Canadian digital dollar is spent. 


Addendum




Friday, 28 June 2019

Petrodollar Warfare: Understanding the US Obsession with Iran

First invasion of Iraq 1991

When the USA was planning its first invasion of Iraq, a young Kuwaiti nurse testified before Congress  describing Iraqi soldiers pulling infants out of their incubators and tossing them on the floor.  The "nurse" turned out to be a princess of the Kuwaiti royal family, and her testimony pure fiction. However, her story created the needed public support for the invasion.

Second invasion of Iraq 2003

As the USA was preparing its second invasion of Iraq, Colin Powell was tasked with presenting "irrefutable" evidence that Saddam Hussein was producing weapons of mass destruction.  Powell's presentation together with the totally fatuous belief, held by some Americans, that Hussein was responsible for 9/11 were sufficient to once again garner support for a war against Iraq.  As is well known at this point, the proclaimed purpose of the war was baseless--no WMDs or facilities were found.

USA preparing for war in Iran

As the USA once again prepares to go to war in the Middle East, this time against Iran, perhaps it's time to ask why.  What is the "real" reason the USA is about to invade Iran?  The answer is for the same reason the USA invaded Iraq:  petrodollars.  There are hundreds of sites on the internet which will give you a more detailed, sophisticated description and expert explanation of petrodollars than I will give you here.  As usual, I am shocked by my own ignorance.  However . . .

Petrodollars are basically another name for American dollars, but to understand the significance of this simple fact we need a primer on how money works.  Imagine you are looking at a house and the price is one million USD.  We always think in terms of what the house or the product or the service is worth in terms of money, but we rarely ask "What is $1,000,000 worth?"

Prior to the 1970s it was easy to say what one American dollar was worth, because the USA promised to maintain a stockpile of gold and every American dollar was backed up by that gold.  However in the early 70s the USA was no longer able to maintain a sufficient amount of gold to back up the amount of money they were spending on the Vietnam War.  Richard Nixon announced that the US dollar was no longer on the gold standard.

How the "gold standard" became the "petrodollar"

Keep in mind that money, the US dollar, for example, is physically just paper or pixels--pretty worthless.   The challenge for the USA was:  How do you make your money worth something when you don't have the gold or resources or anything else to back up the trillions and trillions of dollars you want to create and spend?   The answer is that the USA made a deal with the Royal Family of Saudi Arabia--the largest oil producing country in the world.  "We will buy your oil and provide you with military protection against any and all your enemies.  In return, you agree to only sell your oil for American dollars."  Eventually, all the OPEC countries signed on to the same deal.  Over time, virtually all oil transactions world-wide would come to be conducted using American dollars.

Why is an American dollar worth something even in China or Japan or Sweden or Australia?  Because you are going to need American dollars if you want to buy oil, and every industrialized country in the world needs oil (so far).  Oil remains the most valuable resource on the planet. From an American perspective this means you can print paper money and produce pixel dollars, endlessly running up deficits and debts, but you don't have to worry about your money losing its value because virtually every country in the world has a vested interest in maintaining the value of the US dollar because they have some and they need them to buy oil.

As William Clark puts it in Petrodollar Warfare, "No longer backed by gold, the dollar became backed by black gold."  The irony is, of course, that the American dollar isn't backed by American oil; it's backed by oil from other countries.  What happens if some countries and some oil producers decide that they want to start buying and selling oil in a currency other than American dollars?



Military defense of oil, the USD and the petrodollar seems inevitable

The USA is the largest debtor nation in the world.  The USA spends more on its defense and runs larger deficits than any other country in the world.  The economy of the USA (including the strength of its military) depends on oil, the US dollar, and the connection between these two.  If you are still wondering why the USA invaded Iraq in 2003, as Williams points out: "On September 24, 2000, Saddam Hussein emerged from a meeting of his government and proclaimed that Iraq would soon transition its oil export transactions to the euro currency."

Iran has also announced its intention to sell oil for Euros and other currencies--as has Venezuela.


https://www.youtube.com/watch?v=CWtIu7mbnbM&feature=youtu.be




Tuesday, 19 December 2017

How Is Money Created?

Money isn't just pixel dust! 

In an earlier post I described money as “pixel dust.” I was being cute—way too cute! Sometimes an analogy can hide much more than it reveals. Money is not created by Tinker Bell, though I did feel a bit smug upon realizing that the writers of the Zeitgeist film series repeated my observation that when you take out a bank loan you create that debt out of nothing.




Banks have the right to create money, but they need your help

The bank does not have the money it is lending you. Stop and think about that for a moment, because it is the answer to the question “how is money created?” As more and more people struggle to understand bitcoin, the fact that money is just a way of recording debt is starting to sink in. When I googled the question “how is money created?” I was surprised by the number of sites covering the question—the number of people who knew the answer. I found myself asking, as I often do, how could I not know this? Shouldn’t every ten-year-old know the answer to this question?  Every time you take out a loan for a house or a car or an education, or buy a cheeseburger with a credit card, you create money--those pixels on a computer screen somewhere that are the reason you work and save and struggle.


The Federal Reserve gives banks the right to create money

In the USA the Treasury prints the money, but the amount of printed money is less than three percent of the total money supply in the system. Actually no-one really knows how much digital debt (i.e. money) there is floating around on the internet and in the intranet systems of all the banks and financial institutions in the world. We know, as I pointed out in my earlier post, there are 1.35 trillion US dollars in circulation (i.e., paper money), but the US debt is 18 trillion dollars. The unregulated derivatives market (the one that caused the crash of 2008) is believed to be worth between 710 trillion and 1.2 quadrillion dollars. To answer the question how much US money exists in the world today (remember money is just a measurement of debt), you need to add up all these numbers: 1.35 trillion plus 18 trillion plus (to be conservative) 710 trillion.  In total, a conservative estimate is that there are  729.35 trillion US dollars in circulation right now. How was all this money created?


The rules for creating money

There is an exchange of paper but, basically, the US Treasury gives it to the Federal Reserve. The Federal Reserve then distributes the money to 12 Reserve Banks across the country which in turn pass the money onto private banks. So how does so much money get produced?  We've been here before: leverage.  It's all about the leverage ratio.  




This graphic (above), which I found online, does a nice job of showing how the money flows in what is known as the "fractal reserve banking" system.  "Fractal" (aka "fractional") means that the banks get a fraction of the amount that they are allowed to lend out, so it really boils down to leverage. Descriptions of the "fractal system" make it sound as if the amount of leverage in the system is quite modest, but as Blinder (who you might remember was a VP in the Federal Reserve) points out, in After the Music Stopped, financial institutions figured out ways to create synthetic leverage ratios of up to 40%.  Let me remind you of what a 40% leverage ratio means.  A 4% leverage ratio means a bank with $1 can lend out $25,  a 40% leverage ratio means that a bank with $1 can lend out $250--250 times more than it actually has.



What is the US Federal Reserve? 

The Federal Reserve is the moolah machine, the institution that creates money and runs the monetary system.  It is the model for and has tentacles into just about every central bank in every country in the world.  The cynical, conspiratorial answer to the question is that the Fed is a bunch of bankers, a cabal of the CEOs from the biggest banks and financial institutions in the world. According to the Zeitgeist movement, all the ways that we might imagine the world is being run--politics, religion, economics--are distractions, cover-ups, window dressing.  The only real power is the monetary system which remains hidden behind the activities of governments, religions, and all movement of goods and services.  If you ask why the USA is constantly at war with someone or something, the Zeitgeist answer is that nothing feeds the monetary system better, profiting and empowering those closest to the system, than warfare. Even conservatives acknowledge that money is the life-blood of the economic system, and nothing pumps more spending, borrowing and debt (i.e., money) into the system than a war.

graphic of Federal Reserve System



Who owns the Federal Reserve?

This may seem like a strange, dumb, childlike question, but I as I have attempted to get a handle on how the system works, I understand perfectly how we end up at this question.  The pervasive suspicion that the Fed is owned and run by self-serving financial titans is hard to dismiss.  In her book Plutocrats, Chrystia Freeland notes a study on the incomes of Harvard University graduates showing a "split between bankers and everyone else, with financiers earning 195 percent more than their classmates." Harvard grads aspiring to become part of the 1% of the 1% have figured out that being connected to the monetary system is the way to do it. Certainly Jamie Dimon, a card-carrying member of the .1%, CEO of Morgan Chase, the largest bank in the USA, being a member of the board of the New York Federal Reserve has got to have the average wage-earner wondering "what the fuck! how is that possible?"

The official answer is that the Federal Reserve is “a blend of public and private characteristics.” Historically the network of "reserve banks" was created in 1910 at a meeting of private bankers on Jekyll Island (yes, it's a real place; I played golf there once in the 60s).  The idea that the entire monetary system would be run by unsupervised private bankers was unacceptable to Democrats; consequently, it was eventually agreed that the Chair of the Federal Reserve and the seven members of the Board would be chosen by the President of the USA and ratified by Congress. They all inevitably have strong connections to the world of banking and finance. As you work your way through the layers of administration, through the lip service and platitudes, the Federal Reserve does seem to be more and more a system run by banks for banks—despite repeated claims that the objective of the system is “to promote the effective operation of the U.S. economy and, more generally, the public interest.”


There are three kinds of answer to the question "Who owns the Federal Reserve?"


  1. The historical, conspiracy-inclined answer is that the Federal Reserve is owned by eight families: https://www.linkedin.com/pulse/federal-reserve-cartel-eight-families-max-kofoed

  1. The official answer is “The Federal Reserve System is not 'owned' by anyone. Although parts of the Federal Reserve System share some characteristics with private-sector entities, the Federal Reserve was established to serve the public interest.” https://www.federalreserve.gov/faqs/about_14986.htm

  1. The third answer, on the other hand, is “The Fed is privately owned. Its shareholders are private banks.” https://www.globalresearch.ca/who-owns-the-federal-reserve/10489


Whatever answer you accept, it seems clear that the much mocked concept of "trickle-down economics" is beside the point. We live, without much question, in a trickle-down monetary system.

Thursday, 23 March 2017

Saint Mathew Pray for Us! Bank Deregulation Is Back!

Shock and awe and bank deregulation

Amid the boom and flash of the spectacular political theatre going on right now, you may not have noticed the announcements in a single utterance on television or in columns in the back pages of your local newspaper—“banks need to start lending money again,” (Trump on CNN), “President Donald Trump promised a meeting of community bankers to strip away some Dodd-Frank financial regulations” (B3 Globe and Mail 10 March 2017) and White House fires Preet Bharara “the high-profile Manhattan prosecutor known for his pursuit of public corruption and Wall Street crime” (A18 Globe and Mail 11 March 2017)—bank deregulation is back! “Bank deregulation” was the precursor to the financial collapse of 2008 causing banks and financial institutions to go bankrupt, individuals to lose homes, jobs and pensions, and triggering the government bailouts of the banks costing taxpayers what is now estimated to be a trillion dollars.  (Historically the British and Americans defined “billion” and “trillion” differently, but these days the American definition seems to prevail.  In the American system, a “billion” is a thousand million and a “trillion” is a thousand billion. Here is a more visual and visceral sense of how much a trillion is.)   The “Dodd-Frank regulations,” about to be "stripped away," were the rules put in place to prevent the collapse of 2008 from happening again.




Saint Mathew, the patron saint of bankers and accountants

Saint Mathew was an apostle of that Jesus the Anointed (who was voted “God” by the Council of Nicaea in 325).  Mathew is the alleged evangelical author of the first gospel of the New Testament  (although his name was not attributed to the text until after he was long gone, and oddly, in the gospel, he refers to himself in the third person--but then again so do I sometimes), and the patron saint of bankers and tax collectors (these days we might suggest that he choose a side), of accountants and money in general  He has a lot to answer for.  Even though I have graduated from agnosticism to atheism since beginning this blog, I’m recommending prayer in this case, because there really don’t seem to be any other options.  Bank deregulation isn’t just on the agenda, it seems a foregone conclusion.  



Bank regulation, bank-robbery deregulation; tomato, tomaato

I have to confess that I broke my pedagogical rule of Do No Harm Part II: Avoid Irony in my last post on bank robbery, but the point I wanted to make is that the next time you hear someone talking about “deregulating banks,” you can substitute “deregulating bank robbery”  and discover that the arguments, the logic and justifications turn out to be the same. So what?  We may be living in a global oligarchy these days with wealth dictating government policy and the law, but perhaps there is some measure of solace in being able to say, “I know you are going to screw us because you have that power, but forget being smug and self-righteous because we know what you’re doing.”

Step one of being un-fooled is to understand what the expression “bank deregulation” means.  Here are three words that you need to know in order to know what "bank deregulation" is all about: "derivatives," "leverage," and "rent-seeking."

  • Derivatives.  I may have talked “derivatives” to death in my earlier post, but basically what you need to understand is that “derivative” means that banks and financial institutions can “bet” on the stock and bond markets.  “Bet” is the important word here.  As described in The Big Short (both book and film), these “derivatives” are not investments in companies or products or services, they are simply companies and individuals betting that a stock will go up or down without actually investing in the company they are betting on or against.  Finance people make “derivatives” sound reasonable by describing them as “insurance”; as in you buy an insurance policy on your house to protect yourself against the possibility that it might burn down.  However, a derivative is more like buying an insurance policy on your cigar-smoking, alcoholic neighbour’s house in the hopes that his house will burn down—so why not buy him a bottle of vodka and a box of cigars for Christmas, his birthday, etc?  In the film version of The Big Short derivatives are shown as being like following your neighbour to the casino and when he bets two dollars on the roulette table, you bet 10,000 dollars with someone else that he is going to lose his two dollars, and someone else bets 100,000 dollars that you are going to lose your 10,000—that’s the derivatives market.  The derivatives market is estimated to be between between 710 trillion and 1.2 quadrillion US dollars.  (see "The Size of the Derivatives Bubble").  Just to put those numbers in perspective once again the total GDP of the USA is 17 trillion.

  • Leverage. How are these crazy numbers possible?  How is it possible that so much money—40 to 70 times the total wealth of the USA, 700 to 1000 times the amount of US paper currency which actually exists in circulation—is being gambled?  The answer is “leverage” (that’s chapter six in The Art of the Deal, the book which Trump’s ghost writer, who wrote the book, called “a tissue of lies”).  “Leverage” is what “bank deregulation” is all about.  If a bank has assets worth one million dollars, the average person might imagine that a bank can therefore lend out to clients up to one million dollars.  Under current US banking regulations the leverage ratio is 4%, which translates as a ratio of 1 to 25.  In other words, if the bank has 1 million dollars, they can lend 25 million dollars.  That’s right; for your mortgage or your car or your kid’s education, they can lend you 24 million dollars that they don’t have—but you, of course, must repay in money that you actually have.  (By the way, the mortgage that you owe to the bank is considered one of the bank's assets.  If you owe the bank $200,000, by regulation the bank is considered to have that money within its assets.)  The current "leverage ratio" (1 to 25) is the key regulation that banks find too onerous, limiting and difficult to comply with.  They want to change the leverage ratio so they can lend you even more money that they don’t have.
  • Rent-seeking.  This is the concept that we really need to watch out for.  The idea has been around since the 1970s, and is being much discussed in financial circles.  I found out about it reading Christia Freeland's Plutocrats:  The Rise of the New Super-Rich and the Fall of Everyone Else.  You might imagine that with all this money floating around it should be easy to cure cancer, end world hunger and poverty, offer everyone daycare and free education from kindergarten to PhD, but as the operations of rent-seeking become more obvious, it is becoming apparent that all this fabulous wealth doesn't actually produce anything, and it isn't the result of anything being produced.  Monumental wealth is being produced simply through the manipulation of government regulations, in particular the laws govern finance and banking. "Money" has become like Tinkerbell's pixie dust, not tied to anything of value, but available to the super rich to sprinkle on politicians, and for politicians to sprinkle back in greater measure on the super rich by adjusting the regulations for banking and finance to their whims and favour.  The disappearing middle class can look back on "trickle-down economics" and crumbs from the big table as "the good old days" because pixie dust may float in cosmic clouds above  but the .1% are exceptional at keeping it afloat and have little motivation to let it fall on the rest of us.





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