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

Friday 25 March 2022

Foreign Policy Realism: Can an Agreement on Ukrainian Neutrality End the War?

The USA and NATO are to blame . . .

In his 2015 lecture at the University of Chicago, Professor John Mearsheimer argued that expanding NATO  to Russia's borders was a mistake.  In 2022, Mearsheimer has continued to reiterate his position that a neutral Ukraine serving as a bridge between Russia and Europe would serve everyone's best interests:  the Russians', the EU's, the USA's, the West's and especially and most importantly, the Ukranians'. As early as 1998, George Kennan, author of "The Long Telegram" and "architect of America's successful containment of the Soviet Union" also decried the reckless and ill-advised expansion of NATO to Russia's borders. The expansion of NATO was a mistake, they argued, for two basic reasons:  1) it would eventually goad Russia into a hostile response and 2) it offered a false promise of military intervention to new member states (the USA was highly unlikely to engage in a nuclear war with Russia in defence of Latvia, Lithuania or Estonia, for example, when they had no strategic or economic value for the Americans).  


The "Historical pattern" counterargument

In a New Yorker interview, Stephen Kotkin, a scholar of Russian history, declares:

In a Globe and Mail article entitled "To understand why Ukraine is under attack today, we need to look at Russia's actions over the last 70 years," Michael Ignatieff adopts a similar "historical pattern" argument.  Ignatieff writes:  "This story of four Eastern European capitals, all under attack from Russia, over the past 70 years makes nonsense of the claim that NATO expansion eastward caused this crisis." 


 Foreign Policy Realism

Perhaps because I have become so familiar with the aphorism which always accompanies financial advice--"Past performance is no guarantee of future results"--I find the "historical pattern" argument unconvincing.  Additionally, a close focus on Russia's historical pattern of behaviour tells, at best, only half the story.  Any attempt to analyze a global conflict would, logically, have to consider the American historical pattern of behaviour over the last 70 years:  a 20-year war in Afghanistan, two wars in Iraq, the war in Yugoslavia, bombings in Syria, targeted assignations throughout the Middle East, interventions in Granada, Panama, Chile, Nicaragua, etc, etc, all the way back to the Vietnam War. Imagining, on behalf of the Russians, that they had nothing to fear from the US expansion of NATO and that what is happening can be completely explained by Russian imperialism and nostalgia for the Soviet Union strikes me as willful blindness. 

Reading Ezra Klein's NYT interview with defence and foreign policy analyst Emma Ashford, I discovered that my thinking had a name:  "foreign policy realism."  As Klein explains:

Realism is a political framework that understands international relations as a contest between relatively rational states for power and security. It’s pretty structural in that way. It sees the actions and activities of states as quite predictable, given their role and needs in the international security hierarchy.

[ . . . .]  It wants to be structural, not personal or individualistic.

In this case, there’s a particular realist analysis that has caught a lot of people’s attention, which is John Mearsheimer’s model of the conflict.

Realism, Neo-classical realism, game theory and chaos theory

Emma Ashford is, according to Klein, "what’s called a neo-classical realist. She begins with a structural, state-based, power-based analysis of realism, but then opens it up to more influence from domestic politics — the psychology of individual leaders, the messiness of reality."  We've been here before in another context.  My post "The Market, the State and the Monkey in the Middle" highlighted economist Jean Tirol's "game theory" which, like neo-classical realism in strategic studies, proposed that the traditional models based on the assumption that all agents would act in rational self-interest were inadequate because they failed to take into account the cognitive bias and ideology of individuals.  I must also admit that I believe in "chaos theory" (see "The Chaos Theory of International Trade"), the idea that individual actions can unleash global consequences, as in the case of Gavrilo Principthe Bosnian teenager whose assassination of Archduke Ferdinand is said to have started World War I. 


The Danger of melodrama

In the current crisis, I retreat to realism because being rational and crediting our enemies with being rational is the only way to de-escalate and to avoid the worst possible of all catastrophes.  As I have reviewed Western media coverage of the war, I have noted the high frequency of images of desperate women and children.  The intent is to call upon our compassion and, of course, compassion is called for.  But compassion over time and with increased intensity can become simply passion, overwhelming emotions which have no real objective but create an irrational antagonism towards Russia, Russians and all things Russian.

I have long observed that a story "has legs" in Western media if it manages to copy the structure of melodrama:  strict moral justice,  a courageous hero, an evil villain, innocent victims,  suspense, and surprising happy ending--all the features which dominate our TV and film entertainment.  The word "melodrama" is synonymous with heightened emotions and derives from the practice of playing music during a character's speech to raise the emotional intensity.  An emotional response to the war in Ukraine is appropriate but the substitution of a melodramatic narrative for a clearheaded, rational awareness of what is going on is dangerous.

Consider Michael Ignatieff's recent article in the Globe and Mail ( O1, 06, 9 March 2022).  Ignatieff writes:

The Russians need to understand that if they stage a military incursion across the NATO border--Lenin's bayonet probing--they will be met by force, and if that fails to hold them, they will be met with nuclear weapons, at first tactical, and then as necessary, strategic, too.

As a Harvard University professor, Ignatieff was a supporter of George W. Bush's invasion of Iraq.  He was leader of the federal Liberal Party and, were it not for his impatience, forcing an early election that no one wanted, he might have become Prime Minister of Canada.  In case you missed the gist of his halting prose, he is advocating a nuclear war against the country which holds the largest stockpile of nuclear weapons on the planet.  


Claims of Putin's insanity make him more dangerous not less

Ashford, like Mearsheimer, is categorical that "Putin is a rational person [and] that he’s making rational decisions."  However, Ashford contends that Putin is being ill-advised because he is surrounded by sycophants determined to tell him what they think he wants to hear.  Western foreign policy and strategic analyses all too often prove to be pseudo-psychological speculations on Putin's innermost dreams, fears and ambitions.  Ruthless, autocratic and amoral as Putin might be, melodramatic depictions of him as an insane, evil villain, protagonist to courageous, heroic Zelensky, the movie star who became president of Ukraine in fiction before he became President of Ukraine in fact, move us in only one possible direction:  escalation, with the hope that the hero will save the day as he always does in the movies.  If Putin really is the mad megalomaniac we have been encouraged to believe he is, then we should be showing much greater fear of him than we have so far.


Are We the centre of the universe?

The Globe and Mail article entitled "UN General Assembly deals Russia overwhelming diplomatic defeat over Ukraine invasion" displayed this map:

Blue indicates the 141 countries which voted in favour of the resolution condemning the Russian invasion.  Red indicates the 5 countries which voted against the resolution.  Yellow and grey indicate the 35 countries which abstained and 12 which did not vote, respectively.  Considering, as a block, the 52 countries which failed to condemn the invasion, including China, India, Pakistan, Iran, Iraq, Kazakhstan and 17 African countries, a division of the globe between East and West begins to appear.


Noting this division reminded me of Peter Frankopan's The Silk Roads: A New History of the World. For me, the book was, in fact, a "new history of the world." Throughout my studies and my career as a professor, the world began in Greece, spread to Europe and the UK, and eventually crossed the Atlantic to the USA and Canada--there was barely anything else worth knowing about. Awareness of the East changes the entire world narrative that we call history. Western imaginings that the West is the centre of the world are not unlike that time before Galileo when we thought the Earth was the centre of the universe. Our imaginings are not easy to give up. When the Inquisition showed Galileo the instruments of torture he recanted his claims that the earth and planets revolved around the sun. It would take the Catholic Church 350 years to admit, in 1992, that Galileo was right all along while absolving the Inquisition of any blame for their justified, well-intentioned error.

We, in the West, imagine that "we are the world" at our peril.  Without paying much attention, our self-absorption has made enemies and forged alliances against us among countries that have been erstwhile enemies to one another:  Russia and China, India and Pakistan, China and India, Iraq and Iran.  For much of recorded history, the East (not the West), as Frankopan elaborates, has been the centre of wealth, progress, civilization and empires.  It is Western orientalist folly to imagine that the East can never rise again.

The USA sanctions China and Russia at the same time

In his 2015 lecture, Meirsheimer argued that the USA would need Russia, as an ally, to compete against the growing power and influence of China.  The opposite has, of course, been happening, as the USA practically forces Russia and China to ally with one another by imposing sanctions on both countries at the same time.  Only a few short weeks ago, the USA was accusing China of genocide and passed into law the Uyghur Forced Labor Act which, if Border Security Agents enforced the letter of the law, would ban virtually all imports from China. The Canada-United States-Mexico Agreement free trade agreement would compel Canada and Mexico to do the same. (See What if China Isn't Using Forced Labour?)

Joe Biden's recent State of the Union, which focused on Russia, Ukraine, and NATO adopted a distinctly different tone toward China.  In fact, China was only mentioned in the context in the new US infrastructure bill:

In tone, this State of the Union downgrades China from "evil empire" to one of many friendly competitors and Xi from an aggressive dictator to a "good ol' boy" confident.  

However, as reported in Politico, the more recent two-hour-long call between Xi and Biden indicated that the China-US relationship had turned "profoundly negative."  As reported in Politico:

 Russian Tanks versus a weaponized US dollar

Since President Biden has already signed into law a ban on the importation of goods from China, further sanctions would have to be the kind of weaponized financial sanctions that the USA has already imposed on Russia, Iran, Cuba, North Korea and Venezuela.  Weaponizing the USD (US dollar) against China has been much discussed in recent years. (See Analyzing the Discourse.) Canadians got a small taste of how that process functions when we were called upon to arrest the Huawei CFO on a charge of bank fraud for allegedly misleading HSBC about Huawei's financial transactions in Iran. The current American weaponization of the dollar against Russia is of such a scale that in addition to claims that it will destroy the Russian economy, it is raising questions about the survival of the USD as the highly privileged global reserve currency.

In "Ukraine and Dollar Weaponization," George Pearkes writes: "America has responded by threatening Russia with an unconventional weapon: the dollar. However, deploying the dollar may actually undermine its power, and hasten its departure from the US arsenal."  Discussions of how long the USD can remain the global reserve currency and what might happen as it declines have been around for a long time.  Historically, six countries--Portugal, Spain, France, Netherlands, Britain and now the USA--have held the coveted status of "global reserve currency" (i.e., being the country which produces the money that other countries must use for international trade).  On average, countries have maintained the privilege of being the global reserve currency for 94 years.  The USD has been the global reserve currency for 101 years.  Both the Chinese yuan and Bitcoin have been discussed as candidates to replace the USD as the dominant global reserve currency.


What Happens next?

To state the obvious, we have never been here before.  Many may predict but no one knows how these never-before-seen variables will play out.  For those who might have thought of the "weaponized dollar" as an esoteric myth, the current circumstances make plain that a weaponized dollar is a real-world strategy.  The question remains as to how strong and effective a weapon it is.  David Frum, in The Atlantic, claims that financial sanctions will cause the collapse of the Russian economy.  In the State of the Union, President Biden announced that 

Some commentators have pointed out that the sanctions and seizures might be largely symbolic.  Seized yachts, planes and apartments remain the property of the Russian oligarchs until such time as it can be proved in court that they are connected to criminal activity or support for the Ukrainian invasion.  Many of the Russian oligarchs are finding sanctuary in Israel which has shown muted support for Ukraine's Jewish president.


Of the states which have been the target of US financial sanctions:

Can an Agreement on Ukrainian Neutrality End the War?

In recent days, President Zelensky has announced that Ukraine will not join NATO.  Ezra Klein cites this fact as evidence that NATO expansion was not the cause of the invasion.  History has proven over and over again that wars are easier to start than to end. For those who embrace a melodramatic vision of the war in Ukraine, Zelensky's declaration might seem a setback for the hero and a victory for the villain, but it is also a step toward ending the war without escalating the destruction and bloodshed.  At least one of Putin's claimed justifications for the invasion has been removed.  We might ask why it took twenty days of warfare to get to this point.  Putin's other conditions, sovereignty over Crimea, which he has held since 2014 and is dominantly Russian in terms of ethnicity and language, and the lifting of sanctions, seem not unreasonable concessions compared to the risk of a nuclear war.  It might grate that we would be rewarding Putin's bad behaviour but this isn't kindergarten; it's the real world with lives at stake.


Interviewed on "Going Underground," John Bolton claimed that Putin's real interest in Ukraine is the eastern and southern provinces--sites of the Ukrainian civil war and ports on the Black Sea, respectively.  (I cannot link to the interview because internet access to Russia Today is now being blocked.)  The hard negotiations will likely centre on these territories. 

Russian forces overrunning Ukraine sites where the USA has established bio-weapons labs have sparked new areas of concern.  The claims of US bio-weapons labs in Ukraine have been broadly dismissed, but Glenn Greenwald offers a convincing argument that such facilities do exist even as US officials manage to deny their existence.  However unsavoury and unpalatable a negotiated peace might seem, it pales in comparison to the alternatives.  Consider: What would a Ukrainian victory look like?  What would a Russian victory look like?  In the end, there isn't much difference between the two:  everyone loses in a lengthy war of attrition--likely lasting longer than the major players will be alive--guaranteeing more destruction and loss of life, and the potential escalation and expansion of the war beyond any measurable limit. 


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. 


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.


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.


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. 


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