Archive for the ‘Monetary Reform’ Category

Waste and Corruption Out of Thin Air

Friday, August 7th, 2009

If government proposed a “stimulus” program to give each American 50 million dollars, we’d immediately think of inflation.  At that scale, the proposal would meet its deserved ridicule.

However, I’d like to look at how it would work ex-inflation, so let’s pretend there is no inflation problem.  The Federal Reserve’s magic omnipotence determines that there’s “slack” in the economy so that government can create and give everyone 50 million dollars (and Goldman Sachs its commission), with no significant inflation.  We’ll make no assumption about ever repaying the 50 million per capita, which is a realistic expectation in the current real world of money and credit expansion anyway.

So with no inflation, should The Fed get really excited (they must have been at least starting to doubt the magic) and do it again?

No.  Even without inflation, the artificial abundance of credit money will cause plenty of other distortions to economic behavior.

For starters, some people will simply retire to become consumers only.  With their production removed earlier than it otherwise would have been while their consumption is still there (and may increase in early stage “stimulus” euphoria), over all wealth measured in production (rather than money out of thin air) has gone down.

In our decades long credit roller coaster this retirement miscalculation has certainly occurred, with credit expansion giving people false signals that they can retire or semi-retire when actually they still needed the economy and the economy still needed them (provided they could somehow have been directed to real production and not to bubbleland).

The scope of this gift from The Fed and the banking system to our seniors and near seniors is still unknown.  Some people soon to be forced into unretirement now that the credit veil has slipped will have skills they can market at the level they’re used to in the face of impaired economy headwinds, and some won’t.  Since that’s about all we can know for now, we’ll have to leave these folks high and dry where the helpful stewards of the economy have put them, and move on to other expansionary credit “life blood” effects.

With my 50 million, I’ll probably stop everything else to pursue a writing career.  Any other productive possibilities from me will be permanently (or at least until everything blows up even more) lost to society.

In the 50 million for everybody story, plenty of other part-time writers will join me in pursuit of the full-time dream.  Also, actors, film makers, dancers, models, painters, sculptors, chefs, fashion designers, musicians, and of course, singers.  American Idol will need at least a few extra rotations– maybe even its own network.

Something like this happens in real life credit expansion.  It’s not just directly bohemian pursuits, but other apparently more practical endeavors that become over indulged because of false expansionary signals: we get more retailers, restaurateurs, boutiquerateurs, financial and real estate tycoons in training, “internet marketing gurus”, advertisers, public speakers, and miscellaneous experts– every type and stripe of consultant who once did something successfully for a decade (or at least didn’t fail too publicly), and have now risen above doing the expert activity to advise others.

Pursuing the dream, or advising others on dream pursuit, isn’t bad as such (too late, I’ve insulted everyone– no one is reading anymore).  And it’s certainly not that many people in professions this piece may appear to denigrate aren’t exactly in their productive niche and awesome there.  However, regardless of whether we make those judgements that money and credit creation make the economy too fluffy, it clearly does make it too frothy– entrepreneurs get hasty in pulling the trigger, and then hang on waiting for the next boom that credit expansion signals have promised them.  This paper promise must eventually be broken since no amount of paper, nor any book keeping entry of whatever size, is ever going to eat a single restaurant meal, or otherwise consume anything except for a dwindling supply of economic clarity and perspective.

(It isn’t entirely a vacuumful of wishful thinking on the production side of course.  The psychological extremes of overreaching are naturally late stage, while consumers will all along have been helpfully translating their expansionary false signal receptions into “real” but ultimately regretted demand for dreamy non-essentials– the new era feedback loop that the Fed thinks it wants, and doesn’t really even seem to much doubt after it collapses.)

In the 50 million dollar story, Fed magic is still on the job, and there’s no collapse yet.  There are no laborers– everyone is retired, an artist, or an entrepreneur– but we still haven’t got to the true elephant in the central bank.

The “slack” has come out of the economy– at 50 mil per head, probably with a pop.  The artificial boom has ratcheted up the optimism of the players.  Those entrepreneurs with apparently successful businesses will be getting signals to expand them.  The Fed, not wanting to “choke off” the apparently vibrant economy, and getting plenty of cheerful feedback from the banking system that new credit can be “absorbed”, will feed the frenzy, as they were born and structured to do.

Now the future looks so huge that the entrepreneurs believe they can take on bigger and more distant expansionary projects.  Indeed, the situation seems to demand it.  The closer borrowed money gets to being free– a favorite central bank ploy– the more dangerous it seems to decline expansion.  Your competitor may be using the free money to grow to infinity and then smother you.

Because the credit is artificially created, it can signal temporary enthusiasm, but it can’t signal an actual match up to future available resources.  The flashing, screaming pedal to the metal promise of future resources to complete every entrepreneur’s project is a screaming pedal to the metal lie that no actual arriving future can possibly fulfill.  (For one thing there aren’t any laborers, somebody’s bound to notice that eventually.)

This is where the true “confidence” issue shows up.  It doesn’t matter if players are confident that government “will provide liquidity”.  Speeches, guarantees, backstops and loans of last resort don’t help– in fact make it worse, because these are rational doubts about what is and is not being produced from finite resources, how much of the future is being crammed into the present, and when exactly this denuded future will make it’s appearance (or from where we are at the moment, its curtain call).

No Bernanke or Geithner speech can address this, because all they can produce is debt and more speeches, and all that brings is economic and political miscalculation, waste, instability, and possibly on top of that, inflation.

By Les Lafave
Monetary and Banking Reform – themaestrosrep.org
Originally Published at Strike The Root

Carbon in the Monetary Unit: Alternatives to Fiat Currency

Sunday, April 5th, 2009

In an earlier piece, An Energy and Carbon Monetary Unit, I wondered if there might be a happy medium (so to speak) between the bubbly excesses of fiat currency and a perhaps distant but disturbing problem of interest payments under a gold standard.

Energy money can be considered on its own, but I’d like to introduce a “carbon” credit sub-plot, on the theory that an analysis of energy should be undertaken with all of its output, and tied to its negative externality so that true costs percolate into the light.  A related piece of theory is that over a long enough time frame we benefit if all stakeholders at every scale get to give their “answer” to our economic questions.

My fantasy is that if we could throw the issue into the monetary unit and force a cost judgement on everything, from mini wind turbines hand-knitted of hemp fiber at vegan communes, to whale blubber charcoal cured in spent reactor fuel baths by North Korean child labor, then we could all shut up for just five minutes (except for me; I’d spend ten of my five minutes on a request for exemption).

As an example of energy-pollution monetary interaction, if we determined that wind energy was as friendly as anything could be, then a wind energy unit would require the lowest additive pollution credit to bring it up to one monetary unit– one “energy-carbon dollar”.

Say you’re a farmer (you don’t have to say it out loud if you’re near someone who’ll think it’s weird). You’ve built a wind turbine.

Perhaps (since you’re a farmer), the government will let you use your wind energy on your farm without buying a carbon credit; perhaps (since they’re the government), not.  But if you want to convert your wind energy into money, then you’ll send it through the grid to your bank where they store it in their accumulators and you get, say $.90 for each $1.03 of energy– $.03 in the bank’s pocket, and it’s matched up with $.10 of pollution credit hypothetically required for clean wind, to create an energy-carbon dollar.

If you want, your energy-carbon dollar thus created could sit and wait for you in the bank as a demand deposit.  As is normal for a non-fiat, non-fractional reserve currency, you wouldn’t get interest (and don’t forget the 3% you just got charged for the bank’s administration, risk and loss).  Your money, by law (at last rational), would not be loaned out by the bank, since it’s waiting there for you to demand it.

If you prefer you could ask the bank to loan out your energy money as a term loan.  Then you would get paid interest, with a portion to the bank as intermediary, but you’d no longer have access to your money until the end of the term.  Only one person, the borrower, would be using the saved money until it’s returned to you, upon which only one person, you, would then have access.  (No credit money has been created “from thin air”, and no credit bubble can occur– Austrian School money and credit theory with energy and pollution credits jammed into that mold.)

There is money being created in the example, however the energy piece is created on the productive side of the economy, not the made up financial engineering side, and this energy piece is created from real savings, with a real practical use in future growth, or in a future crisis.

The pollution credit piece is not real savings, and is indeed forged from the fires of Mordor (as some readers may have long ago stopped screaming to their computer screens about out of exhaustion and stress laryngitis).  However, I’d like to invite you to please take a sip of water and look on the bright side. The government created pollution credit part is not real savings, but is “real taxation” for real use of resources, not credit from who knows what, when or who.  Also this money creation can’t occur unless it’s directly and objectively demanded by the market side of the equation.

There would be no Federal Reserve jamming as much credit into the pipe as they can based on a formula of: (Politics) – (What We Think We Can’t Possibly Get Away With) = (Money Supply).

Back to Mordor for a moment.

I’ve seen suggestions that government should issue currency with a deliberate predetermined decay (over and above inflationary decay), so that people can’t “hoard” savings.  In the U.S. this seems like a solution to the world’s biggest non-problem, at least up until now.  How this glib manipulation can be viewed as anything other than disgusting– folks who’ve gamed their way into a nice pension determined that the peasants should never find a way to get any rest of their own– that’s hard to fathom.

However, a practical reason for decay that economic actors can attempt to mitigate seems both qualitatively and quantitatively different– the wear to a gold coin, for example, or in this case, costs and imperfections to storage.  A key question is how cheap and how good energy storage can become, but that seems like a question worth working on anyway.

Would pollution credit, as essentially a tax embedded in money, make industry uncompetitive and drive out capital? That depends.  As a replacement for income tax, it could be the opposite.  (Also as a replacement for creating credit fueled financial whirlwinds and calling them GDP growth. )

Can we get there from here?

Well.  (And this may have a familiar upside-down ring to it, if you read Part I of this piece.)  I tend to be a pessimist.  I believe that if you always listen to the yeasayers, you end up doing stunningly stupid stuff, like building your society’s economy on the premise that credit can create wealth, as long as the credit is created faster than analysis can catch up (sort of a perpetual optimism machine).

The positive part of the pessimist’s credo is that at rock bottom, there may be some upside.  There wasn’t any reason to expect that a king would accept the Magna Carta, but with friendly assistance from societal breakdown, a desperate king did.

Monetary reform doesn’t get much traction– it takes power away from people who’d prefer not to give it up.  The energy in the monetary unit would tend to take some power; the carbon piece might give some back.  I think that what’s given back wouldn’t be as much as the “political class” might think.  Maybe a concept like carbon money could jump in to roll some political logs on the way to hard (or at least harder) money.

By Les Lafave

 Monetary and Banking Reform – themaestrosrep.org

 Originally Published at Strike The Root, March 30, 2009