THE GLOBAL GOVERNMENT PUT

In the last few years we’ve witnessed unprecedented government intervention at every twist and turn.   We’ve seen massive fiscal stimulus, endless monetary stimulus, QE2, Euro plans, etc, etc.  It’s been an endless parade of government “fixes” that don’t appear to have really fixed anything.  And if you’ve been an investor in this market, there is one clear cut lesson from all of this government intervention – don’t fade government intervention.  If you’ve shorted government intervention in the last few years you’ve had your face smashed into the pavement time and time again.

The problem is, without the government intervention, market participants inevitably settle into the reality that the government isn’t really fixing anything through all of these various policies.  They’re more or less shuffling chairs around on the deck of the Titanic.  And yes, they can move the chairs where ever they want when ever they want, but they’re not fixing the hole that is sinking the ship.  So this market has turned into one great big “buy the rumor and sell the news” event.  This all really started in early 2009 when rumors of suspension of mark to market and the implementation of several other government policies were rumored to be on the table.  At that time I made an incredibly lucky buy call the day before the market bottomed on March 8th (my thinking was entirely based on this idea of not fading the government), but I never could have imagined that the strategy over the next 3 years would be one of constantly trying to front run the governments at every twist and turn.

The recent Euro “fix” is the latest and greatest case of government intervention.  And if you’ve been short into this event you’ve had your face rightfully smashed.  And while this government intervention appears to be great in short bursts it also has an inevitable downside.  And the problem for the markets now is that they have to once again wake up to the reality that there’s no government intervention in the near-term.  The EMU leaders have unveiled their great “fix”.  Fiscal stimulus in the USA is off the table as politicians fight over the bankruptcy of the USA that will never occur.  And QE3 is on the table, but unlikely to be implemented until we see inflation indicators simmer down.  Who will calm the markets in the near-term with its much needed intervention?

One of the keys to succeeding in this market during the balance sheet recession has been discovering government interventionist policies, front running them and selling the news.   It’s absurd that I am even writing about this, but this is our reality.  The global government put has come to dominate every twist and turn in the markets.  There is no buy and hold.  There is no value investing.  There is only one big roller coaster of volatility based on the decisions of clueless politicians who fail to understand our monetary system, fail to understand the impact of their policies, but will do anything to make sure that the portfolios of wealthy politicians don’t get blown to smithereens.  Unfortunately, like any trusty rollercoaster, we get off right where we got on.

In sum, know your government intervention.  While all this government intervention might not be doing much for capitalism, the failure to understand it is surely detrimental to your portfolio’s well-being.  Sadly, this is what “investing” has come down to in the day and age of the “New Normal”.  Welcome to the global government put.  Fight it at your own peril.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Michael Covel

    Nobody told me there’d be days like these/
    Strange days indeed, strange days indeed/
    Everybody’s runnin’ and no one makes a move/
    Well everybody’s a winner and nothing left to lose/
    … most peculiar mama/

  • DanH

    Sad indeed. Markets crash when there is no government support and rally in anticipation of it. Meanwhile, unemployment is high and global angst is rising. The stock market is just another case of the aristocracy protecting their own skin. They’re not fixing anything. They’re just fixing their own portfolios so they don’t lose their enormous wealth. The rest of us are just floating in the wind.

  • Anonymous

    Everybody’s flying and no one leaves the ground
    Well everybody’s crying and no one makes a sound
    There’s a place for us in movies, you just gotta stay around

  • brazzo

    In many contries if you are a top manager in a financial institution you compromise your own personal assets in the case the institution goes bankrupt. Your real estate equities and everything else is taken to minimize the loss of depositors. In America the CEO gets his bonus when his large bank goes under harming the nation taxpayers. Fixing that could be a start to avoid 2008 in the future. Same logic should fit politicians too.

  • Rob T

    “but I never could have imagined that the strategy over the next 3 years would be one of constantly trying to front run the governments at every twist and turn.”

    We’re all Kremlinologists now.

  • HG

    Just posted similar points at a website in my country (european). It will be for the history books to judge what this will do for capitalism, long term economic growth, incentives, moral hazard etc. I am not positive.

  • http://www.3spoken.co.uk Neil Wilson

    Same time, same place next year then Cullen?

  • Moe Gamble

    I don’t think the market rally is about Europe. Look at the volume today–nobody’s fooled.

    This is about the Fed floating the idea of more large scale asset purchases in time to goose the market through a technical barrier. Now there’s another bigger technical barrier overhead, while the reality that the Fed won’t be doing another LSAP hits on Wednesday.

    I wish everybody here would read Gregor MacDonald’s piece today at Chris Martenson’s blog: The Great American False Dilemma: Austerity Vs. Stimulus. Since the limiting factor in the economy is oil, none of the options being discussed to save the economy will work. MMT ideas work well with MacDonald’s perspective on oil, and like Cullen, MacDonald recognizes the terrible hit on the middle class and poor from the cost-push inflation caused by the Fed’s asset purchases and threats of asset purchases.

  • ES

    I am quite startled to see 10% + on most stocks in my account today. And, -8% on one momo stock short I have. ((
    That is not a normal market, for sure. This is beyond moral hazard at this point, this is an insane casino with the government being the house.

  • esb

    After the next G-X meeting in early November all attention will then shift over the Atlantic to the Congressional “Supercommittee” and we can do this multi-week tap dance one more time.

    And we had all best be thinking just how far it will float SYP and everything else equity should they announce a “grand bargain” package of 4 trillion consisting of 3 trillion in cuts and one trillion in preference eliminations. In such a case expect relentless leaks, press releases (and conferences) and the like all intended to levitate the equity markets as we move toward the big announcement day.

    If they do it right (the European way) they can get SPY into the 150s by early January or even by EOY 2011.

  • boatman

    it will work til it doesn’t………doesn’t is coming we just can’t see it yet.

  • JRH

    Steve Jobs said that when he returned to Apple in 1997 and it was three months away from bankruptcy, CEO Gil Amelio had a saying: “Apple is like a ship with a hole in the bottom, and my job is to get the ship pointed in the right direction.”

    Given how things are going, that would be a good quote for Merkel.

  • steve

    Knowing when to get on and get off is NOT easy. This rally is similar to the one during the week of July 4 or the day of July 21. Both gov’t puts were failures and markets dove shortly after. We all know markets are up big this month and today. What about tomorrow? Getting on or getting off?

  • Robert in Chicago

    Yep. We have been macro bears for 7 years, we have never been more cynical about governments than we are now — and we’re up 7.5% today. As soon as markets close, I need to go take a shower to wash the slime off.

  • Bond Vigilante/Willy2

    Governments (incl. the FED, ECB, etc.) can only stimulate. They can’t fix the problem. If Mr. Market doesn’t want to cooperate then any government is powerless.

    This was NOT a large government intervention. Too many folks were short and got their head handed to them and were forced to cover their shorts. What it took was one little push and the market went the other way forcing the shorts to cover. This is a market called “”Trade the trader”” since early May.

  • SS

    Cullen, you’re not against government intervention though, right? This piece reads like that. Correct me if I am wrong.

  • F. Beard

    While all this government intervention might not be doing much for capitalism, the failure to understand it is surely detrimental to your portfolio’s well-being. Cullen Roche

    We have not had genuine capitalism in the US since 1913 at the latest. All the current government intervention has been inevitable since then.

    One might have faith that genuine capitalism would pull US through. But what is the basis for faith in fascism?

  • Malmo

    How many jobs has this unprecedented government intervention/s created? How many has it preserved? What type of intervention would have created the most jobs? All I’m seeing from this is speculative froth, absent any real desire to grow the PRODUCTIVE economy.

  • http://www.pragcap.com Cullen Roche

    Well, when we fail to understand the monetary system we fail to understand what hurts it. So we save banks and implement policy focused on helping the wrong elements. We misunderstand what caused the problems so we fail to fix it. I am not saying that govt intervention can actually fix all of our issues, but it can certainly help if implemented properly. The last few years have been a total disaster in terms of policy. If anything, it has proven how poorly our leaders understand the system they are trying to fix.

  • KB

    Cullen,

    You are spot on 100% with the strategy from March 09 up to now. Yet, as with all ponzi schemes, this one works until it does not. Remember, what happened to those who utilized “don’t fade government intervention” strategy in the spring of 2008, when Bear Stearns had been saved and government intervened heavily? They god destroyed.
    At some point government intervention is just not enough and fails. Could you imagine the magnitude of failure under current “world government” put? I feel it will dwarf 2008-09 events.

  • Pierce Inverarity

    You just don’t give up do you?

  • Mercator

    Governments that manipulate free markets; the best and brightest economists study history and end up with conclusions 180 degrees from each other. I was less confused when I read much less. Going back to trusting my own gut and instincts. Served me much better.

  • Mateo

    but it’s not just sell the news, is it?
    some of the announcements you refer to have created real momentum.

  • Malmo

    “I am not saying that govt intervention can actually fix all of our issues, but it can certainly help if implemented properly.”

    Have you any writings on proper implementation or could you provide a few bullet point ideas? Thanks.

  • Ted

    Definitely a piece of the puzzle that we should be addressing. I saw recently that net oil imports account for about half of our trade deficit. According to sectoral balances, reducing this “oil deficit” would help reduce the government deficit, increase private savings, or a combination of both, correct? I’d imagine that would be a very good thing.

    The satellite photo of LA in the article is a bit scary. God forbid we build some dedicated bike paths in this country, so that I’d occasionally be able to bike the 5 miles to work rather than crawl along on a 4-lane beltway…

  • http://riskandreturn.net Lance Paddock

    Oh, I think buying and holding stocks that are good values still works. Mind you, I am not saying many stocks are a good value, but that makes another point. Being negative on stocks longer term (or positive for that matter) based on valuation in the face of government intervention will eventually pay off. Your “tracking error” if you care about such a thing will be huge, but you can still win. Whether clients and our own impatience can survive that is another matter.

    Not to say that it should be the only tool in the box, but it can work. In fact, it has over the last few years.

  • jt26

    “One of the keys to succeeding in this market during the balance sheet recession has been discovering government interventionist policies, front running them and selling the news”

    For the rest of my investing life I’ll remember this great quote. The Great Generation told stories of landing in Normandy … I’ll be telling this quote to my grandkids.

  • phsmith

    Great post! Gov’t wins again, and again. Now about those bonds in Italy…..hmmm.

  • Blissex

    «decisions of clueless politicians who fail to understand our monetary system, fail to understand the impact of their policies, but will do anything to make sure that the portfolios of wealthy politicians don’t get blown to smithereens.»

    That’s ridiculous — the portfolios of wealthy politicians is their influence, not whatever their campaign funds are invested in.

    The politicians (who are as a rule far from clueless, and well briefed, and know what they are doing) «will do anything to make sure that the portfolios» of their constituencies are protected as much as possible as long as possible.

    In particular two constituencies: the 1% who are unloading their properties at the top of each bubble, to invest in higher growth markets elsewhere, and the 10% who are buying those properties at the top of each bubble going dementedly after the tax-free capital gains they think will deliver them the mirage of an aristocratic lifestyle in retirement, because they deserve it, having been hero producers.

    Then there is the older slice of the bottomost 90%, who are being kept quiet with no really bad news about their defined benefit pension funds and their 401k small accounts. As long as possible, while the top 1% is trying to get rid of the OASDI insurance that is the only thing that would save them to get them to support property prices by getting them invested in the market.

    I am mentioning here again this very interesting analysis by the research department of the Atlanta Fed:

    http://macroblog.typepad.com/macroblog/2011/10/state-and-local-fiscal-fortunes-follow-the-money-collected.html
    http://macroblog.typepad.com/.a/6a00d8341c834f53ef014e8c52cacf970d-popup

    that shows that public sector pension fund returns follow closely the SP500 on the upside, but overshoot it significantly on the downside, which seems to mean that the funds are mostly invested in the stock market instead of treasuries and bonds, that stock investment is leveraged, and their buying power is used to push prices up (they are in effect the greater fool), but when this does not work, the leverage kills them on the downside.

  • sc

    Why should he give up?.He’s nailed it absolutely spot on.

  • sc

    I should have added that any time you see 90% days which include racks of bluechips moving 8,9 10% or more you can bet the farm you’ve just blown a fleet of shorties right out of position.

  • b_b

    Spot on Cullen.

    I’m not afraid to admit it – I’ve been short running into this event, and it had hurt plenty. I will not close, because Europe has not fixed the underlying problem as evidenced by Italian bond yield action.

    Cullen – you have been saying this is not a “buy and hold” market for some time. Reluctantly, I can now accept you are right.

  • Pierce Inverarity

    I wasn’t referencing the short covering. He’s probably right on that. I meant his persistent claim the U.S. is at the whim of bond vigilantes.

  • H Nguyen

    Looking back at history, it is self-evident that government policies drive economic expansion, extension, contraction, gives birth to new industry, destroys old ones, and among other things. The only difference of why more people can see the effects and implications of government policies now than ever before is because they are most blatant lately. The concept of allocating capitals by understanding government policies is nothing new. George Soros had implemented this investment concept successfully in many occasions-the most well known trade was the currency trade. That faithful day of March 17th, 2009 was the day I bought bonds and gold because I had a check list of what the government had done and had not done to save the economy, and I knew the only thing left for Bernanke to do before he had to bring out the canon was that he HAD to purchase bonds to drive down interest rate. My decision was based on Bernanke’s speech in 2001 where he spelled out his plan to save the economy if it were to experience a deflationary period like in the depression. I did not care whether his action was going to actually going to fix the economy or not. I just knew that bonds and gold will be up if he would buy bonds. Ironically, not a few people were betting that Bernanke might purchase bonds.

    The question of whether the policy is a right one or a wrong one, or if it can fix anything is a discussion for another day. “I’m not a policy maker, I am a steward of other people’s capital and I’m here to outperform.” Jefferey Gundlach

  • JWG

    When the Fed buys assets such as mortgage securities, it intervenes in a particular market and picks winners and losers. Cutting payroll taxes in half gives everyone who is employed a significant raise; it does not pick winners and losers and does not target a market. The Fed is in the process of destroying its legitimacy with what it facetiously calls “unconventional” monetary policy.

    Many (but not most) politicians now have grasped that the Fed’s balance sheet and magic keystroke money machine can buy the world under exisiting statutes, with inflation being the only true constraint. Even though these politicians may not have heard of MMT, the Fed is educating them every day as to this reality. Once the great secret of our fiat dollar is no longer a secret, American politics will fundamentally change. Saying “no” to any constituency is going to get ever more difficult for the politicians and the Fed to do. A secular inflation trend, slowly growing over time but steady and sure, is my bet, but it could turn on a deflationary dime if we surprise ourselves and elect a “take your medicine” anti-bailout government. What the government is doing, planning to do and thinking of doing are the three most important issues for investors today.

    This site has been a fantastic education in what is actually going on behind the curtain, and it has paid off for me in the real world. Thank you TPC and the MMT regulars on this site for the free education in how the world really works.

  • Zeej2020

    Cullen-

    Check out the link below. Quality from Hugh Hendry.

    http://www.zerohedge.com/news/and-now-some-semblance-sanity-here-one-hour-hugh-hendry

  • http://pragmaticcapitalism Michael Schofield

    The real fun will start if we move from “too big to fail banks” to “can’t afford to fail economies”.

  • Andrew P

    I noticed that oil also popped today, along with the stock market. The price action in oil has convinced me that the global economy is energy constrained. Governments will print money like mad to prevent collapses before elections (France is next May) or to prevent the favored elite from taking losses, but they can’t print oil. If oil goes to 150-200 again it will be time to get really bearish.

  • Cowpoke

    “One of the keys to succeeding in this market during the balance sheet recession has been discovering government interventionist policies, front running them and selling the news. It’s absurd that I am even writing about this, but this is our reality.”

    Cullen, we have had ABSOLUTELY ZERO FED intervention No QE3, 4 5 Six etc since the last one expired this past summer and look at the markets Down and Right back up.

    So is the FED really pointless? OR is there really something more PATHETIC and ROTTEN to the CORE? A system where there is no real free mkt and only one where News media spin coupled with BS political noise at play.

    The whole free mkts are looking and Smelling VERY Fishy.

    Think about it. China, the great Bastion of free mkts is saving the cradle of Democracy and the Magna Carta?

    Come On Man, This is getting stranger than an Alfred Hitchcock Movie.

  • Dylan Johnson

    Cullen…its sad, but Fundamental Analysis means nothing in this market…its a “volatility arbitrage” (ambiguous based off of success)swing traders dream….well we revert back to the mean of semi rational trading and investing? Round and Round and Round it goes….when it stops nobody knows…

  • Octavio Richetta

    cR, vat did u do vit the Europe buys some time post? The link still works but you wiped it from t.mne front page!

  • Anonymous

    That’s happened to me before. It’s annoying.

    Ve vill do vat he vants!

    (Squints eyes).

  • Sherman McCoy

    I agree that governments have distorted the markets, and historical asset class relationships. My portfolio is up in dollar terms. At the end of the day, can the government create (real) wealth?

  • http://www.pragcap.com Cullen Roche

    It’s under the special reports now on the top right.

  • Alan

    “I am certainly in favor of govt that can allocate capital efficiently. Unfortunately, that’s proven difficult with this group in charge. But yes, MMTers understand the need for deficits, particularly at a time like right now. Though I think the definition of “intervention” will vary depending on your political affiliation. From an economic perspective, MMT is agnostic in this regard.”

    Imagine a world where MMT is the accepted orthodoxy. Do we have a battle royale over the proper role and size of government? Who will win in a world of inattentive voters?

    I accept that MMT is the proper description of the way the economy really works. But wow. What an opportunity it provides for those who have an incorrect view (in my opinion) of the proper role of the federal government.

    I’m genuinely afraid of the “truth” becoming widely known just because of the opportunity for catastrophic abuse.

  • Alan

    P.S.

    I’ve felt guilty all day for not complimenting you for the most excellent analysis you made earlier on the euro rescue situation. Now I don’t see it. Please be aware that I’m old enough to have premature (I hope) Alzheimers concerns. What happened to it? Be gentle.

  • Trixie

    Hi Alan,

    I think the post you are looking for is here:

    http://pragcap.com/europe-buys-some-time

    It’s been moved to the Special Reports section (upper right) on the main page. And you weren’t the only person looking for it. So feel free to yell at Cullen about these things. I do it all the time.

    For instance, I can’t get back to my non-anonymous profile where I can change my name every 90 seconds. He’s messin’ with me. I just know it. He underestimates me though.

    RAISE YOUR VOICES! WE WILL NOT BE SILENCED!

    Oh wait, never mind, wrong website…(I think).

    :)

  • Bond Vigilante/Willy2

    Oh, yes.
    1. In 2008 foreigners started to sell their Agency paper, instead of buying more Agency paper. And that led to the bankruptcy of Lehman Bros. It was NOT an European bank that went down first.
    2. Because now the US Trade deficit is shrinking this WILL lead to less foreign demand for US T-bonds and ultimately to higher interest rates. And that’s VERY dangerous especially now when in the US the federal budget deficit is going through the roof (> $ 2 Trillion). And a shrinking US trade deficit is the result of both falling world market prices for commodities and/or falling US demand. (oil, copper, gasoline etc.).
    3. China could dump their T-bonds when the US continues to meddle in Afghanistan, Tibet and W.-China. It would wreck their export market called USA but in this case geopolitics trumps economics. Because it would ruin the US economy.
    4. China has issued in 2009 their own T-bonds in Hong Kong in order to facilitate their trade in Asia. This simply means less demand for US T-bonds. Because e.g. Australia could buy chinese T-bonds to invest their proceeds of their trade with China.
    5. The US is the world’s largest importer of gasoline (originated mainly from Europe). So, if Europe would cut off that flow then especially the US east coast would have to cut back on driving.

    And these are forces are beyond the control of the FED. So, that’s another set of reasons why the FED CAN NOT control interest rates and that’s why the US is at the mercy of foreigners.

  • T. Reilly

    The EU “Plan” is nothing more than Paulson’s original plan – Everyone is happy the day its announced but then everyone figures out the plan has no details and the mkt resumes its decline.

    The shanghai composite has been leading mkts lower and it will continue to do so. It is under performing this rally.

    In the US earnings expectations are rolling over.

  • Dr. Oliver Strebel

    Italy auctioned today 11 year BTP with a yield of 6.06% and a Bid to cover ratio of 1.27.

    Such auctions make up the government put in Europe ;).

    This buying panic will turn soon in a selling panic and vice versa. And the timing will be extremly difficult.

  • Different Chris

    I don’t always 100% agree with you, but 100% of the time you make me chuckle.

    Thanks.

  • boatman

    that would be “when” micheal…..course its just my opinion.

  • Steve

    No doubt government intervention does work at the time. If you consider war to be the ultimate government program; what happens during war? You get a lot of economic activity based on a lot of borrowing. What happens after a war? Assuming you won and your economy and infrastructure wasn’t smashed to pieces; all the misallocated spending and investment that went into the war economy results in a depression or recession after the war as the economy reverts to a peacetime economy. Government intervention does work at the time, but inevitabley you set yourself up for the next recession.

  • quark

    Gobalized interlinking of financial assets has cteated the percieved need to socialize the losses. This will contine until those who have amy debt are shunned.

    Common men and women today ultimately have no more property rights than existed during feudism. The rich continue to play their gamea of indulgence and when they frikup, the common citizen goes to war or surrenders their property to sustain the autocracies lifestyle.

    Its a joke ro think that investment monies will be supplied to an entity that has ahown its willingness to blow up creditors. These actions give me confidence that we remain in the grips of global deflation that destroys debtors thus destroying the assets of creditors.

  • rfr

    OT, but here’s a general MMT question. Isn’t the correct fiscal policy, whether entering a recession or exiting from one, or neither of those, to keep the accelerator pedal depressed? IOW, the government should always be expanding the money supply via deficit spending? It never actually hits the brakes. If this is correct, then, in theory, is there even any need for federal taxes AT ALL? Couldn’t the government just create the “money” it needs to spend?

  • rfr

    Oh, nevermind. I think I see that the government COULD do that, but it could have almost no BUDGET — one only consisting of the deficit amount.

  • Peter D

    The govt always creates money when it spends and destroys it when it taxes. Bonds serve a different purpose – they are a reserve drain from the system to allow the Fed to hit its target rate and also supply the savers with risk free option to earn interest rate (which many MMTers would deem unnecessary.) Taxation exists to ensure that the state currency remains the dominant one (no real competition can arise) and to regulate aggregate demand (but, of course, the distribution of taxation has great consequences itself).

  • Alex

    Cullen, am not sure why you think that QE is on hold till inflation eases, as the Fed has clearly telegraphed it and got the put priced-in. By not doing it the market will price the put out and they will be creating the inverse effect. Also it is a targeted action and as such the timing of the intervention seems to be set. Finally, it looks as a concerted effort including China and Japan, so seems also set within a global agenda. Unsure what readers think, but would be interesting having them comment the probability of QE.

  • rfr

    Peter D. since you were kind enough to respond, would you go into more detail on this phrase of yours: “allow the Fed to hit its target rate”. I know I’m not the only one who isn’t clear on WHAT rate you and Cullen mean, and more importantly WHY they want to hit a certain rate.

    If I had to guess based on my MMT readings so far, I’d say you are talking about the rate that banks lend reserves to each other, and the rate target is to heat up or cool down economic activity by making it easier or harder for banks to lend money. But then this somewhat conflicts with Cullen’s frequent statements that banks aren’t reserve constrained. If they aren’t reserve constrained then why would they need or want to borrow other banks reserves?

  • F. Beard

    Taxation exists to ensure that the state currency remains the dominant one (no real competition can arise) Peter D

    Why shouldn’t government money compete with private monies for the payment of private debts? Isn’t its monopoly as the sole legal tender for government debts sufficient to insure demand for government money?

    and to regulate aggregate demand (but, of course, the distribution of taxation has great consequences itself). Peter D

    And what is government doing regulating demand other than for its own money supply?

  • Adam1

    Warren is expecting WTI to march back to at least $110.

    http://moslereconomics.com/2011/10/26/crude-oil-update/

  • Peter D

    >>Why shouldn’t government money compete with private monies for the payment of private debts? Isn’t its monopoly as the sole legal tender for government debts sufficient to insure demand for government money?

    Maybe. I think there is a natural limit on liquidity of private currencies whenever a govt stipulates that it would only accept its own scrip in payment of taxes. Ask beowulf.

    >>And what is government doing regulating demand other than for its own money supply?

    I am not sure what the above means, but the govt creates “room” for its own non-inflationary spending by taxing. For sure, it could always spend without taxing, but not without causing inflation.

  • Peter D

    >>If I had to guess based on my MMT readings so far, I’d say you are talking about the rate that banks lend reserves to each other, and the rate target is to heat up or cool down economic activity by making it easier or harder for banks to lend money.

    Yeah, it’s called the Fed Funds Rate (FFR) and the Fed thinks that FFR is indeed a good lever for “heating up or cooling down economic activity by making it easier or harder for banks to lend money”, but it is mostly an illusion. What is important is that the FFR rate is stable. If there is a shortage of reserves in the system, you’d have it go up (potentially to infinity) and the payment system just breaks. This is like denying blood to the body to fight obesity (but, yes, you need blood volume to increase when you gain weight).
    Most MMTers think that the FFR should be zero, where it will naturally land if the govt just spent without issuing reserve drains (aka bonds). See this:
    http://moslereconomics.com/wp-content/graphs/2009/07/natural-rate-is-zero.PDF

    >>If they aren’t reserve constrained then why would they need or want to borrow other banks reserves?

    It means that they are not reserve constrained as long as the Fed keeps targeting the FFR, which per above they have to do in order for the system to even function. They can always borrow those reserves either from each other or from the Fed itself, and thus are not reserve constrained. This is the operational reality. Banks in real life lend first and then look for reserves later and they know they’ll find them because if all else fails, the Fed just have to supply them on demand to ensure that FFR does not stray too far from the target.

  • rfr

    Thanks!

  • F. Beard

    I think there is a natural limit on liquidity of private currencies whenever a govt stipulates that it would only accept its own scrip in payment of taxes. Peter D

    Maybe but that is the private sector’s concern. Private currencies would allow non-usury forms of money such as common stock to be widely used. Who knows what effect that might have on US labour relations and productivity? In any event, legal tender laws for private debts are unjust on their face. What business is it of government what the population uses for private debts?

    I am not sure what the above means, but the govt creates “room” for its own non-inflationary spending by taxing. For sure, it could always spend without taxing, but not without causing inflation. Peter D

    I am not opposed to explicit government taxation but many are rightly angered and alarmed at the “stealth inflation tax”. Genuine private currencies would allow the population to escape that tax. Government would have to spend wisely since if it did not then only government and its payees would suffer.

    Politically, if the “stealth inflation tax” is not abolished properly then the danger is that it will be abolished improperly via a government enforced gold standard which would be a disaster ala the Euro.

  • F. Beard

    Most MMTers think that the FFR should be zero, where it will naturally land if the govt just spent without issuing reserve drains (aka bonds). Peter D

    That’s nice to hear since the government has no business borrowing its own money anyway.

  • Peter D

    >>Private currencies would allow non-usury forms of money such as common stock to be widely used. Who knows what effect that might have on US labour relations and productivity? In any event, legal tender laws for private debts are unjust on their face. What business is it of government what the population uses for private debts?

    OK, I don’t disagree, but I am not sure that those laws have a large impact on private currency liquidity. Maybe, I’m not an expert. I think beowulf would have a better take.

    >>Genuine private currencies would allow the population to escape that tax. Government would have to spend wisely since if it did not then only government and its payees would suffer.

    The govt would still be able to tax people to make room for its spending, even with private currencies.

    >>Politically, if the “stealth inflation tax” is not abolished properly then the danger is that it will be abolished improperly via a government enforced gold standard which would be a disaster ala the Euro.

    Nobody denies there are dangers in bad govt spending but the question is whether private currencies would help or hurt and I don’t have the answer.

  • Pierce Inverarity

    There aren’t a lot of legal tender laws on the books. I don’t know if the U.S. has them or not. Again, we’ll call on the big brain of beowulf to confirm or deny.

    Most MMT literature I’ve read suggests legal tender laws are, by and large, completely ineffective and insuring the acceptance of the government’s currency. You’ve heard of bitcoin right? I don’t think the government has squashed it yet.

  • Pierce Inverarity

    Wish I could edit: “at ensuring…”

  • F. Beard

    The govt would still be able to tax people to make room for its spending, even with private currencies. Peter D

    Of course but the tax increases would have to be explicit. The “stealth inflation tax” bypasses explicit tax increases and thus the voters.

  • F. Beard

    Federal Reserve Notes have all sorts of government privileges besides “THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE”. A big one is the capital gains tax where the “gains” in potential private money alternatives such as common stock are measured in FRNs. Thus a decline in the value of FRNs registers as a phoney gain in the value of things subject to a capital gains tax.

  • Pierce Inverarity

    Set up a private exchange where the stocks are not bought and sold in dollars and I don’t think you’d have a problem.

  • F. Beard

    Nobody denies there are dangers in bad govt spending but the question is whether private currencies would help or hurt and I don’t have the answer. Peter D

    The problem is that the economy is tragically dependent on government spending, be it good or bad. For instance: Where else will interest payments come from if not deficit spending? Private currencies, especially usury-free ones, would eliminate the tragic need for government spending, whether good or bad.

  • F. Beard

    My bet is that a fully armed IRS swat team would pay a visit to such an exchange. I could be wrong but it is my impression that FRNs are meant to be unavoidable.

  • Bond Vigilante/Willy2

    Ooops, skip #5 in my previous post. It seems US gasoline imports already have dropped.

    http://205.254.135.24/dnav/pet/pet_move_impcus_a2_nus_epm0f_im0_mbbl_a.htm

    But the other points remain valid.

  • Peter D

    >>Private currencies, especially usury-free ones, would eliminate the tragic need for government spending, whether good or bad.

    I guess I see nothing inherently “tragic” about govt spending. And I doubt that private currencies will (a) take enough of a hold even in the absence of legal tender laws as long as the govt taxes in its currency and (b) that they would do anything to solve the issue of financial instability. In fact, many competing currencies create additional complexity in valuation and exchange. The agents would have to take into account a matrix of ever changing exchange rates etc and waste unnecessary resources on that. There is a real benefit to having a de facto monopoly issuer of currency.
    And if you are worried about inflation, I have what I think is a better solution. The govt would issue bonds but the rate on those bonds would be only the inflation rate. And these would be the only bonds the govt issues. This way the savers – those that would like to defer consumption – could buy those from the govt and be assured that the purchasing power of their dollars would always be intact when they decide to spend in the future. Inflation problem solved.

  • Alan

    I ask for gentle and Cullen sends me the PragCap angel…Thank you Trixie.

  • Peter D

    You just keep putting the cart before the horse,that’s all. Those that bought US Tsy decided to save in USD. If they don’t want to save as many USD – no problem, by sectoral balances their savings go down – the govt deficit goes down. Savings desires drive the deficit, not the other way around. If the non-govt sector in aggregate wants to shift from Tsys into USD – no problem, they’d have to do something with those USD – demand goes up – deficit goes down. Yes, this could be sometimes ugly if the demand channels into commodities and causes some Cantillion effects on the prices. Always a danger, though.
    You still haven’t wrapped your head around the fact that the govt does not need to issue bonds – it is really a favor for the non-govt sector that it does.

  • Coolidge Low

    Great post Cullen.

  • F. Beard

    I guess I see nothing inherently “tragic” about govt spending. Peter D

    You misunderstand me. What is tragic is that we are dependent on government spending whether it is good or bad.

    As for private currencies, shouldn’t the free market make the decision to use them or not? And don’t computers and modern communications make them quite practical?

    As for measuring price inflation, that is highly subjective. Quality of life cannot be measured objectively. In many ways, we are less well off than in 1913.

    What I am advocating is moving on to true capitalism which MUST include liberty in private money creation. Otherwise, how do we expect to remain competitive with the rest of the world now that they have adopted our current model – banker fascism?

  • Pierce Inverarity

    Wait, sorry, but how are we worse off since 1913?

  • Peter D

    >>What is tragic is that we are dependent on government spending whether it is good or bad.

    With competing currencies, each currency issuer would have to ensure enough deficit to satisfy the desire to save in that currency. How is that any better than the current setup? What you are saying is a little bit like (I know I am reusing my own analogy from earlier): “we are tragically dependent on the blood in our body to grow, whether for good or bad. We have the problem of obesity – let’s have alternative bloods into the body to make sure people don’t get obese.” My point is, it is not govt spending per se that is to blame for unhealthy features of the economy, like you cannot blame increase in blood volume for enabling obesity. You’d need to show a compelling argument that competing currencies would reduce instability with minimal downsides.

    >>As for private currencies, shouldn’t the free market make the decision to use them or not?

    Shouldn’t there be free market for everything? Let’s go Rothbard route all the way then. Why accept no free market for defense but demand free market for currencies?

    >>And don’t computers and modern communications make them quite practical?

    No. The problem scales exponentially, so, unless the number of those currencies is very small, you’re stuck with intractable problems even on supercomputers.

    >>As for measuring price inflation, that is highly subjective. Quality of life cannot be measured objectively. In many ways, we are less well off than in 1913.

    Let’s dedicate our best minds to solving the problem of measuring inflation objectively. If it is indeed a problem, we should be able to come with an adequate metric that would jive with the average person’s perception of that problem.

    >>What I am advocating is moving on to true capitalism which MUST include liberty in private money creation.

    This is still far from the true capitalism. If you are really consistent, you’d have to go anarcho-capitalism route.

    >>Otherwise, how do we expect to remain competitive with the rest of the world now that they have adopted our current model – banker fascism?

    Not by throwing the baby with the bathwater, that’s for sure. I don’t think you identified the real cause of our problems, so, your solution is not the solution we’re looking for.

  • http://www.pragcap.com Cullen Roche

    I’d love to hear that rationale as well….

  • F. Beard

    Wait, sorry, but how are we worse off since 1913? Pierce Inverarity

    That is, of course, a matter of opinion. However, where I was growing up in the 50s and 60s, middle class families lived in large houses, with large lots, with large families and with only one parent working. I presume that 1913 was not so different.

  • Franklin

    The Elite Plan for a New World Social Order

    By Richard K Moore

    Global Research, October 28, 2011

    When the Industrial Revolution began in Britain, in the late 1700s, there was lots of money to be made by investing in factories and mills, by opening up new markets, and by gaining control of sources of raw materials. The folks who had the most money to invest, however, were not so much in Britain but more in Holland. Holland had been the leading Western power in the 1600s, and its bankers were the leading capitalists. In pursuit of profit, Dutch capital flowed to the British stock market, and thus the Dutch funded the rise of Britain, who subsequently eclipsed Holland both economically and geopolitically.

    In this way British industrialism came to be dominated by wealthy investors, and capitalism became the dominant economic system. This led to a major social transformation. Britain had been essentially an aristocratic society, dominated by landholding families. As capitalism became dominant economically, capitalists became dominant politically. Tax structures and import-export policies were gradually changed to favour investors over landowners.

    It was no longer economically viable to simply maintain an estate in the countryside: one needed to develop it, turn it to more productive use. Victorian dramas are filled with stories of aristocratic families who fall on hard times, and are forced to sell off their properties. For dramatic purposes, this decline is typically attributed to a failure in some character, a weak eldest son perhaps. But in fact the decline of aristocracy was part of a larger social transformation brought on by the rise of capitalism.

    The business of the capitalist is the management of capital, and this management is generally handled through the mediation of banks and brokerage houses. It should not be surprising that investment bankers came to occupy the top of the hierarchy of capitalist wealth and power. And in fact, there are a handful of banking families, including the Rothschilds and the Rockefellers, who have come to dominate economic and political affairs in the Western world.

    Unlike aristocrats, capitalists are not tied to a place, or to the maintenance of a place. Capital is disloyal and mobile – it flows to where the most growth can be found, as it flowed from Holland to Britain, then from Britain to the USA, and most recently from everywhere to China. Just as a copper mine might be exploited and then abandoned, so under capitalism a whole nation can be exploited and then abandoned, as we see in the rusting industrial areas of America and Britain.

    This detachment from place leads to a different kind of geopolitics under capitalism, as compared to aristocracy. A king goes to war when he sees an advantage to his nation in doing so. Historians can ‘explain’ the wars of pre-capitalist days, in terms of the aggrandisement of monarchs and nations.

    A capitalist stirs up a war in order to make profits, and in fact our elite banking families have financed both sides of most military conflicts since at least World War 1. Hence historians have a hard time ‘explaining’ World War 1 in terms of national motivations and objectives.

    In pre-capitalist days warfare was like chess, each side trying to win. Under capitalism warfare is more like a casino, where the players battle it out as long as they can get credit for more chips, and the real winner always turns out to be the house – the bankers who finance the war and decide who will be the last man standing. Not only are wars the most profitable of all capitalist ventures, but by choosing the winners, and managing the reconstruction, the elite banking families are able, over time, to tune the geopolitical configuration to suit their own interests.

    Nations and populations are but pawns in their games. Millions die in wars, infrastructures are destroyed, and while the world mourns, the bankers are counting their winnings and making plans for their postwar reconstruction investments.

    From their position of power, as the financiers of governments, the banking elite have over time perfected their methods of control. Staying always behind the scenes, they pull the strings controlling the media, the political parties, the intelligence agencies, the stock markets, and the offices of government. And perhaps their greatest lever of power is their control over currencies. By means of their central-bank scam, they engineer boom and bust cycles, and they print money from nothing and then loan it at interest to governments. The power of the elite banking gang (the ‘banksters’) is both absolute and subtle…

    Some of the biggest men in the United States are afraid of something. They know there is a power somewhere, so organised, so subtle, so watchful, so interlocked, so complete, so pervasive that they had better not speak above their breath when they speak in condemnation of it. – President Woodrow Wilson

    The End of Growth – Banksters vs. Capitalism

    It was always inevitable, on a finite planet, that there would be a limit to economic growth. Industrialisation has enabled us to rush headlong toward that limit over the past two centuries. Production has become ever more efficient, markets have become ever more global, and finally the paradigm of perpetual growth has reached the point of diminishing returns.

    Indeed, that point was actually reached by about 1970. Since then capital has not so much sought growth through increased production, but rather by extracting greater returns from relatively flat production levels. Hence globalisation, which moved production to low-waged areas, providing greater profit margins. Hence privatisation, which transfers revenue streams to investors that formerly went to national treasuries. Hence derivative and currency markets, which create the electronic illusion of economic growth, without actually producing anything in the real world.

    For almost forty years, the capitalist system was kept going by these various mechanisms, none of which were productive in any real sense. And then in September 2008 this house of cards collapsed, all of a sudden, bringing the global financial system to its knees.

    If one studies the collapse of civilisations, one learns that failure-to-adapt is fatal. Is our civilisation falling into that trap? We had two centuries of real growth, where the growth-dynamic of capitalism was in harmony with the reality of industrial growth. Then we had four decades of artificial growth – capitalism being sustained by a house of cards. And now, after the house of cards has collapsed, every effort is apparently being made to bring about ‘a recovery’ – of growth! It is very easy to get the impression that our civilisation is in the process of collapse, based on the failure-to-adapt principle.

    Such an impression would be partly right and partly wrong. In order to understand the real situation we need to make a clear distinction between the capitalist elite and capitalism itself. Capitalism is an economic system driven by growth; the capitalist elite are the folks who have managed to gain control of the Western world while capitalism has operated over the past two centuries. The capitalist system is past its sell-by date, the bankster elite are well aware of that fact – and they are adapting.

    Capitalism is a vehicle that helped bring the banksters to absolute power, but they have no more loyalty to that system than they have to place, or to anything or anyone. As mentioned earlier, they think on a global scale, with nations and populations as pawns. They define what money is and they issue it, just like the banker in a game of Monopoly. They can also make up a new game with a new kind of money. They have long outgrown any need to rely on any particular economic system in order to maintain their power. Capitalism was handy in an era of rapid growth. For an era of non-growth, a different game is being prepared.

    Thus, capitalism was not allowed to die a natural death. Instead it was brought down by a controlled demolition. First it was put on a life-support system, as mentioned above, with globalisation, privatisation, currency markets, etc. Then it was injected with a euthanasia death-drug, in the form of real-estate bubbles and toxic derivatives. Finally, the Bank of International Settlements in Basel – the central bank of central banks – pulled the plug on the life-support system: they declared the ‘mark-to-market rule’, which made all the risk-holding banks instantly insolvent, although it took a while for this to become apparent. Every step in this process was carefully planned and managed by the central-banking clique.

    The End of Sovereignty – Restoring the Ancien Régime

    Just as the financial collapse was carefully managed, so was the post-collapse scenario, with its suicidal bailout programs. National budgets were already stretched; they certainly did not have reserves available to salvage the insolvent banks. Thus the bailout commitments amounted to nothing more than the taking on of astronomical new debts by governments. In order to service the bailout commitments, the money would need to be borrowed from the same financial system that was being bailed out!

    It’s not that the banks were too big to fail, rather the banksters were too powerful to fail: they made politicians an offer they couldn’t refuse. In the USA, Congress was told that without bailouts there would be martial law the next morning. In Ireland, the Ministers were told there would be financial chaos and rioting in the streets. In fact, as Iceland demonstrated, the sensible way to deal with the insolvent banks was with an orderly process of receivership.

    The effect of the coerced bailouts was to transfer insolvency from the banks to the national treasuries. Banking debts were transformed into sovereign debts and budget deficits. Now, quite predictably, it is the nations that are seeking bailouts, and those bailouts come with conditions attached. Instead of the banks going into receivership, the nations are going into receivership.

    In his book, Confessions of an Economic Hit Man, John Perkins explains how the third world has been coerced over the past several decades – through pressure and trickery of various kinds – into perpetual debt bondage. By design, the debts can never be repaid. Instead, the debts must be periodically refinanced, and each round of refinancing buries the nation deeper in debt – and compels the nation to submit to even more drastic IMF diktats. With the orchestrated financial collapse, and the ‘too big to fail’ scam, the banksters have now crossed the Rubicon: the hit-man agenda is now operating here in the first world.

    In the EU, the first round of nations to go down will be the so-called PIGS – Portugal, Ireland, Greece, and Spain. The fiction, that the PIGS can deal with the bailouts, is based on the assumption that the era of limitless growth will resume. As the banksters themselves know full well, that just isn’t going to happen. Eventually the PIGS will be forced to default, and then the rest of the EU will go down as well, all part of a controlled-demolition project.

    When a nation succumbs to debt bondage, it ceases to be a sovereign nation, governed by some kind of internal political process. Instead it comes under the control of IMF diktats. As we have seen in the third world, and is happening now in Europe, these diktats are all about austerity and privatisation. Government functions are eliminated or privatised, and national assets are sold off. Little by little – again a controlled demolition – the nation state is dismantled. In the end, the primary functions left to government are police suppression of its own population, and the collection of taxes to be handed over to the banksters.

    In fact, the dismantling of the nation state began long before the financial collapse of 2008. In the USA and Britain, it began in 1980, with Reagan and Thatcher. In Europe, it began in 1988, with the Maastricht Treaty. Globalisation accelerated the dismantling process, with the exporting of jobs and industry, privatisation programs, ‘free trade’ agreements, and the establishment of the regulation-busting World Trade Organisation (WTO). Events since 2008 have enabled the rapid acceleration of a process that was already well underway.

    With the collapse, the bailouts, and the total failure to pursue any kind of effective recovery program, the signals are very clear: the system will be allowed to collapse totally, thus clearing the ground for a pre-architected ‘solution’. As the nation state is being dismantled, a new regime of global governance is being established to replace it. As we can see with the WTO, IMF, World Bank, and the other pieces of the embryonic world government, the new global system will make no pretensions about popular representation or democratic process. Rule will be by means of autocratic global bureaucracies, which will take their orders, directly or indirectly, from the bankster clique.

    In his book, The Globalization of Poverty, Michel Chossudovsky explains how globalisation, and the actions of the IMF, created massive poverty throughout the third world over the past several decades. As we can see, with the dramatic emphasis on austerity following the collapse and bailouts, this poverty-creation project has now crossed the Rubicon. In this new world system there will be no prosperous middle class. Indeed, the new regime will very much resemble the old days of royalty and serfdom (the ancien régime). The banksters are the new royal family, with the whole world as their dominion. The technocrats who run the global bureaucracies, and the mandarins who pose as politicians in the residual nations, are the privileged upper class. The rest of us, the overwhelming majority, will find ourselves in the role of impoverished serfs – if we are lucky enough to be one of the survivors of the collapse process.
    Today Americans would be outraged if UN troops entered Los Angeles to restore order; tomorrow they will be grateful. This is especially true if they were told there was an outside threat from beyond, whether real or promulgated, that threatened our very existence. It is then that all peoples of the world will plead with world leaders to deliver them from this evil. The one thing every man fears is the unknown. When presented with this scenario, individual rights will be willingly relinquished for the guarantee of their well being granted to them by their world government. – Henry Kissinger speaking at Evian, France, May 21, 1992 Bilderbergers meeting

    The End of Liberty – The Global Police State

    For the past four decades, since about 1970, we’ve been experiencing a regime-change process, from an old global system to a new global system. In the old system, first world nations were relatively democratic and prosperous, while the third world suffered under police state tyranny, mass poverty, and imperialism (exploitation by external powers). As discussed above, the transition process has been characterised by ‘crossing the Rubicon’ – the introduction of policies and practices into the first world, that were formerly limited, for the most part, to the third world.

    Thus debt bondage to the IMF crossed the Rubicon, enabled by the collapse-bailout scam. In turn, mass poverty is crossing that same Rubicon, due to austerity measures imposed by the IMF, with its new bond-holding powers. Imperialism is also crossing the Rubicon, as the first world comes under the exploitative control of banksters and their bureaucracies, a power nexus that is external to all national identities. Unsurprisingly, police state tyranny is also crossing the Rubicon: the imposition of third world poverty levels requires third world methods of repression.

    The anti-globalisation movement can be taken as the beginning of popular resistance to the process of regime change. Similarly, the police response to the Seattle anti-globalisation demonstrations, in November 1999, can be taken as the ‘crossing of the Rubicon’ for police state tyranny. The excessive and arbitrary violence of that response – including such things as holding people’s eyes open and spraying pepper into them – was unprecedented against non-violent demonstrators in a first world nation.

    Ironically, that police response, particularly as it was so widely publicised, actually strengthened the anti-globalisation movement. As demonstrations grew in size and strength, the police response grew still more violent. A climax of sorts was reached in Genoa, in July 2001, when the levels of violence on both sides began to resemble almost a guerilla war.

    In those days the anti-globalisation movement was dominating the international news pages, and opposition to globalisation was reaching massive proportions. The visible movement was only the tip of an anti-systemic iceberg. In a very real sense, general popular sentiment in the first world was beginning to take a radical turn. Movement leaders were now thinking in terms of an anti-capitalist movement. There was a political volatility in the air, a sense that, just maybe possibly, enlightened popular sentiment might succeed in shifting the course of events.

    All of that changed on September 11, 2001, the day the towers came down. The anti-globalisation movement, along with globalisation itself, disappeared almost totally from public consciousness on that fateful day. Suddenly it was a whole new global scenario, a whole new media circus – with a new enemy, and a new kind of war, a war without end, a war against phantoms, a war against ‘terrorism’.

    Earlier we saw how the orchestrated financial collapse of September 2008 enabled certain ongoing projects to be rapidly accelerated, such as the dismantlement of sovereignty, and the imposition of austerity. Similarly, the events of September 2001 enabled certain ongoing projects to be greatly accelerated, such as the abandonment of civil liberties and international law.

    Before the towers had even come down, the ‘Patriot Act’ had already been drafted, proclaiming in no uncertain terms that the police state was here (in the USA) in force and here to stay – the Bill of Rights was null and void. Before long, similar ‘anti-terrorist’ legislation had been adopted throughout the first world. If any anti-systemic movement were to again raise its head in the first world (as it did, for example, recently in Greece), arbitrary police powers could be brought to bear – as much as might be necessary – to put the resistance down. No popular movement would be allowed to derail the banksters’ regime-change designs. The anti-globalisation movement had been shouting, ‘This is what real democracy looks like’. With 9/11, the banksters replied: ‘This is what real oppression looks like’.

    The events of 9/11 led directly to the invasions of Iraq and Afghanistan, and in general helped create a climate where invasions of sovereign nations could be readily justified, with one excuse or another. International law was to be as thoroughly abandoned as was civil liberties. Just as all restraint was removed from domestic police interventions, so was all restraint being removed from geopolitical military interventions. Nothing was to stand in the way of the banksters’ regime-change agenda.
    The technetronic era involves the gradual appearance of a more controlled society… dominated by an elite, unrestrained by traditional values… this elite would not hesitate to achieve its political ends by using the latest modern techniques for influencing public behaviour… Persisting social crisis, the emergence of a charismatic personality, and the exploitation of mass media to obtain public confidence would be the stepping-stones in the piecemeal transformation of the United States into a highly controlled society… In addition, it may be possible – and tempting – to exploit for strategic political purposes the fruits of research on the brain and on human behaviour. – Zbigniew Brzezinski, Between Two Ages: America’s Role in the Technetronic Era, 1970

    The Post-Capitalist Era – New Myths for a New Culture

    2012 might not be the exact year, but it’s difficult to see the endgame lasting much beyond that – and the masters of the universe love symbolism, as with 911 (both in Chile and in Manhattan), KLA 007, and others. 2012 is loaded with symbolism, eg. the Mayan Calendar, and the Internet is buzzing with various 2012-related prophecies, survival strategies, anticipated alien interventions, etc. And then there is the Hollywood film, 2012, which explicitly portrays the demise of most of humanity, and the pre-planned salvation of a select few. One never knows with Hollywood productions, what is escapist fantasy, and what is aimed at preparing the public mind symbolically for what is to come.

    Whatever the exact date, all the threads will come together, geopolitically and domestically, and the world will change. It will be a new era, just as capitalism was a new era after aristocracy, and the Dark Ages followed the era of the Roman Empire. Each era has its own structure, its own economics, its own social forms, and its own mythology. These things must relate to one another coherently, and their nature follows from the fundamental power relationships and economic circumstances of the system.

    Whenever there is a change of era, the previous era is always demonised in a new mythology. In the Garden of Eden story the serpent is demonised – a revered symbol in paganism, the predecessor to monotheism. With the rise of European nation states, the Catholic Church was demonised, and Protestantism introduced. When republics came along, the demonisation of monarchs was an important part of the process. In the post-2012 world, democracy and national sovereignty will be demonised. This will be very important, in getting people to accept arbitrary totalitarian rule…

    In those terrible dark days, before the blessed unification of humanity, anarchy reigned in the world. One nation would attack another, no better than predators in the wild. Nations had no long-term coherence; voters would swing from one party to another, keeping governments always in transition and confusion. How did anyone ever think that masses of semi-educated people could govern themselves, and run a complex society? Democracy was an ill-conceived experiment that led only to corruption and chaotic governance. How lucky we are to be in this well-ordered world, where humanity has finally grown up, and those with the best expertise make the decisions for the whole globe.

    Capitalism is about growth, progress, and change. Under capitalism the virtues of ambition, initiative, and competitiveness are praised, because those virtues serve the dynamics of capitalism. People are encouraged to always accumulate more, and never be satisfied with what they have. Under capitalism, people need to have a bit of liberty, and a bit of prosperity, so that the dynamics of capitalism can operate. Without some liberty, ambition cannot be pursued; without some prosperity, how could accumulation be pursued? In the post-capitalist world, the capitalist virtues will be demonised. This will be very important, in getting people to accept poverty and regimentation…

    The pursuit of money is the root of all evil, and the capitalist system was inherently corrupt and wasteful. Anarchy reined in the marketplace, as corporations blindly pursued profit, with no concern for human needs or for the Earth. How much more sensible are our production brigades, producing only what is needed, and using only what is sustainable. Capitalism encouraged greed and consumption; people struggled to compete with one another, to ‘get ahead’ in the rat race. How much wiser we are now, to live within our ration quotas, and to accept our assigned duties, whatever they might be, in service to humanity.

    In this regime change, ushering in the post-capitalist era, we’re seeing a conscious orchestration of economics, politics, geopolitics, and mythology – as one coordinated project. A whole new reality is being created, a whole new global culture. When it comes down to it, the ability to transform culture is the ultimate form of power. In only a single generation, a new culture becomes ‘the way things are’. And what, we might inquire, might stand in the way of any future manipulations of the cultural regime that the bankster royal family might contemplate?

    Ever since public education was introduced, the state and the family have competed to control childhood conditioning – and it is in childhood that culture is transmitted to the next generation. In the micromanaged post-capitalist future, we’ll most likely see the ‘final solution’ of social control, which is for the state to monopolise child raising. This would eliminate from society the parent-child bond, and hence family-related bonds in general. No longer is there a concept of relatives, just fellow members of the hive. The family must be demonised. Already, here in Ireland, there are daily TV spots dramatising the plight of children who are being abused or neglected by their parents…

    How scary were the old days, when unlicensed, untrained couples had total control over vulnerable children, behind closed doors, with whatever neuroses, addictions, or perversions the parents happened to possess. How did this vestige of patriarchal slavery, this safe-house den of child abuse, continue so long to exist, and not be recognised for what it was? How much better off we are now, with children being raised scientifically, by trained staff, where they are taught discipline and healthy values.

  • Pierce Inverarity

    A link would have sufficed.

  • F. Beard

    With competing currencies, each currency issuer would have to ensure enough deficit to satisfy the desire to save in that currency. How is that any better than the current setup? Peter D

    I have no problem with government deficit spending. Government SHOULD deficit spend. But in order that excessive government deficit spending not damage the private sector, alternative private currencies should be allowed so the private sector can escape the “stealth inflation tax”. Then government could deficit spend freely.

    What you are saying is a little bit like (I know I am reusing my own analogy from earlier): “we are tragically dependent on the blood in our body to grow, whether for good or bad. We have the problem of obesity – let’s have alternative bloods into the body to make sure people don’t get obese.” Peter D

    The human body has at least two circulatory systems that I know of – blood and lymph. I would bet there are more.

    You’d need to show a compelling argument that competing currencies would reduce instability with minimal downsides. Peter D

    On the contrary, the burden of proof is on you – historically and philosophically. We have already had one Great Depression since 1913 and may be in another. And how do you justify a government enforced monopoly money supply for private debts in a so-called “free market economy”? You can’t.

    Shouldn’t there be free market for everything? Let’s go Rothbard route all the way then. Why accept no free market for defense but demand free market for currencies? Peter D

    Because government has a legal monopoly on force, its scope should be strictly limited. Enforcing a private money monopoly should NOT be part of government’s scope. Why should it? Qui bono? The bankers? The usury class?

    >>And don’t computers and modern communications make them quite practical?

    No. The problem scales exponentially, so, unless the number of those currencies is very small, you’re stuck with intractable problems even on supercomputers. Peter D

    The free market would settle on the minimum number of currencies needed or is it incompetent?

    >>As for measuring price inflation, that is highly subjective. Quality of life cannot be measured objectively. In many ways, we are less well off than in 1913.

    Let’s dedicate our best minds to solving the problem of measuring inflation objectively. If it is indeed a problem, we should be able to come with an adequate metric that would jive with the average person’s perception of that problem. Peter D

    That is elitist, conceited, none of our business and inelegant to boot.

    >>What I am advocating is moving on to true capitalism which MUST include liberty in private money creation.

    This is still far from the true capitalism. If you are really consistent, you’d have to go anarcho-capitalism route. Peter D

    Government cannot and should not disappear overnight because of past injustices it has allowed via the present money system. However, if we reform the money system it should be expected that the need for government should “wither away” to a bare minimum.

    >>Otherwise, how do we expect to remain competitive with the rest of the world now that they have adopted our current model – banker fascism?

    Not by throwing the baby with the bathwater, that’s for sure. Peter D

    So a government enforced private money monopoly is the “baby” that must be preserved? Who are you? British Royalty?

    I don’t think you identified the real cause of our problems, so, your solution is not the solution we’re looking for. Peter D

    How odd. The free market can solve every problem EXCEPT money? But in any case, the solution is not mine, it comes from Matthew 22:16-22 (“Render to Caesar …”).

    Alternative private currencies (APC) are a perfect compliment to MMT since they allow the government to deficit spend freely without being concerned about damaging the private sector. Politically, they cut the gold standard advocates off at the knees. What can they say if they are allowed to play with their shiny metals in the private sector?

  • JWG

    Doesn’t the issuance of debt instruments by the Treasury corresponding to federal deficit spending serve de facto as a partial conversion of vertical money into horizontal money? I think of this function as sterilization of deficit spending although sterilization is a forex concept. Continentals and Greenbacks were, I think, vertical money without a corresponding debt instrument, although the old school transmission mechanisms of currency bricks and wheelbarrows don’t really apply today.

    The reserve drain function of Treasury debt seems to fit the sterilization concept. When the Fed executes QE and creates keystroke money to purchase federal debt, it “unsterilizes” the deficit spending reflected in the debt instrument. QE might therefore be something more than an asset swap but much less than a helicopter drop. Maybe that is why QE2 increased commodity price inflation, and headline inflation by a per cent or two, but did little else.

  • Adam1

    Just to add some additional clarity to Peter’s comment…

    “Yeah, it’s called the Fed Funds Rate (FFR) and the Fed thinks that FFR is indeed a good lever for “heating up or cooling down economic activity by making it easier or harder for banks to lend money”…”

    This is correct in describing why the FED changes its interest rates; however the FED has a target for another reason. The primary job of the FED is to be the lender of last resort and to protect the banking system. At the heart of each bank is a payment system. The payment system is what is used to clear and settle payments between institutions and it uses reserves. So as the guardian of the banking system (payment system) the FED needs to know when there is not enough reserves for the banking system to operate safely (not enough reserves can lead to bank illiquidity and bank failure and even banking panics – the banking panic in 2008-09 primarily began outside of the FED’s legal domain with shadow banks and investment banks) the FED has a target interest rate. The interest rate is market set; meaning as demand increases or decreases relative to supply the rate wants to move. The FED adds and subtracts reserves via Open Market Operations anytime the FFR deviates more than a small amount from its target.

    Banks are not reserve constrained because they don’t actual lend money – at least not in the conventional sense. When you borrow “money” from a bank in reality the bank is only promising to make and settle a payment. For example, you take your loan check to a car dealer who takes it to his bank. The check gets passed through the banks payment system. The bank at the time of clearing and settling the check will determine then how it will fund that payment. It might use existing resources (from its existing deposit base or bonds it issued); it might seek reserves from the Federal Funds Market; or if it is in a real pinch it can borrow directly from the FED discount window. So while a bank must eventually fund the payments tied to a loan, it is a process that is determined long after the loan was underwritten and disburst (and as the check is deposited at any bank it becomes “money out of thin air” so typically the bank can always borrow the deposit from some institution if it wasn’t deposited at its own bank).

  • Peter D

    Thanks, Adam! Good clarification on the distinction between changing the target and defending the target.

  • Peter D

    JWG,

    >>Doesn’t the issuance of debt instruments by the Treasury corresponding to federal deficit spending serve de facto as a partial conversion of vertical money into horizontal money?

    Can you explain further? How is vertical money gets “partially converted” into horizontal money?
    For me it is easier to think of this in terms of NFAs – because with or without issuance of bonds the private sector has net injection of FAs when the govt deficit spends. This is what MMT really means by “vertical money” – “money” being net financial assets. Then the bonds will just serve as a tool to convert MZM (money of zero maturity) into money of non-zero maturity (bonds) according to the preferences of the private sector.

  • Pierce Inverarity

    That’s a pretty big assumption to make. Life in 1913 was pretty drastically different from that in the ’50′s and ’60′s by all accounts I’ve read. If you want to compare the 60′s favorably to *now*, and maybe I’ll bite. But 1913? Most work was manual, hard, and economically unrewarding. The average life expectancy for men born in 1913 was 50 years. 50. Now, it’s in the 70′s. Average infant mortality was close to 100 per 1000 births. Now? It’s 5.

  • Wantingtoretire

    Now is the time to switch in to precious metals and ride that bull all the way up the stairs……………

  • http://www.pragcap.com Cullen Roche

    Quality of life is difficult to gauge of course, but from a purely economic perspective (using hours worked to acquire goods and services) we are infinitely better off than we were in 1913…..

  • Pierce Inverarity

    Completely agree. Not trying to tread in subjective/philosophical waters here, but by all statistical measures we have available, life is better now than in 1913. If one wants to live in a place where life expectancy is 50, infant mortality rates are north of 9%, and have high hours worked to goods and services ratios, there are plenty of Sub Saharan African nations one can move to…just saying.

  • Gerald P

    If the Chinese feel it would be smart to put up their US T-bonds for sale, who is likely to buy? If they are unwanted, the price drops, China loses, and the USA will be less able to buy Chinese products. If the purchaser is correct in expecting they will really go up, then China has again lost. Actually, China is more likely to trade US T-bonds for US real estate or industry.

  • Gerald P

    Once upon a time, banks in the USA issued their own money, you can look it up. Its good to learn why we switched to a national currency. Trying to gauge the exchange rates was a nightmare.

  • rfr

    Cullen, a 1MW power plant powered by cold fusion was successfully tested in Milan today. Fuel used is nickel, and energy and copper are output. This should mean an unlimited supply of cheaper-than-fossil-fuels energy that doesn’t produce CO2. What affect do you think that will have on the world economy?

    http://www.e-catworld.com/2011/10/e-day-thread-rossis-1-mw-e-cat-plant-tested-by-first-customer/

  • JWG

    Banks create horizontal money when they make loans; a deposit asset and a debt liability. When the government deficit spends, it creates an asset (the NFA). There is no corresponding liability until the Treasury issues a debt instrument as the law requires it to do when it deficit spends. If the law did not require the debt instrument, the deficit spend is pure vertical money. I have seen this called sterilization, but I know that is not technically accurate. Is there more going on here than just a reserve drain? Peter, what do you think?

  • Peter D

    JWG, even without issuance of debt, the HPM spent in deficit spending is govt liability in that the govt promises to dispense your tax obligation with it. Yes, it’s kind of convoluted, but nevertheless correct conceptually.
    With bond issuance this liability is swapped for a bond, which is a more straightforward liability. No “leakage” into horizontal money here. Actually the definition of horizontal money is that which has a corresponding liability within the non-govt sector, so, vertical money and horizontal money never intersect. But sometimes people don’t recognize that some govt transactions are vertical money creation. For example, the latest craze about NGDP targeting. As long as the Fed overpays for purchase of non-govt asset, it de facto creates NFAs. Thus the premium in such a transaction is a de facto fiscal operation.
    I don’t know whether you’re familiar with the following two links that explain these concepts in detail:
    http://neweconomicperspectives.blogspot.com/2010/01/helicopter-drops-are-fiscal-operations.html
    http://neweconomicperspectives.blogspot.com/2010/11/yes-government-bonds-add-to-private.html

  • first

    We have witnessed unprecedented FED and Government manipulation publicly called intervention. Unfortunately deceptions and deferrals are a tactic, not a strategy.

  • first

    “if we reform the money system it should be expected that the need for government should “wither away” to a bare minimum.”

    Reform the Government and the money problem will fix its self.
    The Government can not be a regulator when it is a participant at the same time.
    Who regulate the regulators when they benefit from there own regulations?
    Decentralize and demonopolize and the regulator “the Government” will be respected again.

  • JWG

    The links were excellent; thank you. I am still left with the thought that the issuance of Treasury debt by law to correspond to federal deficits somehow offsets or blunts the effect or velocity of what would otherwise be pure vertical money creation via direct spending, similar to the issuance of Continentals or Greenbacks to pay war debts. Is it the reserve drain that has this effect that I perceive? Or is it modern transmission mechanisms as compared to currency bricks and wheelbarrows?

  • http://www.marketkarma.blogspot.com MK

    Sorry, but what has been the massive US govt fiscal stimulus? I think the US govt has not done anything meaningful in the way of fiscal stimulus. In fact, one could argue we have seen fiscal deterrent opposing monetary stimulus for the past few years.

    Also I should add, when has the market NOT been a buy the rumor sell the fact mechanism? Anyone that trades for a living knows that the markets have operated according to “buy the rumor sell the fact” since markets first existed!

  • http://www.marketkarma.blogspot.com MK

    Life is better now and products are MUCH cheaper now. For example, the average car cost the average person 1000 work hours today but in 1910, the average car cost the average person 5000 work hours. And today’s care does MUCH more than the care of 100 years ago. That is just one of many examples.

  • Gary_UK

    Whilst I fully agree with the article, I do believe the inevitable conclusion to continual government intervention is that they will be seen to be impotent, and worse, seen to be detrimental to any real recovery.

    Even now, the numbers keep getting bigger and bigger, and the results smaller and smaller. Maybe in a year ot two it’ll take $4 trillion QE4 to get the S&P from 800 to 1000.

    Scary times, an endgame for the fiat experiment being played out in front of the world. As I am convinced this ends with dollar collapse, and probably sterling collapse too, I am investing only in physical gold held securely, delivered there by me. I advise all to grab some gold before it’s too late.

  • F. Beard

    Scary times, an endgame for the fiat experiment being played out in front of the world. Gary_UK

    Fiat is an ideal and the only ethical government money form. The experiment that is failing is the government backed/enforced banking cartel.

    As I am convinced this ends with dollar collapse, and probably sterling collapse too, I am investing only in physical gold held securely, delivered there by me. I advise all to grab some gold before it’s too late. Gary_UK

    Fiat is backed by government’s taxing authority. What is gold backed by? Limited industrial use and women’s jewellery preferences?

  • http://binaryoptiontutor.wordpress.com/ Options Trader

    Amen.

  • Peter D

    JWG

    >>I am still left with the thought that the issuance of Treasury debt by law to correspond to federal deficits somehow offsets or blunts the effect or velocity of what would otherwise be pure vertical money creation via direct spending

    I think that’s because you feel that the govt “bribes” the private sector not to spend money by offering it interest bearing bonds. But I think this is mostly wrong. Savings desires of the private sector come first. Warren Mosler summarized it nicely here:

    the reason the govt can deficit spend in the first place without causing ‘inflation’ via excess demand is because the economy has a net savings desire for whatever reason.
    so govt doesn’t deficit spend first, and then, quick, offer some rate to keep those funds from causing inflation.the govt buys things when it deficit spends, and that they are offered for sale is the evidence that the economy wants the net financial assets.
    yes, the term structure of rates figures into that savings decision, but looking at the interest income channels and econometric evidence I suspect that higher rates reduce savings desires, and vice versa.

    (at http://feedproxy.google.com/~r/CommentsForTheCenterOfTheUniverse/~3/flBYi5eUPJI/)

  • Wantingtoretire

    “Government wins again”.

    The economy is comprised of both the government and the private sector. America would benefit enormously if they stopped turning everything in to a 2-sided fight where one-side wins and the other side loses.

  • Wantingtoretire

    I think McGregor’s real point was not the diminishing supply of oil and the fact that America is a society built around oil as the fuel of choice but the fact that America (and Canada) have vast reserves of natural gas. This fuel is presently so much cheaper than oil it is mind boggling. Yet, America is not turning to this fuel in a big way. Why not?

  • beowulf

    31 USC 5103 Legal tender
    United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues. Foreign gold or silver coins are not legal tender for debts.