JoNova

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Subprime carbon is coming

There are people out there who manufacture money from nothing. Literally. The rest of the world has to earn it, but some are in it from the start–where money is created from the ether.

Cover image: Manufacturing Money and Global Warming

Banking is not a secret but no one tells you how it works… it’s hard to get your head around it, but if everyone understood, some aspects would be outlawed tomorrow (just like they used to be).

Greens and bankers make strange bedfellows. The bankers know where the Greens are coming from, but the Greens need to find out why bankers, “the paper aristocracy”, are so keen to save the planet. It’s an unholy alliance.

St Louis Federal Reserve Money Base Graph 1918- 2009

This is the US Money Base graph. Base money is cash and reserves at the central bank. It’s a graph to stop you in your tracks, starting from 1918 and going up to this week. It took 90 years to grow the US money base up to about 800 billion dollars, then in four months from August 2008  it doubled. This is the parlous state of our “managed” paper currencies. Just as one fiat system collapses, some people want to set up another.

In a free market economy the one price of the most important, most central item is fixed by a group of bureaucrats we don’t elect. The price of money. That’s the interest we have to pay to those who made our sovereign dollars from nothing.

Carbon credits are a fiat currency, the market will have the same players and similar rules: governments decree everyone must pay tax in dollars and… trade in carbon credits. The units are worthless without government backing. It’s a “free market” but at the point of a gun. There is no box on purchases where you can opt out from sending some money to men in dark suits based in London and New York.

Once we let this system in there is no easy way to back out

The vested interests are already massive. Last year alone $126 billion dollars was traded in carbon markets according to the World Bank. Projections are in the trillions. Literally. It will be the largest commodity market in the world–which is all the more ironic given that there is no commodity to back it– we don’t trade carbon, we trade the right to air that could have had more carbon in it. The coulda-had-carbon-market just doesn’t have the same ring.

David Evans has written up a paper that describes just what kind of Octopus we are dealing with, and it’s bigger and more insidious than almost anything you can imagine. It’s a long paper, but if you are not aware of how our currencies are created out of thin air, backed by nothing, and why the Global Financial Crisis was not a surprise to those of us watching the money supply, then stand back, hold onto your hats and take a deep breath. It’s like living in The Matrix.

The summary:

  • Modern money is paper, manufactured by banks out of thin air. Banks make something from nothing. This is the story of the rise and abuse of that great power, a high-level view of the current financial bubble and its causes and consequences.
  • Modern money is created by debt. The growth of the bubble is tracked by the ratio of debt (money) to GDP (size of the economy). It started at its normal level of 150% in 1982. By 1987 it had reached 235%, the previous record set in 1929 on the eve of the Great Depression. By 2007 it had soared to 340%, and by mid 2009 it was 375%—nearly 20% of GDP is now spent on interest. There is now scarcely any more disposable income for taking on yet more debt. We are hitting the wall.
  • The newest game by the banks is carbon emissions trading. The plan is to manufacture emission credit certificates out of thin air, trade them between big financial companies, and compel the rest of us pay for them by producing real goods and services. The new financial slavery.
  • Carbon emission permits are the latest paper currency, brought to you by the same crowd who profited from the world’s largest financial bubble. Same structure, same modus operandi, same beneficiaries, same use of exaggerations, half-truths, and tricky government statistics.
  • Banks want carbon trading. They do not make a profit from a carbon tax, which would be fairer and simpler. Governments are not offering a carbon tax, only cap and trade. Ever wondered why?

Cover image: Manufacturing Money and Global Warming

Read the full Science and Public Policy Institute original paper Manufacturing Money, and Global Warming by Dr David Evans.

This is a story that has been years in the making.

It’s time has come.


You can get updates of the money base (and all other monetary aggregrates) at the St Louis Federal Reserve web site.

I wrote a shorter synopsis of carbon as a fiat currency in February.

The corruption is inevitable: Carbon casino caught with it’s pants down.

Tiny URL: http://tinyurl.com/jonova-sub-prime-carbon

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71 comments to Subprime carbon is coming

  • #
    co2isnotevil

    I predict that the price of carbon offsets will plummet once the science of climate becomes better known. Can you go short on carbon offsets?

    George

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  • #

    There is a Library of Liberty that is a collection of important classical and Austrian economic theory and commentary. Some of it is rather heavy reading but if you get thorough it, you will understand Capitalism and free market economics. You will see why our current path is rapidly taking us into an abyss that will be very difficult to escape.

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  • #
    Steve Meikle

    Once more they are hawking indulgences, forgivenes for carbon rather than forgiveness for lying lust greed etc.

    Complete fools

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  • #
    fasteddy

    What we need is for an innocent simple child, to look upon the parade of fools and exclaim “Look, the emperor has no clothes”.

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  • #
    Tel

    What we need is for an innocent simple child, to look upon the parade of fools and exclaim “Look, the emperor has no clothes”.

    The correct ending to that story was when the emperor had the child executed in public, and everyone stopped laughing and the wonderful clothes reappeared.

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  • #
    Ray Hibbard

    I remember distinctly when I was a kid I had a ‘savings account’ that returned 6 or 7%, today the banks think they are doing you some kind of favor giving you 1% on 25,000.00. Then people wonder why we don’t save more of our income. If you save money and inflation is eating it at a 5 to 8 % rate it is the same as burning it very slowly.

    So; they can print money from nothing, loan it out at 7% to 30% interest and if it’s a mortgage repossess your house if you don’t make your payments. How can I get a job like that!? When you look at the Treasury bill transactions between the government and the FED it is even more ridicules. The Fed buys T Bills through their member banks with fresh counterfeit money and for all their trouble get paid interest from the U.S. taxpayer!

    If the majority of the people ever took the time to understand how the central banking, fractional banking, fiat currency scam really worked they would be so incensed the stones that were once the Federal Reserve building would be laying in the middle of Pennsylvania Avenue by the end of the week.

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  • #

    George,

    Can we short that market?

    A related question. For all the superannuation funds involved in it, can anyone sue them for losing their clients money by investing in a scheme that had no basis…?

    Will they all get away with just saying… well the IPCC reckoned it would happen.

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  • #
    allen mcmahon

    On a similar note ABC radio reported yesterday that the market for the solar credits certificates issued by our wonderful government has fallen by 50% in the past six weeks. For the people who have recently invested in solar systems they have lost on average $2500. The market is over subscribed and will continue to plummet as more people try to cash in their certificates.

    Penny Wong was unavailable for comment but one of her spin doctors said it was controlled by the market and therefore not the government’s concern. I wonder how the people who were sucked in by this government promoted scheme feel.

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  • #

    Related to “For all the superannuation funds involved in it, can anyone sue them for losing their clients money by investing in a scheme that had no basis…”

    So… when it’s all finally properly publicly exposed as the big scam it is, will our glorious governments give us a refund of the money they have ripped out of us “working people” who will end up paying our real money for their idealogically driven indulgences?

    Somehow I don’t think a refund will be uppermost in their minds.

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  • #
    Henry chance

    Carbon fell in trading from 7 dollars a ton to 10 cents. That will never sustain the Chicago climate Exchange which is run by non financial types.
    10 cents tells me there is doubt that it will have value evah.

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  • #
    Mike M

    Although I’m not exactly certain how it fits into this topic I suspect that it does somehow… National Grid, a British company who now has a huge monopoly supplying natural gas and electricity in my area, has come out with a new campaign called “Power of Action” where they actually encourage their customers to buy less of their product because they declare that their company is dedicated to a sustained social movement to save polar bears among other things.

    You just can’t make this stuff up – :

    ….With your help we can create a sustained social movement. And the results could be amazing.

    There are so many reasons to do it. For starters, the less energy you use, the less you pay. The need for new power plants would go down. We’d all be less reliant on foreign energy sources. There’d be far fewer carbon emissions into our atmosphere, less acid rain, slower climate change. Everybody would benefit – you, your kids and grandkids, even the polar bears.

    So in the inverted eco-zealot world where more is less, National Grid can increase it’s earnings by selling less product. It doesn’t seem possible until you surmise that perhaps their ‘earnings’ include not just cash like ordinary corporations but the carbon credits they receive for selling less energy. It’s the only explanation I can think of, can anyone think of a better one?

    So shouldn’t I be concerned that some cold day in February, if carbon credits reach a high enough level, the extra ‘earnings’ will become so irresistable that they’ll just shut off my gas and electricity altogether to make a real windfall?(Of course they’ll manufacture an excuse why the gas stopped flowing so it looks like they profited by accident.) I’m feeling rather cold and dark already. Hmmm… probably what is it like to live in cave? These people won’t declare ‘progress’ until we’re all living in one.

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  • #
    Mike M

    [ Joanne Nova: For all the superannuation funds involved in it, can anyone sue them for losing their clients money by investing in a scheme that had no basis…? — JN]

    Careful there Joanne, that’s exclusive territory for class action trial lawyers; don’t mess around threatening to end-run those parasites! ;)

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  • #

    Mike M.

    National Grid. NG: LSE

    Does it mean anything that the top five shareholders of National Grid LE are investment houses? Maybe not, but some of these may well benefit from carbon trading.

    INVESCO Asset Management Ltd. 6.06%
    Legal & General Investment Management Ltd. 5.40%
    Barclays Global Investors Ltd. (UK) 3.12%
    FIL Investments International Ltd. 3.03%
    M&G Investment Management Ltd. 2.23%

    And Re Superannuation: It’s a serious question. I don’t have any money in those super funds. But if those super funds thought they might get sued they might look at the science more closely. After all, what’s a carbon credit going to be worth once the scam is known?

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  • #
    Chris Bolts Sr.

    This “cap-and-trade” scheme is the greatest fraud perpetuated by man. Bernie Madoff has nothing on the pols in government who are trying to give us their commie “green” economy through a complex maze of rules and regulations that no one will be able to figure out. If this stuff isn’t stopped we’re all about to become criminals, stealing energy wherever we can get it.

    That being said, I don’t think that the people will sue these green zealots once they realize they’re losing their money on a dogmatic religious belief. After all, it has been revealed to the Danes that they are subsidizing their neighbors use of THEIR wind energy and the Dane pols are trying to expand the energy output by windmill by 25%. THAT IS MADNESS. It’s like walking straight into a wall at full speed, cracking your head, and saying, “THAT’S FUN! LET’S SEE WHAT HAPPENS WHEN WE RUN INTO IT!!!!”

    I’m afraid that if we don’t make a stand, Western civilization will do something that Mark Steyn said (on a totally different topic, but poignant nevertheless):

    “I keep getting e-mails saying, ‘People will reach a tipping point and they’ll no longer put up with this stuff.’ I doubt it. Right now the way to bet is that once free societies will retreat incrementally, one trivial step after another, into a totalitarian hell.”

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    Tel

    So in the inverted eco-zealot world where more is less, National Grid can increase it’s earnings by selling less product.

    The logic will make a whole lot more sense when you get a look at the price hike that is coming around the next corner. Every monopoly dreams of selling less product at a higher margin.

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  • #
    Ray Hibbard

    Mike M: 12

    “So shouldn’t I be concerned that some cold day in February, if carbon credits reach a high enough level, the extra ‘earnings’ will become so irresistable that they’ll just shut off my gas and electricity altogether to make a real windfall?”

    I don’t know what the rules are in your country, I’m guessing Britain, but here in the U.S. utility prices are highly regulated. It practically takes an act of state legislature to raise the rates. So we have on the one hand electricity and gas prices that are difficult to increase and on the other hand carbon futures where prices will fluctuate with the free market. Mike, I think you have identified a very likely scenario. If any speculation occurs with carbon credits and believe me eventually it will, selling carbon credits will be many times more lucrative then providing gas or electricity. Rolling blackouts here we come.

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    tdiinva

    You wrote:

    “In a free market economy the one price of the most important, most central item is fixed by a group of bureaucrats we don’t elect. The price of money. That’s the interest we have to pay to those who made our sovereign dollars from nothing.”

    This is the pure Keynesian monetary theory that underpins Hick’s famous LM curve. It is flat out wrong. The interest rate is not the price of money as Keynes said; and is not the price of credit that Karl Brunner and Alan Meltzer claim; the interest rate is the price of time. The price of money is alway = 1 unit and value of money is equal to the purchasing power of money, i.e., the price level.

    The interest rate is what you have to pay to induce people to give up purchasing power today so someone can use it to do something now. It is the link between today and tomorrow. Any economic analysis that views the interest rate as the price of money is inherently flawed. Brunner and Meltzer can get away with it because the credit market is about giving up something today for a return tomorrow. However, the key unit of measure is acually time.

    10

  • #
    Ray Hibbard

    “The interest rate is what you have to pay to induce people to give up purchasing power today so someone can use it to do something now. It is the link between today and tomorrow. Any economic analysis that views the interest rate as the price of money is inherently flawed.”

    I suspect that this may be a semantic misunderstanding so I’d like to ask a few questions.
    In today’s world with banks deposit to loan ratios almost nonexistent who is it that is putting off using their money today so that someone else can? Today banks don’t loan deposit money per se. Almost all of the loan balance is borrowed into existence. Given this I would think that as far as pure fiat currency is concerned it would be time neutral.

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    tdiinva

    All bank loans in a fractional reserve system are borrowed into existence. It doesn’t matter whether you use fiat money or a commodity standard. That is why there have been periodic bubbles and busts throughout history.

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  • #
    Tel

    In today’s world with banks deposit to loan ratios almost nonexistent who is it that is putting off using their money today so that someone else can?

    China mostly, and to some extent India, and SE Asia. I doubt they will get back what they think they have been promised but we do seem to be headed for a non-academic debate over exactly what interest rates do mean.

    Fiat currencies (in the modern central-bank design) are in fact commodity backed currencies. The commodity is force, which is really the only commodity the state has to offer for sale. This is such a good offer (your money or your life) that most people see it as acceptable, and the small number who don’t accept this deal tend to end up keeping quiet about it.

    For example, the Australian dollar represents a written expression that the holder is entitled to a limited amount of protection from the Australian government. The US dollar, likewise for the US government. To ensure this protection offer is time-limited those governments will routinely take back some of these dollars in a process known as taxation.

    If you would like additional protection beyond just your person (perhaps you would like to own land, or drive a car, or run a business) then this additional protection must quite reasonably be paid for by additional taxation. If your like a structured system for being able to predictably survive an encounter with someone unreasonable who takes a dislike to you, then you will most likely be needing a legal system (structured deployment of force) and a police force (military power with constraints on lethality). All of this implied additional taxation.

    Finally, (as with any protection racket) the fundamental problem for the victims (err citizens) is that if they shoot the local Capo, then there’s a nearby Capo on every side just waiting to move into the territory. That’s why you need military force to keep them off (more tax).

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  • #
    Ray Hibbard

    tdiinva: post 20
    “All bank loans in a fractional reserve system are borrowed into existence. It doesn’t matter whether you use fiat money or a commodity standard. That is why there have been periodic bubbles and busts throughout history. “

    I have to differ here. Currency that has a commodity backing is just a representation of that commodity whatever it might be. It exists because that commodity exists not because it was borrowed. The commodity must be produced before the money representing it can exist.
    Fiat currency actually does not exist until the loan papers are signed, and then presto there they are.

    I assume when you say fractional reserve system you mean simple fractional banking without the added wrinkle of central banking, if I am mistaken please clarify. Assuming I’ve got that part right I can’t see how fractional banking under a commodity currency can cause bubbles or busts. I can see how you can have a bank panic or a run on the fractional banking system but as such the money supply is still tied to the commodity backing.

    If you are referring to the various nefarious actions that central banks and the banks themselves do, well I don’t think you can lay those sins at commodity backed currencies doorstep. By this I mean it is not commodity money’s fault that it can be debased. Fiat currency only makes it dramatically easier.

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  • #
    Ray Hibbard

    Tel : post 21
    I understand your point believe me, and thanks for pointing out China, India, SE Asia. Your right they do lend money primarily by buying US government securities T Bills etc. The effect of this is that the government doesn’t just print ALL of it. In 2007 the IRS collected 2.4 trillion after refunds. 248.6 billion of that was collected from individual taxpayers. We are on our way to spending two times that in 2008. So it seems that the U.S. government runs a whole lot more on borrowed and printed money than with collected taxes.

    I think the idea that fiat money has value because it keeps the Mafia,, I mean the government at bay muddies the water a bit more than I care to. I prefer to think of it in the following terms, commodity money is not an obligation on anyone where fiat money is just an IOU. An ounce of gold is just that, an ounce of gold, it is, or has been worth, pretty much the same in terms of goods and services for thousands of years. Fiat money on the other hand generally always ends up worthless if you take a longer term point of view, we have only had pure fiat currency for about 38 years.

    I have to tell you I won’t ever count on the police to insure my surviving unpleasant encounters. For me 911 (government sponsored dial a prayer) is the number you call after everything is over with.

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  • #

    Fractional Reserve banking still creates “money from nothing” but the process is limited if it’s backed by gold or silver. The norwegians went for 400 years with less than 1% inflation (as an annual average) – their currency was backed, by silver I think, not “fiat”.

    Today’s currencies flow from fractional reserve banking but are unleashed. The only thing that stops them printing infinitely is “what they can get away with”. But hardly anyone watches money supply, so they get away with a lot. They diverted us to watch the CPI, people fell for it, then the the CPI was “adjusted” ever downwards. No one seemed to notice the trick.

    As far as the “price” of money goes. Lets not argue the semantics too far. I want to buy the use of your money for a while, call it “renting” if you want. What price will you ask? Whatever your yearly fee is, if it’s higher than the banks I’ll say no thanks. Hence the price of “renting” money is fixed by bureaucrats, not the free market.

    When the price is set too low, it demands we all become speculators, not savers, in order to keep up. If money supply grows at 10%, goods grow at 1%, then I need to make at least 9% on my money just to stand still and preserve its purchasing power. I can’t loan it for that, so I’ll have to invest just to beat inflation.

    We do want some speculation in our societies, and we want some saving. Shouldn’t there be a debate about how much we allow our money to grow each year, and what that balance should be? Shouldn’t the growth in our money supply be watched by the citizens? We report CPI every quarter, but no one mentions M3. In Australia it grew 23% from Jan 07 to Jan 08. Unnoticed.

    All high schoolers should know what money supply is and what the numbers mean and the advantages and disadvantages of diluting our sovereign dollar.

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  • #
    tdiinva

    Mr. Hibbard:

    Differ all you want but you can have bubbles and busts without a Central Bank and operating under a commodity standard. (See “The Panic of 1907/Lessons Learned from the Market’s Perfect Storm by Robert Buner and Sean Carr). In 1907 the United States operated under a Gold Standard and the National Banking Act and did not have a Central Bank. The Federal Reserve Act was a result of this Panic which by the way was quite similar to last year’s financial meltdown.

    JoNova:

    There are a policies a Central Bank can pursue: The money rule, recommended by Milton Friedman where the central bank increases the monetary base by a fixed amount every year consistent with long term growth or it can peg an interest rate. Historically, the Fed has pursued an interest rate policy which turns out to be pro-cyclical. (see Friedman’s “A Monetary History of the United States.” He advocated a money supply rule because the effect of monetary policy has long lags and is reactive to events that have already occurred. From 1980 through 2001 the Fed pretty followed Friedman’s Rule to good effect.

    In the current crisis the Fed acted properly in maintaining liquidity just as JP Morgan did in the Panic of 1907. The challenge now is to buy back all those securities before the velocity of money increases with the business cycle and generates a hyperinflation.

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  • #

    The fingers of government were reaching deeply into the economy by 1907. Anti trust was running rampant. Not as much as today but it did a lot of damage. We didn’t have a truly free market economy even then. Yet the free market got and still gets most of the blame for the consequences of government intervention.

    J.P. Morgan – Savior — The Panic of 1907

    Quote:

    The U.S. economy had taken a downturn in 1906. At Princeton University, the school’s president, Woodrow Wilson, attributed the country’s economic troubles to the government’s “aggressive attitude toward the railroads, that made it impossible for them to borrow.” President Teddy Roosevelt was under fire from the business community who urged him to ease up on regulatory measures and antitrust prosecutions. Instead, Roosevelt threatened at the end of 1906 to subject all large trusts to federal control. Americans were enjoying “a literally unprecedented prosperity,” he said, ignoring the storm clouds on the horizon.

    In her book “Morgan: American Financier,” author Jean Strouse writes of this time and J.P.’s emerging role in the spring of 1907.

    “Morgan planned to leave for Europe in mid-March 1907, but the combination of monetary shrinkage [largely due to financing of the Boer and Russo-Japanese Wars] and a rumor that Roosevelt would make some dramatic new move against the railroads called him out of his ‘Up-Town Branch.’ He went to Washington on March 12 and spent two hours discussing ‘the present business situation’ with the President. As he left the White House he told the press that Roosevelt would soon meet with the heads of leading railroads to see what might be done to ‘allay public anxiety.’”

    Unquote.

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  • #

    The Bank of England raised rates from 3.5 to 6% in 1906. (possibly it had kept them too low for too long, thus ensuring a bubble where people preferred gold to money – especially when inflation becomes obvious – and so they were forced to raise the “price of money” to stop losing the Kings gold.
    http://query.nytimes.com/mem/archive-free/pdf?res=9B05E2DC1631E733A25753C2A9669D946797D6CF

    That familar pattern. Lower rates, ensure everyone borrows up big. Then tip the balance back, raise rates, loans dry up, stock prices fall… Voila. JP Morgan rolls in to “save” everyone, using money he borrowed into existence and also used himself to buy companies very cheaply in the fire sale. He did very well out of the 1907 crash I understand.

    And the Money Trust got to scare the masses into thinking the market needed more regulation. What it really needed was less regulation. Get the “money trust” out of control of interest rates.

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  • #
    Manuel

    I have finished reading the ebook mentioned on this post. While I do certainly agree that links between government and bankers are extremely dangerous, the author seems to mix up things a little. That clearly reduces the credibility of the document substantially.

    Central banks do have the power to manufacture money, either by using the traditional printing press or the more modern electronic means.

    Normal banks, on the other hand, can’t manufacture money unless they use fraudulent means (but then, everybody can do that). At the end of the day, their assets (loans) have to match their liabilities (deposits) minus the other elements on the Balance Sheet.

    It is true that, in a way, banks seem to duplicate money because, a dollar deposited in a bank and loaned to a third party is aparently doubled. The client that deposited the dollar can still request it anytime and the client that received the loan can invest or expend it until it has to return it to the bank.

    But this doubling of money is really an illusion. What is really happening is that money is being used more effectively with the bank acting merely as an intermediary. Someone has some saved money which does not intend to use at the moment and a bank makes this money available to some other person that needs the money now.

    In other words, if governments were forbidden to create money out of nothing and banks were to keep their books balanced, the system would work without any net creation of money.

    This would not be optimum because currency would become more scarce as total wealth increased and prices (expressed in units of currency) would plummet.

    That is why governments through central banks should create (or manufacture if you prefer the term) more money to equal the combined wealth of all economic agents.

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  • #

    Thanks for reading the e-book Manuel.

    Banks hold “base money” (backed by nothing, made from thin air, limited only by what they can get away with) but they create “bank money” from thin air too (that’s the money we all deal with everyday). Sure it has “asset backing” (read the next para to see how little this means) and the banks are supposed to keep about 8% in reserve, so they are limited in how much they can create from thin air.

    Do a thought experiment.
    Lets say a country had 1000 houses and 1000 dollars. Nobody had a mortgage. Then half the country mortgaged their house for $20 each. Now the country still has 1000 houses but it has $1000 + (500 x 20) or $11,000 dollars. In other words, the country has exactly the same total wealth as before but it has made $10,000 from thin air.

    Sometimes money creation does increase the wealth of the nation by enabling, say, someone to build a house that wouldn’t have been there otherwise, but have no doubts at all, both kinds of money are created from thin air.

    If all depositors (clients) went to the bank to ask for their rightfully owned money all banks would, at that instant, become insolvent. Banks are not run with the same accounting rules as other businesses.

    If we stopped all money creation, that would also mean that a percentage of loans would be impossible to pay back over the next year. Money is a ponzi scheme. It has to keep growing in order for people to pay back their debts.

    If money were being use more effectively, then $50,000 would still buy you a house in Australia like it did in 1980. Creating money creates inflation, unless there are more goods and services created at the same time.

    It’s a myth that Banks loan out “savings” – only 10% or less of any loan was ever deposited in the bank. The rest blinks into existence as you sign on the dotted line.

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  • #
    Ray Hibbard

    Joanne: post 29
    “It’s a myth that Banks loan out “savings” – only 10% or less of any loan was ever deposited in the bank. The rest blinks into existence as you sign on the dotted line.”

    Additionally if you take this a step farther, the money that was created is given to the seller. That newly created money is then in turn deposited in the sellers’ bank which in turn counts the new money as a deposit and the entire process is repeated. After about 13 turns an awful amount of money is created, about ten times the original loan amount.

    Add to that the fact that inflation is a very convenient method whereby governments can tax their citizens’ assets away from them as in the following example.
    It was not uncommon for houses to appreciate at a steady 3% yearly average in the U.S.
    If you bought a house at 100,000.00 fifteen years later you could sell it at 151,259.00. During the same period it was not at all uncommon to have an average 4% annual inflation. Under those conditions over the 15 year period you would loose 43% of your purchasing power on your currency.

    After selling the house at 151,259.00 have you made a dime? No you haven’t, in fact you have lost about 13,782.00 in purchasing power. The 151,259.00 is only worth about 86,217.00 of the pre purchase dollars used 15 years ago. But, and this is a big but, the government doesn’t tax you on purchasing power, it taxes you on nominal dollars. And you are showing a 51,259.00 long term capital gain in nominal dollars.

    So if you decide to pocket the profit and skip reinvesting it in the next house you will owe 15% of that 51,259.oo to the IRS or 7688.85. This leaves you with 143,570.00 with in pre purchase dollars is worth 81,834.00 in purchasing power. The 7688.00 you gave the IRS is also in cheaper dollars so adjusting that back to the original 100,000.00 it amounts to about 4382.00.

    The upshot of this little tale is you lost 13,784.00 of the original 100,000.00 dollars to inflation and 4382.00 to capital gains taxes.

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    Ray Hibbard

    tdiinva: post 25
    “Mr. Hibbard:
    Differ all you want but you can have bubbles and busts without a Central Bank and operating under a commodity standard. (See “The Panic of 1907/Lessons Learned from the Market’s Perfect Storm by Robert Buner and Sean Carr). In 1907 the United States operated under a Gold Standard and the National Banking Act and did not have a Central Bank. The Federal Reserve Act was a result of this Panic which by the way was quite similar to last year’s financial meltdown.”

    Mr. tdiinva:
    I differed with you on your assertion that commodity based currency is borrowed into existence. The fiat money we have today would be more accurately described as debt money. Commodity based currency is by its definition not a debt or obligation on anyone to pay. For some reason you decided to argue a point I did not make. I never stated that you ‘cant’ have bubbles and busts with a gold standard and with no central bank. I stated that I can’t see how these facts could be the ‘cause’ of those bubbles and busts.

    What I differ now with you about is that it seems that you assert that a panic occurred in 1907 was ‘due’ to a gold standard or the lack of a central bank I think that is a hard case to make if you are trying to make it. The largest difference between that 1907 panic and today is that the currency today is having its purchasing power drained away and most people have no savings and are deeply in debt. Give me 1907 any day. It would seem that the Federal Reserve Act has been a dismal failure in performing its stated function.

    The point is that a gold/silver standard is not going to prevent people from doing stupid things with their money. Central banks and fiat money set up a situation where savers are penalized and are forced to take larger and larger risk with their money in order to stay even with inflation. You are forced into risk in order to preserve your capital. I think this need for yield had more than a little bit to do with where we find ourselves today.

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    IMO… The banking failure of 1907 had nothing to do with any fault of a gold standard. In reality, the failure was an affirmation that ANYTHING can take the form of ‘fiat money’ to then undermine the entire financial system itself. In the case back then, the fiat money was in the form of worthless stock certificates. The establishment of the federal reserve in response to the bank failures therefore not only did nothing to address the original sin, it exacerbated it by exchanging one fiat system that affected a few people for another one that spread the misery out to everybody. Instead, a regulation should have been established right then and there – KEEP BANKS OUT OF THE STOCK MARKET FOREVER and set a high minimum requirement for collateral on loans, (e.g. real estate).

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    Lionell Griffith

    The difference between a commodity money and debt or fiat money is that the so called “irrational exuberance” that leads to boom and bust is local and limited with commodity money. This is because commodity money can come into existence ONLY by actual productive effort and is therefore itself limited.

    Fiat money has no reality limitation, for a while. As a consequence, the limitations placed by reality appear to be canceled. The spending seems to be able to go on for ever and usually does, again for a while. It spreads more widely and more deeply into the economy. Investments appear to be all winners. This is because there is no way to distinguish good from bad. That is until the economy is so wildly distorted it cannot be sustained. Then the collapse comes and almost all investments are exposed as bad.

    The fundamental fact is reality is real even for and especially for the economy and economic values. They longer there is an attempt to fake it, the higher the boom, the deeper the fall, and the longer it takes to recover from the collapse. This is true both on a personal bases as well as for the entire economy.

    So the question becomes, do you want the individual to be responsible for his actions and reap the benefits and pay the costs for them? Or do you want the entire society to pay a much larger cost after the party? A commodity money insures the first and supports building wealth. A debt or fiat money grantees the second and accomplishes little more than the destruction of wealth, loss of freedom, and aggrandizement of government power. Which, by the way, is the reason and purpose behind the establishment of a debt or fiat money systems.

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    [ Ray Hibbard: The upshot of this little tale is you lost 13,784.00 of the original 100,000.00 dollars to inflation and 4382.00 to capital gains taxes. — JN]

    Why we should all demand that capital gains be INDEXED to thereby favor long term investment over day trading.

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    hmmm, notice that when we talk money no one’s laughing?
    “ahahhahahahahahahaha”.

    Where are the commentators saying:
    1/ OK so the banks traded $126 billion. But who pays you?
    2/ You are not a banker or an economist. Listen to the experts duh! There’s a consensus of bankers who say we should trade carbon. You wouldn’t get a kidney transplant from your gardener…
    3/ Got any peer reviewed references for that?

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    Ray Hibbard

    Jonanne: post 35
    It has been my experience that bankers at least in this country have only a little bit more on the ball than the teenager that asks you “Would you like fries with that Sir?”. It is a bit funny that you mention the differences in the posts where money is concerned vs. global stuffiness, my new technical term for global warming, because it made me think of the similarities.

    The majority of economists are not of the Austrian school of economics. They are true believers in fiat currency and Keynesian economics. Decade after decade of economists have been schooled in the three commandments 1: Silver bad 2: Gold worse and 3: Paper and legal tender laws, great. You won’t find anyone on the board of governors at the Fed that believes in a commodity based money. I would be surprised if they even know who Frederic Bastiat, Ludwig von Mises or Murray Rothbard were.

    In the U.S. before central banks and fictional money minting gold and silver into coin was the extent of the governments’ involvement in the monetary system. Basically all the government was responsible for was certification of weight and purity. With the exception of bank runs which is caused by the fractional (fraudulent) banking system you decided what risk you would take and which to pass by. Perhaps someone would like to justify to me what right the government has in ANY involvement in the monetary system of its citizens.

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    Ray Hibbard: Perhaps someone would like to justify to me what right the government has in ANY involvement in the monetary system of its citizens.

    To justify the government involvement in the economy requires the justification of repeated acts of theft and other violations of individual rights. No moral justification of such is possible.

    A government has no rights. Only individuals have rights. Government has only powers. It is nothing but institutionalized force and can be nothing else.

    Government creates nothing. It can’t give anything that is not first created by the governed. The so called gift is taken by force from those who created it and given to those who didn’t.

    When government is taken over by those who think a power unused is a power abused, the end of both the government and the society it governs is all but assured. That is unless extreme measures are used by the people to eliminate the seekers of power. We did it in 1776. Its getting close to the time to do it again.

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    Manuel

    Joanne,

    It’s a myth that Banks loan out “savings” – only 10% or less of any loan was ever deposited in the bank. The rest blinks into existence as you sign on the dotted line.

    I believe you are mixing two concepts. Banks do loan either savings or money lent to them by other financial institutions. In addition, they have to keep in the form of equity around 8% of all their lending.

    If all depositors (clients) went to the bank to ask for their rightfully owned money all banks would, at that instant, become insolvent. Banks are not run with the same accounting rules as other businesses.

    This is true for most businesses that I know of, not only for banks. A working company has certain amount of assets offset by the same amount of equity and liabilities. Usually cash is just a tiny fraction of all assets. Therefore, if all creditors ask for they money at the same time, the company is bankrupt.

    With respect to your thought experiment, I still maintain that there is no creation of money (unless the banks used certificates of deposit from the Central Bank) because, as I maintain, Banks can only loan money previously deposited or loaned by other clients.

    Finally, when I say “use more effectively” what I mean is not having the money hidden behind a brick but rather used by someone else.

    In any event, I find it highly amusing that, of all men, I have to defend banks. I hate them.

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    Manuel

    Further to my previous comment. Please do yourself a favor. Look at the Balance Sheet of your favorite bank and try to pinpoint the “created money” account on it.

    You won’t find it.

    Therefore:

    - Is it that loans to clients or other banks is under represented on the assets side?

    - Or else, deposits from clients and other banks is over represented on the liabilities side?

    - Could it be that, maybe the Balance does indeed balance and all that banks do is move money around?

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    Manuel, of course, The Proof by “assumption of honest open communication in bank balance sheets”. Silly me, imagine thinking that banks would find clever ways to not make it blatantly obvious that they create money from thin air. Of course banks would practice the kind of open plain english that no one else does. Of course.

    If you hate banks already wait until you read The Creature from Jekyll Island. It will leave you chilled to the bone. Far scarier than any Stephen King novel.

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    Manuel

    After reading some more comments on this post I feel compelled to continue writing. I beg your pardon in anticipation.

    I have been following this blog, among many other, for months because I don’t like the way a coalition of different parties are scamming us with the threat of AGW to, basically, seek a personal benefit. Being a serious subject, which is already causing harm, I want to have the most information.

    Therefore it is very important to me that the signal to noise ratio continues in a high level and that we don’t trap ourselves in the same corner as our opponents are trapping themselves. We laugh at their unfounded and exaggerated claims; the Artic will become ice free in 10 years, sea level will rise 200 m during this century, species are becoming extinct and I have a photo that proves it …

    These Armageddon predictions were the smoking gun that initially started my interest in the subject. My reasoning was: why are all these people trying to scare us? what do they get in return? Now, I know.

    So, please let’s try to avoid the same kind of rhetoric.

    I have been maintaining from a long time now that the Leftists are the new ultra conservatives. When you look at history you notice the centuries long struggle for … liberty. We, the liberal minded people (in the European sense) are therefore in the front of that war, fighting against those that only seek the maintenance of their privileges (or to gain access to them) they used to be called conservatives, because they wanted to keep their privileges. They have been recently joined (a mere two or three centuries ago) by another group of people that want to subvert the balance of power, to then become the power-holders.

    So, indeed I agree with the e-book in that bankers and politicians should not be allowed to mix up freely because that is going to be harmful for us. I agree that monetary policy is too important to be handled in the way it is being handled now. But, let’s stick to the facts.

    Money is a convenience system used to facilitate trading between producers of goods (or services) and users of them. If I bake more bread than I eat and you write wonderfully, I could give you bread in exchange for you writing a love letter to my fiancée. This is called barter and has an inconvenience. You have to eat everyday but I just want to send a couple of letters each month.

    Instead, we use money. Initially, money was just an universal commodity (like salt) that everybody wanted for its own value, that could be used to match production and consumption of goods (and services). I sell my bread each day in exchange for money, and I use that money to pay you to write my letters. Very convenient.

    The only thing important with money is that when you accept it as payment, you trust that, in the future you can use it to purchase goods with a value (for you) identical to the value of what you sell.

    If money is mishandled by governments, that does not translate in that everybody loses their wealth. Only that, lacking the fundamental trusted value that money should have, people start using other means to conduct their businesses. At the start of the cycle, it is true that some people lose wealth, until they realize that money is no longer useful. But experience demonstrates that people are not so dumb when it comes to their own economy.

    The greatest harm of money losing its value is that it is still the best mechanism to perform transactions.

    Getting back to this thread. Bankers do not create money. Only central banks do. Bankers do not control the economy, they are only members of the powerful classes that take advantage of their position to get undeserved advantages. You don’t need to be a Banker to be powerful in this sense, you can own any other monopoly (or regulated) company, or control an environmental (or otherwise not-for-profit-but-on-second-though-just-for-profit) organization.

    This is what we have to fight against. People that manipulate us to gain personal benefits.

    Again, sorry for this long post.

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    Manuel

    Joanne,

    One thing is that banks financial statements do not represent the true nature of their business. That is illegal, but I concede that it is not an uncommon practice. Again, it is a practice that not only banks do.

    The manipulation is meant, not to “create money” per se, in the sense mentioned in this thread, but rather to exaggerate profits or to, temporarily, hide losses or potential losses.

    Another, very different thing, is what is being said in this thread. That the fractional system means that banks give loans ten times bigger than deposits they have. This is simply not true. Banks give loans (roughly) equivalent to their deposits (and received loans) up to 10-12 times their equity.

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    Tel

    To justify the government involvement in the economy requires the justification of repeated acts of theft and other violations of individual rights. No moral justification of such is possible.

    A government has no rights. Only individuals have rights. Government has only powers. It is nothing but institutionalized force and can be nothing else.

    The thing about rights is that they make no sense whatsoever outside the context of enforcement. That is to say, rights exist only on the condition that some power structure also exists to manifest those rights. I’m all for individuals defending their own rights to the extent that they are able, but history demonstrates that tightly organised groups are highly effective at warfare.

    Even concepts such as “moral justification” don’t exist in empty space, they can only exist within the context of a group of people who agree to some sort of treaty including a definition of morality that works to the benefit of that group.

    This is why it is far better to see that government exists as a protection racket for one and only one reason: because it can. Once this basic observation is accepted, we have a good foundation for government to focus on running the best little protection business that it is able to, and for citizens to accept the implicit brutality of this arrangement, and get on with their lives on the understanding that it is a business agreement like any other.

    When we start carrying on about “moral justification” we don’t make the brutality go away, we just hide it under layers of self deception. A business can only work effectively if the proprietors have a clear idea of what they sell, and who their market is. When governments start to believe that their job is to actually solve problems for the citizens, and forget that what they are really doing is running a lucrative protection racket — that’s when things go wrong.

    If my tax dollars are putting cops on the beat to deter street muggings then I can easily see a justification for that. Yes, I could probably personally handle some muggers, but that still leaves a substantial number that I can’t handle, and I have a handful of friends and family that I’d like to feel can walk the streets safely. There’s a meaningful value proposition being offered in this case.

    On the other hand, recently in the UK it was determined unlawful for a pair of mothers to take turns looking after each other’s kids while they did some part time work. Apparently, under some braindead ruling, they are not sufficiently qualified and have not been screened aginst child abuse what-have-you. So the upshot is police given the job of enforcing rulings such as this — no common sense justification and a dilution of the original value proposition in the protection business. I don’t want my tax dollars spent busting some young woman for the crime of doing a bit of part time work and helping out her neighbour.

    Sadly, buying government protection is one of those all or nothing products. You can’t buy just the bits that you feel like. You can’t mix and match accessories in this shop. That’s why government should focus on core business and just deliver the minimum essentials.

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    Tel

    Instead, we use money. Initially, money was just an universal commodity (like salt) that everybody wanted for its own value, that could be used to match production and consumption of goods (and services). I sell my bread each day in exchange for money, and I use that money to pay you to write my letters. Very convenient.

    The only thing important with money is that when you accept it as payment, you trust that, in the future you can use it to purchase goods with a value (for you) identical to the value of what you sell.

    If you trade a commodity (e.g. salt, copper, gold, preserved food, etc) then it is perfectly convenient as these are arbitrarily finely divisible and there is no need for any special trust between parties. Each party walks away with a physical item that has intrinsic value. Better still, you can choose from a range of commodities as might fit the time and place, personal preference and the size of transaction.

    Paper money does not in any way improve on this convenience, but it does place a great burden of trust on whoever accepts the paper that they will be able to redeem this paper for something in future.

    By the way, a barter economy does not exclude the potential for trust if parties mutually consent to this arrangement. I could, for example, trust you to pay me back next week and just make a note between the two of us concerning what you owe me. Such private agreements have been very common in the past. For example, villagers would get together to build a barn or some structure which would be used by one family and a general understanding was accepted that this family would help out with similar projects in future.

    Your convenience theory provides a very poor explanation for the usage of fiat money.

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    Lionell Griffith

    Tel: That’s why government should focus on core business and just deliver the minimum essentials.

    If individual rights do not exist prior to government, what can limit government to the minimum essentials? How can the minimum essentials even be defined? Nothing because the minimum can’t be defined.

    Where there is no recognition of individual rights, there is no limitation on the initiation of force by individuals or government. Hence, the existence of individual rights precedes and must be the foundation of the establishment of government. Otherwise, all you have is the law of the jungle.

    I suggest you re-examine your premises re individual rights. Rights become operative only in a social setting. However, they exist prior to that setting. They define the moral bounds over which one may not properly trespass against another. Enforcement of rights can only arise out of the right of self defense. Even then, a third party enforcer (government, police, security agency, et.al.) is only the agent of the individual who’s rights are being defended and can properly act only within the bounds of individual rights. Action outside those bounds are the actions of thugs no matter what the attempt to create a fiction of legality.

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    Tel

    If individual rights do not exist prior to government, what can limit government to the minimum essentials? How can the minimum essentials even be defined? Nothing because the minimum can’t be defined.

    You haven’t indicated that defining individual rights limits it any better. Witness the UN charter of human rights which just provides more fodder for government interference “for our own good”. The charter gets longer and longer, more and more rights, less and less useful.

    Where there is no recognition of individual rights, there is no limitation on the initiation of force by individuals or government. Hence, the existence of individual rights precedes and must be the foundation of the establishment of government. Otherwise, all you have is the law of the jungle.

    All you ever had was the law of the jungle. Every other law comes from either agreement within a group, or from powerful individuals enforcing their beliefs on a group. The intrinsic limitations of government initiation of force are when a government kills or cripples enough of it’s own population that it can no longer be a viable military machine, or when vested interest groups take over sections of government to pursue their own agendas and the corruption corrodes any operational control system (or both of the above happen).

    Given that we don’t want to push it right to the bitter end, it is in the interests of both the individuals and the nation as a whole to keep in mind what goes wrong and draw a reasonable line in the sand well before that.

    You think that physics or chemistry cares about your concept of individual morality and legality? These are entirely man-made constructs, serving only the purpose of allowing humans to work together in a more effective manner. There never was a great stone of commandments handed down from the gods, it was a fake.

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    Lionell Griffith

    Tel: …draw a reasonable line in the sand well before that.

    By what principle and by what standard is that “reasonable line” to be drawn?

    As near as I can interpret from your post, its nothing but the arbitrary whim of whoever happens to be able to grab the power of government.

    I ask: What part does reality have to play here? What part of the nature of man and his relationship to reality play here? Do these things matter or is it all based simply upon arbitrary and unaccountable whim?

    I agree that except for a few very limited instances, arbitrary and unaccountable whim is exactly how governments have been implemented. Does that make it right? Does that even make it necessary and unavoidable no matter what the consequences?

    I suggest our difference is that you see morality as a matter of agreement based upon arbitrary whim. I see morality as founded on the facts of reality and objectively determined by the use of man’s reason. Hence, for you, rights are determined by the whims of mob rule. For me, they are determined by my fundamental nature as a living and functioning human being – ditto for every other human alive. That is if they choose to remain alive and to thrive.

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    Manuel

    Tel,

    Your convenience theory provides a very poor explanation for the usage of fiat money.

    Commodity currencies can also be manipulated, as they have been in the past, just as well as fiat currencies.

    No matter what system you use, it will have holes. The solution is not to blame the system, but to try and close the holes.

    Yes, money is a convenience system. It is an advancement in human enterprises and fiat money is the latest advancement. It is one of the ingredients of our current prosperous (in relative terms) societies. But it does have problems that can be exploited.

    In the past, you could go with using commodity or gold backed systems because the economy was very rigid. These systems, as you mention on your own comment, will necessarily require that other suplementary means are used. Like individuals trusting people with whom they correspond or institutions like goldsmiths keeping gold deposits in exchange of notes.

    Think about my example. In a barter system both the writer and baker have to be clients of each other in order to close the deal. With money (of any kind), the baker and the writer can interact in just one way.

    So let’s forget about barter economy. What about commodity money? The biggest problem is that the total monetary base is not related to the combined wealth so there will be an scarcity of money over time, if the economy is growing, as it has been doing in the world lately, before this crisis. This is called deflation and it makes things very hard to manage.

    In order to prevent that problem, extra-monetary mechanisms should be used. These mechanisms are complex, expensive and easy to forfeit.

    Therefore it is better to create an institution, the central bank, to manage the system to match the amount of money with the underlying wealth.

    But of course you have to also establish the necessary control mechanisms to prevent abuse.

    The problem is not the system (fiat money and central banks) but the lack of effective control systems. They are not that difficult to implement.

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    Manuel, we could get hung up here on the exact nature of “creating money”. I take it you agree that base money is created from thin air, but disagree that bank money is also?

    I understand your point, but suggest that they two forms of money creation are are just different forms of “thin air”, and that yes, commercial banks are supposed to get “collateral” to justify the loan, but it’s a question of how you define “thin” air. Central banks make it from a vacuum (pure “thin-air”), and commercial banks create it from something more substantial, but still hard to determine, more like “foggy air”.

    I don’t really think it matters to those who’ve lost their life savings in the boom bust cycle. But yes fractional reserve banking is not the same hazard as fiat currencies are.

    1/ If you and I offered to mortgage our neighbours house, and we “multiplied” our cash reserves by 10 fold in order to create the cash to swap for the mortgage certificate, we would be jailed. It’s called counterfeiting. Banks are allowed to break that law.
    2/ Banks loaned money (90% of which was created out of nothingness) to buy AAA+ rated mortgages. What are those same mortgages worth now? Answer: Next to nothing, except that through a complex channel, the US Fed now “owns” them at prices well above what the market would pay.

    You can say the commercial banks were tricked by the ratings agencies, but seriously, there were billions of dollars “created” in the name of assets that barely existed. Some stock margins are not that different. Especially many IPO’s.

    The problem is that fiat currencies are inherently too tempting for those in power to NOT abuse. You know what they say about “absolute power”…

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    Lionell Griffith

    Manuel: The problem is not the system (fiat money and central banks) but the lack of effective control systems. They are not that difficult to implement.

    I agree, they are not that difficult to implement. Nearly every government in history as done so. Making them work is quite a different matter. All past ones have failed and ours is in the process of failing.

    When the money supply is subject to political whim, there is no possibility of measuring the money price of all extent wealth. Such measurement is accomplished by all economic actors choosing the price at which they will buy and sell. Fiat money is fiat BECAUSE it is created without production of goods and services that are source of buying power.

    The economic actors who receive the fiat money are not bound by having to produce wealth to exchange for their money. However, they represent a demand on the wealth/production of others. In the short run, they can bid up the prices with little or no consequence to themselves. This distorts the pricing mechanism so that it becomes impossible to evaluate the total wealth in money terms. It also distorts the supply/demand relationships making it impossible to differentiation between good and bad investments.

    Money is the feedback mechanism in a self organizing self regulating complex system known as the market. Distort that feedback mechanism and the system cannot self organize or self regulate. The generation of a fiat money system is the ultimate of feedback distortion. The market will be following false signals and will end up going out of control and achieve destruction of wealth by generalize suboptimal to really bad investments.

    Lest you think all we need is a wise and benevolent central control authority, even he cannot be effective. It is not possible for such a central authority to measure and know all the individual supply/demand relationships in the economy. For each economic actor there are many thousands of such relationships. For the economy, there are many millions of economic actors. The combination and permutations of these relationships is literally astronomically huge. Add to that the countless unpredictable changes that can occur. Hence the absolute universal result of a central control authority is to dampen variety, choice, change, and freedom of action. Which inevitably results in the demise of the economy because it cannot adapt.

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    Lionell Griffith

    Ashby’s Law of Requisite Variety

    “the variety in the control system must be equal to or larger than the variety of the perturbations in order to achieve control”

    We humans are as bound by Ashby’s Law as we are the Law of Gravity. This is the primary reason that ALL non free markets fail. The central control authority can attempt to reduce variety but it cannot reduce the occurrence of the perturbations. The perturbations will accumulate until the non free market fails. This failure is the ultimate perturbation the central authority cannot avoid. Especially by reducing variety in the control system.

    Reality is real. If we try to evade that fact, we will not long continue to exist.

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    Ray Hibbard

    I will put my trust in empirical data. Fiat currency systems have never worked in the entirety of human existence no matter who tried them. They have always failed. Before you say this latest experiment with them has been successful define what you call success. This latest attempt is all of 38 years old. A 1913 dollar is worth a few pennies. This experiment has given us one solid depression under our belt and another on the way, with a light sprinkling of booms busts and recessions in between. I thought the idea of a central bank and elastic currency was to prevent these things, well if it was it is a failure.

    Definition: (insanity) Doing the same thing over and over again expecting a different result. I’m betting this experiment will turn out the same.

    Central banks hold interest rates artificially low. Savers can’t find safe yield anywhere that will protect them from inflation so they MUST accept some risk. And people wonder why we don’t save or if we do we might be tempted to invest in AAA rated securitized mortgage paper. I have talked with people who know and much of the current credit crunch was not so much PUSH the paper as there was PULL from the investor class. By this I mean that investors world wide were clamoring for that triple ‘A’ rated paper with the higher yield, they couldn’t get enough of it. As is expected the NEED was satisfied by the market.

    Average life expectancy of a fiat currency was reported somewhere around 42 years. If so we won’t have to wait long for the answer.

    It is amazing to me that how people can trust an entity like the government with all of its propensity for corruption and incompetence to manage and dictate what they use for money. It’s stupefying.

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    Lionell Griffith

    A History Of U.S. Paper Money

    1913: $50 Gold Certificate

    The last of the true Gold Certificates – the Federal Reserve was instituted in December 1913. This is a completely honest and upright money. You can see that it states right on the certificate: “Fifty Dollars In Gold Coin, Payable To The Bearer On Demand”.

    What you are looking at here is a money substitute. Any holder of this certificate held title to 2.41896 troy oz of Gold (at $US20.67 per troy oz.) which could be redeemed at any bank or from the U.S. Treasury itself at any time.

    Gold price today

    $1088.33 per troy oz.

    One of today’s dollars equals 0.01899 of a dollar in 1913 or slightly less than 2 cents.

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    Manuel

    Lionell,

    Very interesting comment. it As usually happens we are not so much in disagreement in the basis of our arguments.

    There has been a tendency lately for governments to overregulate our lives while at the same time breaking loose from the controls that had been impossed on them during the previous two centuries. Monetary policy is just one more example of that, as is the whole AGW scam.

    Coming back to fiat currencies. Yes, they do have problems, but the alternative is not much better. I don’t see how do you sustain our present highly dinamic economy maintaining the gold standard. The web site you linked explains it very well the kind of instruments that had to be used to maintain gold standard in its latest years of existence.

    All forms of power have to be controlled, the system created in the American revolution was working very well (the checks and balances and limitations to the federal government), but unfortunately is being dismantled very quickly.

    I live in Spain. We used to have an authoritarian dictator named Franco. Now we live in a nominal democracy, yet in many aspects, the power of government has increased and the internal controls of the system have been lessened. Pretty scary.

    Yet, the solution is not to abolish governments and central banks. We still need them but with their powers severely limited.

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    Tel

    Savers can’t find safe yield anywhere that will protect them from inflation so they MUST accept some risk. And people wonder why we don’t save or if we do we might be tempted to invest in AAA rated securitized mortgage paper.

    In Australia the situation is worse, we have Capital Gains Tax, so every investment (be it asset, or interest bearing deposit) is taxed. There are also deeming rules so that you are taxed on the presumption of having made a return at some government-determined rate. These taxes pretend that inflation does not exist, so if inflation is 5% and you are taxed 30% of your earnings then you need a return of 7% just to break even (presuming zero risk, which is of course impossible). Factoring in some risk you probably need a return of around 10% to have a good chance of just keeping what you already have.

    The only way you can save money in Australia is to borrow money on a house, and then hope that the house price goes up. They exempt the family home from capital gains. Thus, everyone is forced to use the same investment strategy, and thus the price of houses do go up. Our private debt levels are very high, backed by housing mostly.

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    Manuel,

    Central banks with fictional (fiat) reserve still has the problem that it distorts the price feedback mechanism in the market place. Money created without actual production of value will damage the price mechanism so the individuals in the market cannot judge good investments from bad. This ultimately will cause the collapse of the economy. This is true no matter what kind of “controls” you place on the central banks. Hence, the only valid money is a commodity money. This makes reality the controller rather than political whims. In which case, government regulation of the central bank is totally unnecessary AND the central bank itself is unnecessary.

    A commodity money is a problem only if you assume prices should never change. Yet, like the climate, prices always change. Some up and some down. Even this is a totally specious reason because fiat money always cause price inflation (a change) eventually. This is seen as good by government because it can pay back debt with cheaper money. Thereby removing the control of the price mechanism from government as well.

    The price mechanism as crippled as it is, has driven down the cost of computer based hardware by many orders of magnitude over the past 50 years. At the same time, capabilities have gone up by many orders of magnitude. This has not destroyed the computer industry. This has enabled the economy to become vastly more effective in spite of massive government intervention. With a commodity based money, a similar result would happen for all goods and services except government intervention would not have been so pervasive and perverse.

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    Manuel,

    Note that I’m not necessarily arguing for a gold standard. As you point out, they can cheat even then. (The US Gold reserves have not been audited since 1956. It’s not clear, even if gold were in the vaults of Fort Knox, that it belongs to the US, as much may have been swapped.)

    I’m arguing at the moment for the simplest first step – the public should know about money supply, those numbers should be reported. Our Australian dollar supply grew by 23% in a single year in 2007, yet 0.0000001% of Australians were aware. The RBA didn’t hide it. (Nor did they issue a press release). It’s only “transparent” if the media report it.

    An educated public is the only possible protection. Vigilance is required. You can’t “legislate that” but you can teach it.

    Having said that, it’s harder for the government to cheat if there is a gold standard. Gold can, after all, be independently assayed, and ingots can be standardized and recorded and audited.
    It’s very hard to audit “money supply” and even harder to audit “inflation”.

    The more fuzzy they make the audit trail, the easier is it to rort it.

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    From comment #25

    The challenge now is to buy back all those securities before the velocity of money increases with the business cycle and generates a hyperinflation.

    The Velocity of money is a bogus concept. You can’t measure it, it’s not an independent variable. It’s a piece of meaningless complexity designed to confound the issue.

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    Ray Hibbard

    Tel: post 55
    We have the same in the U.S. a 15% long term capital gain on investments held for over one year and 35% short term capital gain on investments held under a year. The CPI reported by the government bears no relation to reality as housing, health care, food and energy are excluded from the calculation. Shadowstats.com reports inflation that is routinely 3 percentage points higher than official CPI; they calculate it the same way before changes made during the last 3 presidents were implemented. The only folks that are experiencing the official inflation rate are those living in abandoned cars in Wal-Mart parking lots and are on food stamps.

    Between inflation and the taxman non speculative investments are just and exercise in futility and hardly worth your time or your money.

    It’s almost like they want to reduce everyone to chasing this tax credit or that tax credit, so in the end we become nice little trained lab rats, pushed this way and that by the tax code.

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    Keith

    Got Gold ?

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    Keith

    “People cheat”
    Indeed they do. especially when they are so uncritical and unskeptiocal of their own circumstances. Literally anything can happen due to political disengagement through effective smearing of those who would object to the many ongoing scans: ets, fractional reserve currencies, theft through inflation, superannuation. All these scams will collapse at some point, but I doubt people will be any wiser.
    Get Gold before the final bust and wait and see if people can return to integrity in their lives.
    It will be a hard adjustment. Gold in one’s own possession can’t be faked. You either have it or you don’t.

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    Keith

    The speculative purchase of the “right” to emit carbon reminds one of old church practices of selling indulgences for the forgiveness of sins. Now that everyone feels guilty about carbon, they are easily conned into this scheme. Instead of getting right with God, they can get “right” with the carbon conmen. The church had the reformation just because people began to understand that God’s grace can’t be bought. I guess that people will need another Martin Luther to wake up to the carbon scam.

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    Tel

    I suggest our difference is that you see morality as a matter of agreement based upon arbitrary whim. I see morality as founded on the facts of reality and objectively determined by the use of man’s reason. Hence, for you, rights are determined by the whims of mob rule. For me, they are determined by my fundamental nature as a living and functioning human being – ditto for every other human alive. That is if they choose to remain alive and to thrive.

    On the whole, mobs living by “whim” of mob rule have thrived reasonably well so far, the Earth’s human population is still growing. If there was a prime morality determined by the fundamental rules of nature then it would surely have had time to become universal by now, or at least reached a reasonably narrow valley around this supposedly optimal moral code.

    I would agree that there are some potential rules of morality that never work. For example, a moral code where everyone tries to randomly kill other people has never been the basis of a successful society.

    Ignoring such extreme examples, other rules for morality have been quite arbitrary. For example, paedophilia is considered the worst of the worst in modern times, but was quite common in the ancient world. Sparta was a superpower of its day, considered to be the supreme force in land warfare, but they were also gay, and staunch supporters of slavery, and extreme socialists (not hypocritical equality-based socialists, but practical military hierarchical socialists). Rome also ran on the power of slavery and a great many other practices that would be outrageous in modern context but Rome operated one of the most successful empires in world history.

    Hitler, Stalin and Mao each created moral/legal structures that were almost indistinguishable from each other — highly centralised totalitarian rule, small elite ruling committee, the individual exists only to serve the state and anyone who dissents must be killed. Hitler’s effort collapsed in a decade, Stalin’s lasted about 50 years but China is still running a centrally planned system, still delivers the highest numbers of death-penalty killings in the world but looks set to become another economic and military superpower (with some small drift towards capitalism and away from Mao’s original communist model).

    On the other hand, the USA has drifted in the opposite direction, towards stronger and stronger central planning and greater federal interference in daily affairs. So far the US empire has not crumbled, although cracks are showing here and there. I personally expect the US to thrash wildly for a while then reinvent itself but it would be a bold prediction to claim to know what exactly it will reinvent itself into.

    Let’s not forget that technology drives things forward, and the computer revolution is only in mid swing, the biotech revolution has not even really started yet. Many empires fall over at a crucial change in technology. Heavy cavalry could deliver the speed and punch to defeat a Roman legion, originally used to great effect by the Goths but before long everyone was doing it. The Samurai of Japan considered it unsporting and disgusting that a line of quickly-trained peasants with cheaply made rifles could rip apart a well trained warrior with the best equipment, best family and best horse.

    That’s just how it is, times change, the balance of power swings around. Some ideas work for a while, then new ideas come along. From this point of view, ideas about morality are technology like any other and the agreement people make (more or less voluntarily) when they join a group is part and parcel to the implementation of that technology. So far no particular methodology has proven completely supreme, they have their advantages and disadvantages.

    Libertarianism delivers well on invention and economic advancement, but requires people be tolerant amongst various lifestyles and people do tend to enjoy petty intolerance. Socialism seems to be vary adept at warfare, especially the sort of mass teamwork required to field large armies. If Hitler and Stalin had managed to cooperate rather than bashing each other then Western Europe would have been obliterated. Yes I understand that narrow elite power structures inevitably make blunders, but they could have dealt with many small blunders if they had avoided the Battle of Stalingrad.

    Quite likely the age of large armies is gone now, we are moving towards hi-tech war so inventiveness is getting more valuable, but making new technology is so easy, expect to see a lot of change coming.

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    Lionell Griffith

    Tel: “…but making new technology is so easy…”

    First, thank you for making my point. You view it all as due to arbitrary whim, brute force, and accident. For you, the mind is essentially irrelevant and the conditions necessary for the mind to function as arbitrary. This last point is demonstrated by your statement I quoted above.

    Have you ever invented a new technology? Have you ever moved one from initial concept to the market place? I have and I KNOW what it takes. It is anything but a matter of whim, brute force, or accident. It is especially NOT easy. It is particularly impossible in and environment of mob rule by thugs which you say have been so “successful”. Apparently we also have a VERY different view of the meaning of success.

    Reality is real. That means humans are what they are. To live, they must be more than predatory brutes. They must live by using reason FIRST HAND. Once the brutes have consumed the men who do live by reason, they cease to be able to survive and begin consuming each other. THIS, I contend, is NOT successful.

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    Hello Joanne,

    I have been directed to your site because I have just published a sceptical book on climate change: ‘Chill: a reassessment of global warming theory’ – it is well reviewed on Amazon.co.uk

    Reading through the above posts, I want to tell you that although the science community (to which I belong) studiously ignores the book, some of the most interested people have come from the banking community in London. They know how much money can be made. And they are worried about the carbon bubble bursting – just like the housing bubble and the current inflated asset bubble – but the ones I am meeting are a revelation to me – they do actually care about planetary ecology and they want to know the truth.

    I was already aware of the huge carbon credits scam – but when I researched the book I only touched upon it – now I am having to do more homework – and its really disturbing – I am an intelligent person (Oxford science degrees) and I find the whole financial world extremely hard to comprehend! Knowing that I am not that stupid, I am starting to look at this world as a deception – and how it is disguised by linguistics. I am not doing too well – and David Evans book may help. It is therefore refreshing to find such straight-talking and clear evidence that the whole system is deliberately obscure!

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    Ray Hibbard

    Peter Taylor : post 65

    “I am an intelligent person (Oxford science degrees) and I find the whole financial world extremely hard to comprehend! Knowing that I am not that stupid, I am starting to look at this world as a deception – and how it is disguised by linguistics. I am not doing too well – and David Evans book may help.”

    Your exactly right Peter it’s a tower of babble I would suggest you take a look at http://mises.org if you have not already done so. I hit the work a day world in 1975, could not figure out why I never felt I was getting ahead in spite of the fact that my income was increasing nicely. That’s when I got introduced to inflation. It was then that I started to realize that thing were not as they seemed to be. I began to understand it much better by 1998 through some self study and finally happening on to the http://www.mises.org website. Then I studied Murray Rothbard who as far as I am concerned has no peer when it comes to cutting through the crap and exposing what is really going on. It’s a fun area of study but be prepared to be pissed off.

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    Tel

    Lionel, I’ve spent a bit of time in the technology game, got a few ideas about how it works. I try to put my world into a historical context (including technology and the construction thereof), but I get the feeling you don’t take much of an interest in history so I find it difficult to construct anything tangible for you to respond to. When I try for a specific practical example you tend to ignore it so that doesn’t leave much common ground.

    Once the brutes have consumed the men who do live by reason…

    I would have thought that the primary objective of living by reason was to discover ways to protect oneself from brutes. Maybe your reason is more real than mine, but when the brutes come for me I’ll just make do with what I have.

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    Tel,

    Let’s not get into a mine is bigger than yours argument. I have been in the technology “game” since the mid 1950′s and as a trained and productive professional since the mid 1960′s. Do a patent search on my name as inventor. That will give you some insight into my fields of activity, its intensity, and its duration. Also, the history of science and of human thought has been one of my special studies. Check out my Intellectual Ammunition web site for more information

    While we might agree on the historical facts, we don’t appear to agree on its interpretation nor on the practicality of that interpretation. I suggest that the reason is we start from a very different set of first principles.

    My position is that theory and practice must be a unified whole. Theory without practice is mysticism. Practice without theory is magic. That reality and the nature of man and his relationship to it can be known and understood. That you need not know everything to KNOW something. That words are more a tool of thought than communication. That clarity, precision, and consistency of word usage is critical. That words must refer to things and relationships among things but not foggy internal ill-defined feelings of shape shifting intent.

    I should also point out that it is not possible to make a complete communication within one blog post nor even in several. Hence, there is much left unsaid that constitutes context of what either of our posts. Much of that unstated context can be inferred from the basic principles implied or explicitly stated.

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    Tel: I would have thought that the primary objective of living by reason was to discover ways to protect oneself from brutes.

    Yes and it was discovered and described in The Declaration of Independence and The Constitution of the United States among other documents. For the first hundred years it more or less worked because We the People chose to use reason and to remain free and acted accordingly. Since man has free will, he can choose to be irrational as well as rational. We the People have long since lost contact with the thinking behind those documents and have chosen leaders who are leading them to the abyss.

    When the bulk of humanity is irrational, the most the rational can do to protect themselves is to go John Galt. I contend THAT is exactly what is in the process of happening sans the existence of a Galt’s Gulch.

    The consequence is that the brutes will end up consuming themselves after they have consumed anything else they can grab. While this “solution” may turn out to be the only one possible, it’s much less than practical. That is if by practical you mean supports surviving and thriving. I don’t call one to ten thousand years of dark ages practical. Yet that is exactly where our so called leaders are taking us.

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    Tel

    Yes and it was discovered and described in The Declaration of Independence and The Constitution of the United States among other documents. For the first hundred years it more or less worked because We the People chose to use reason and to remain free and acted accordingly.

    There might be a few Indian tribes with differing opinions about who were the brutes during that time, and differing opinions about what constitutes living free. Very difficult to find a golden era that was golden for all concerned.

    The tremendous technological advantages that allowed the early US settlers to be successful were mostly imported from Europe anyhow (along with those settlers). The US didn’t become a technological world leader until after WWII, and in that particular case got a boost from the waves of highly trained refugees fleeing the old world for the new.

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