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Why are we bailing out the banks? Part two. Theory, Ideology and Failure.

In part One I argued that if we want to understand why our rulers have insisted we MUST bail out the banks we simply have to look at who owns the banks and the vast bulk of the wealth they house. And surprise, surprise the owners of most of the financial ‘wealth’ are…our rulers and their friends.

I ended by suggesting that true though I felt this was, there were also theoretical reasons why some people felt the banks must be protected at all costs -as long as the burden of paying that cost was placed firmly upon the backs of the little people, you understand.

So….

Today’s Economic policy: Print, Bail and Cut

The mainstream response to what I presented in part one is to say, I have simply, perhaps wilfully, failed to understand what they have been and still are, heroically, trying to do. They will insist there is no contradiction in their position of cutting public spending and bailing out the banks at the same time. So allow me to present what I believe that logic is.

The two aspects of their policy ‘bail and cut’, they will insist are not contradictory at all. Simply put, they will say they are loosening or increasing the  money supply (QE) in order to invest in growth (classic Keynesian) while simultaneously cutting those expenditures which they feel do not generate growth and which are in fact ‘drains’ on productivity – in their view any ‘public’ expenditure (Classic Free-market ). Growth, for them, equals the free-market/private sector, while drains on growth equal government, public spending. Thus their policy is a strange hybrid of Keynes and his opposite. No wonder then, that as the policy has not delivered, support for it has fractured. The fracturing has not, however, been in a straight left/right way. Please forgive this digression but before we look further at the policy I think it helps to know who is on what side and why.

Who’s who and why

Supporting the printing in order to bail out the banks are the bankers (obviously) but also all those convinced by the propaganda that if we don’t the sky will fall in, which includes many on the left and all those rotten, stinking, slobbering and putrid whores of the ‘centre’ (Sorry – had to get that off my chest). Those from the traditional left parties which have spent a decade telling us ‘We’re not left. We’re on the centre ground!’ find themselves trying to square the ridiculous circle of supporting bailing the banks, assuring their centre-party credentials by being concerned to cut public debt BUT ALSO being against austerity cuts. At least those of the mainstream, traditional right wing parties like the Tories or the Republicns, much as I dislike them , are consistent. They say bail the banks but save money by cutting everything else. Those on the centre left say, ‘Oh yes of course we should save money and cut the debt. But we must bail out the banks no matter what the cost AND ‘no, we shouldn’t save money by having cuts.’ I think the right wing is wrong. I think the centre-left is wrong and inconsistent and stupid. Of course if they did get back in to power they would cut anyway, but with tears in their eyes as opposed to the barely concealed glee of the right. The centre left is so fuddled I wouldn’t give them the steam from my dinner if they were starving, let alone my vote. I can think of gerbils with more brains and integrity.  But my prejudices aside, those ‘in favour’ of the current policy are a heterogeneous bunch who are not all comfortable with their unlikely bed fellows.

The same is true of those opposed. They too are a mixed up bunch. Some of The Opposed are those who regard themselves as true ‘free-market’ believers. For them the banks should have failed like any other business. They hate the debt levels all the QE has created. They also, perhaps particularly, hate the big banks. Because while the ceo’s of the big banks love to talk about Free-market values, they have, in fact, out of pure self interest (see part one), put on hold their belief in the working of the market to punish the failed, in favour of massive printing and public support…for themselves and their otherwise failed banks. They have used their position of power and wealth to arrange a deafening barrage of media, expert and political advocacy for their message that ‘the banks must be saved or the sky will fall in’.

Also opposed to the Bail outs and the Big banks are a motley group of all those who believe in the Austrian school of economics and all the hard-money, Gold Standard believers. For them debt, the fiat currency which allows it, and the banks who live by it, is a form of Satanism. This group come across like cats caught having a poo, when they are spotted in opposition with those on the left who share with them the belief that the banks should not have been bailed.  Of course the left people do not think there should be cuts and do not share any fear of debts. They believe in stimulus spending.

And that last point confuses all. For those on the right look at the bank bail outs and see stimulus spending. And why shouldn’t they? After all that is what all this spending on the banks has been called by those who ordered it. The architects of the policy have said we have bailed the banks in order to stimulate the economy. They have argued that saving the banks IS stimulating the economy, or at least essential to it. If you accept that bailing the banks has been stimulus – therefore Keynesian  spending – then it is clear that stimulus, Keynesian policy has FAILED.

Only I would argue it has not. I argue Keynesian stimulus spending has not failed because, in the main,  it hasn’t even been tried yet. The key is whether or not you believe that putting money in to the banks has led to real investment in the real economy for real growth. If you think that has happened, first – WAKE UP – and second, show me the evidence.

Print, Bail and Fail. 

The classic neo-liberal, Free-Market world view says only the markets produce wealth while the state is parasitic upon it. It is the logic which wants to turn Great Britain in to Britain Plc. It is the IMF mantra which ‘we’ in the West have watched as it has been forced upon others and turned a deaf ear to their cries of anguish and complaint. Now we find it forced upon us and are alarmed.

Karma aside, this ‘Private good, Public bad’ conviction is why our leaders and their economic advisers from the financial class, will live with debt if it supports the banks but not if it is for government hand outs, and pesky, ‘anti-business’ regulations. In their world the articles of faith say that  only the Free-market can provide growth and only the banks can be trusted to invest wisely in that market.  And given the seriousness of our current situation, they will add, we may have to tighten our belts and cut even those ‘nice’ things like welfare, health spending, education and even policing since they are not immediately wealth producing. Basically – Private Debt good, Public Debt bad. Agree or loath, that, I believe, is their logic.

Some of you may be having a seizure right about now (Especially the MMT brigade), while others of a more Free-market frame of mind may be nodding in agreement. Please both hold on a for a few minutes. Let’s look at the above logic and policy in their own terms before we take issue with the terms/assumptions themselves, because I think it is now quite clear, even to its supporters, that the policy has failed.

First lets be clear about the terms; printing for growth or stimulus spending. We need to be clear because we are already standing in the midst of one of today’s most heated and bitter arguments between those who subscribe to mainstream economic theories of how an economy works, who claim all this printing, for whatever reason, will lead to inflation and hyperinflation and opposing them, those of the MMT (Modern Monetary Theory) persuasion who claim that mainstream economics is a fatally flawed theory which does not understand the nature of economies, money or inflation.

I do not wish to be drawn, just yet, into a full fledged argument over which theory is correct and which is rubbish. My view, so you all know where I stand,  is that mainstream economic theory is fatuous at best and that MMT is well on the way to providing a clearer picture of how money and an economy actually works.  That said what I would like to emphasize here is not  one theory over another but what all economic theories agree on. Keynesian, Austrian , Mainstream and MMT, all recognize that a sovereign government with its own currency can expand the supply of money (print). In fact they all recognize that when an economy grows, governments have to print. More economic activity needs more money/tokens of value.  Pretty simple really. The question at the moment is should government expand the money supply (print) when economies are shrinking as a way of kick-starting growth and if so how?

There is also a side issue of whether QE is printing or simply changing one set of paper promises (private ones) for state backed ones. I will tackle this some other time. It doesn’t alter the current argument.

Critically all theories agree that there must be some match between the supply of money and the economic activity it serves. Which means they all agree you can print IF it leads to actual economic growth. This is the basis of Keynesian counter cyclical spending, which simply means that the government, as printer of the money, can help stimulate growth by providing money and investing it in order to off-set times of private economic contraction.  All theories agree it is not a disaster to inflate the money supply as long as the new money promotes real growth. What is important is the ratio of money to economic activity.

All the theories agree if new money helps create new economic growth then that growth will soak up the extra money and the ratio of money to real economic production stays the same. Thus the argument should not really be about how much money has been printed up but whether it has been spent on things that will create real growth. THAT should be the debate.

There are two points of argument. The first, is how long you can leave extra money sloshing around trying to stimulate growth before its failure to do so will instead create inflation.  MMT seems quite sanguine saying other factors are more important.  The Austrian school is not at all sanguine. Neither knows for a fact how long is too long. They are theories. The second is who is best suited to invest the printed-up money in order to stimulate growth, government or the private sector? In other words if you are going to create new money to invest in growth who should control the investment of the money, government or the banks? And this is where our present policy is  different from the text book story of FDR and The Great Depression. It is also where our economic situation becomes poisoned by ideology.

The classic FDR/Great Depression answer as to who should invest, was government through huge state programmes of public works: Building dams, roads, houses etc.  This is often referred to, by those who dislike it, as the Statist position. The modern version we have today, unsurprisingly after three decades of neo-liberal, free-market consensus, is that the private sector, not the state, should do the investing. Thus this time around, though we have governments printing and expanding the money supply as before, the governments have not invested the expanded money supply directly ( I know there have been exceptions like GM in America)  but generally they have instead funnelled nearly all the money in to the banks for them to ‘lend’ in to the real economy.

Is this progress? Those who have an ideological hatred of government and see all government as just a means whereby a small group of insiders can chose what is best for them at the expense of everyone else, are tempted to think it is progress simply because it cuts out government control. But take off the distorting lens of of ideological hatred and what have we really done? I argue we have exchanged one group of insiders in big government for another set in big banks.  And worse they have a revolving door to shuttle from one to the other. So now we have a small group of men who control the 50 or so most bailed out global banks and their former colleagues now in government, who decide. Have they invested in us and our futures?

Has the monster worked for us?

In a word, no. It has not. The policy has worked only for those who gave it life – the banks. Five years in to the policy,  recovery and growth in the real economy remains absent. In fact many countries are facing accelerating economic contraction, with destructively high unemployment. A measure of just how distorted our world has become is that we now have the mind boggling spectacle of the IMF warning a Tory UK government that their policy of bail and cut is not working and they should have a plan B which includes spending for growth.That’s like finding Nazis at a Bar Mitzvah.

Anyway, in the face of the abject failure of the bail the banks policy (42 million Americans on food stamps is not just failure it’s an indictment) we have had Obama and the rest of the G8 pathetically claiming, “It would have been much worse without the stimulus.” What seems clear to me is that our leaders, at the behest of the banks and sundry ideologues, have insisted on investing in the one sector of the economy which has not and, I argue, will not invest in growth in the real economy.And steadfastly refused to invest in any sector that might.

In the UK we had Project Merlin. Launched in 2011 amid great fanfare it was supposed to be a model of the new light-touch approach. A voluntary agreement between state and banks that the banks would lend more in to the real economy. It failed absolutely. In every quarter of the year it was launched the banks lent less in to the real economy than they had a year earlier.

I talked to one bank which specializes in loans to small and medium sized businesses and they concurred that there is less and less money available from the big banks. Where did the money go? Lots was returned to the central banks where we paid them interest on it, some was used to plug holes in bank balance sheets where non-performing assets had left bills unpaid, much was used to buy and sell European Government bonds and much of the rest was used to speculate on commodities in emerging markets.

I particularly like the money returned to the central banks. We lend the banks money at a very low rate. They take the money and put it back in to the central bank. Why? Because the central bank pays a higher rate of interest on this deposited money than the rate it charges the banks for borrowing it in the first place. That is better than a license to print money because you don’t even have to pay for the printing.  And then the banks turn around and tell us we must cut welfare because our debts are too high. It’s brilliant. When you borrow from a bank, you pay them interest. When the banks borrow from us..we  pay them.

Anyway, unperturbed by abject failure the UK government has decided to try again. This time they call it “Funding for Lending”. Yet again the banks will be allowed to swap yet more dodgy assets that no one will accept as collateral, for Gilts which they can then use as collateral for getting their own loans in the open market.  Does this inflate the money supply? Well the BoE and other central banks buy the bank assets at inflated prices. And the banks then take the gilts and through layers of  loan creation leverage them like mad. So yes it does inflate the amount of money – but with one massive caveat.  Sadly there is no stipulation that whatever money this process unlocks for the banks has to be used for lending to Small and Medium sized businesses. The fact is they can use it for whatever they like. The financial press has already ridiculed Funding for Lending as Funding for Pretending.

The danger is that banks stock up on profitable, low capital-intensive assets like mortgages, or even high-yielding peripheral sovereign debt, and leave domestic small businesses high and dry.

Which is exactly what will happen. There is more money but not for us. The money either stays in the banks and central bank where it serves only the banks, or it flees the country to speculate elsewhere. So we have more money in existence but little more supply in the real economy than before.

The bailed out banks have no interest in investing for growth. Growth is a slow business where the company invested in has to grow first before the bank gets its reward. Banks have grown accustomed to being served first not second. They have no intention of waiting in line with the rest of us. Waiting is for little people.

So once again why are our rulers continuing to bail out the banks?

I hope you don’t mind if I break here. I know it’s not the best place to stop as it leaves out a lot of salient points but this post is already too long.  I will make my remaining points in the next and final part.

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114 Responses to Why are we bailing out the banks? Part two. Theory, Ideology and Failure.

  1. patma2003 October 10, 2012 at 3:10 am #

    Whoa… meaty.

    I very much enjoyed from where you drew the alternative ideologies together as most of them are singing from the same hymn sheet, whether they care to admit it or not – and they appear to be singing from the same hymn sheet simply because the current path we’re on is so warped.

    Which makes me smile inside, because the longer those in control blindly refuse to accept they may be wrong, the less voice they will have in the future.

    Despite the constant tale of woe, the sheer volume of good human energy in this blog is amazing. One blog of many.

  2. Daniel October 10, 2012 at 3:26 am #

    Bail-outs and QE can be equated to Welfare for the Banking system. Welfare is a drain on society and the economy. It is a free lunch.
    For the lower class unemployed, they are styled as ‘scroungers’.
    I see no difference between bank scroungers and unemployed scroungers, except the bankers receive billions more and receive interest on their dole money when they park it back at the Central Bank.

    • patma2003 October 10, 2012 at 4:58 am #

      “The fallacy of monetary policy in the U.S. is to believe this money will go to the man on the street. It won’t. It goes to the Mayfair economy of the well-to-do people and boosts asset prices of Warhols…Very happy. Very good for the Fed. Congratulations, Mr. Bernanke. I’m happy. My asset values go up but as a responsible citizen I have to say the monetary policies of the U.S. will destroy the world.”
      ~ Dr Marc Faber 14/09/2012

      in case you missed that epic encounter on Bloomberg: http://www.youtube.com/watch?v=Sdy8vqiqdCQ

    • YankeeFrank October 13, 2012 at 11:14 am #

      Wrong. Welfare payments to actual people puts money into circulation, creates demand, sales, wages and profits in the REAL economy, a/k/a growth. Welfare for banks throws money into a black hole at best, and at worst causes terrible consequences like commodity inflation that raises the prices of everything from oil to foodstuffs, causing demand to drop and mass starvation. So please do not try to equate welfare to people with welfare to banks. They are completely different animals with totally different outcomes. Get a clue.

      • Phil October 14, 2012 at 9:21 pm #

        I think he was referring to the rhetoric around those who need social security – how they are demonised as ‘scroungers’. And of course there are quite a few who could work but chose to play the system instead. BUT that does not mean we throw the baby out with the bath water.

        Everything you said is true there Yankee, and I would go a stage further and say that I find the whole public sector vs private sector slanging match to be utterly delusional. There are countless private sector companies which depend on public sector contracts and are very grateful for the fact that the government or council always pays and on time. And when they talk of government ‘waste’, I have to remind people that the waste is resources bought from private companies. Too many staff? Well it beats having people subsisting on the dole – and their wages are overwhelmingly spent in private sector businesses. What the political Right doesn’t want to accept is (a) the private sector can’t provide sufficient jobs and wages for everyone and (b) public sector jobs had to be created in many parts of the UK because British banks had (and have) no interest in investing in businesses there.

  3. Yerk October 10, 2012 at 8:54 am #

    “All the theories agree if new money helps create new economic growth then that growth will soak up the extra money”

    And this is the reason why we are going down regardless of theory. We are facing an steadily decreasing EROEI (energy return on energy invested) and I don’t see how the required additional growth can be achieved while the energy rug is being pulled away from under us. The theories being quote are nothing but outflows of times of increasing EROEI. And where shall the government invest today: New roads, more cars, more dams? That did work in the 30ies. Bridges to nowhere they are building, blowing overinvestment bubbles in solar etc.

    • Golem XIV October 10, 2012 at 9:50 am #

      Yes, that is indeed a deeper argument our soiciety has not even begun to grapple with. But as you indicate, we have to and soon

    • Martin October 10, 2012 at 1:58 pm #

      You could accuse any govt money invested as being ‘bubble creating’, but I wouldn’t be so neg on Solar. Renewable energy and energy storage have to be as good an area as any right now to focus on.

    • Trent October 10, 2012 at 2:43 pm #

      Though in hindsight, the austrian theory does try to limit the ability to create credit. And if credit is pulling from the future to consume today, at least in “theory” the Austrian form of economics would be slight more stable and sustainable. But yes i am convinced the goose is cooked no matter form goes into power these days. I just worry who will be in power when the SHTF.

      • YankeeFrank October 13, 2012 at 11:18 am #

        But the Austrian solution digs a different hole. While it is true that credit and debt are out of control and the Austrian solution would reduce that problem, it would create another just as intractable problem which is it would deflate the economy by taking money out of circulation, causing the economy to grind to a halt, which is the reason we left the gold standard in the first place. The Austrian solution is no solution. MMT really is the answer, but that would mean wresting power from those who have it now and redirecting investment back to the public realm, which the neoliberals have ruled out. Unfortunately, until there is such a crash that all of those currently in power are totally wiped out financially and credibility-wise we have no choice but the current path.

    • Jason October 11, 2012 at 12:49 pm #

      The energy crisis is at the root of all of the issues we are facing (the collapse of the financial system is because we operate a debt based currency which requires on average 3% growth globally, no cheap energy, no/low growth, which leads to the inability to service the compounding debt interest on the money issued).

    • Suav October 11, 2012 at 9:06 pm #

      This is a particularly murky side of it, as we are sucking up all the comparatively low tech energy resources to leave half of the globe high and dry at some point – totally dependant on technologies available, on desirable levels of safety, to very few.

  4. Skeptic October 10, 2012 at 9:46 am #

    Great reading. I’m reminded of a comment on pragcap.com some time back…

    “Fiat standard for the banks, gold standard for the rest of us.”

  5. Aaron October 10, 2012 at 11:57 am #

    More great analysis!

    Anyone who has tried to get a mortgage in recent years knows exactly what you are talking about. The banks aren’t interested in stimulating the real economy or growth. They are only interested in stimulating their bottom line as fast as they can.

    People need to realize that these institutions are simply that, artificial constructs designed by people, prone to error and/or failure, and subject to the greed and hubris of man. This ignorant belief that the sky is going to fall and the world will come to an end needs to be addressed. The sooner we realize that society can and will survive without these TBTF banks, the better.

  6. Alan October 10, 2012 at 1:22 pm #

    You mention that the different strands of economic theory agree that increasing the money supply only causes inflation if economic output fails to rise in step with it. You’re right that the theories agree on this, but in my experience, their adherents do not. I’ve yet to come across a forum post or article comment on any site – apart from this blog – where a gold bug, Austrian, or free marketeer accept the idea that it is ever possible to print money without triggering inflation. I’m basically going by the comments I read on CIF or Nationstates – ordinary folk who aren’t too deeply interested in economics. As best I can tell, their line is that if the government even so much as thinks about printing, we will be on an inexorable path to hyperinflation – and also that whenever inflation does occur, someone must have been printing. I’ve never seen a comment by any of these types (aside from on this blog) that indicates awareness of any connection between economic output and inflation; only the MMT advocates seem to understand that. While the theories themselves are sophisticated enough to be worth discussing, many of their supposed followers just seem to pick the bits they like the sound of.

    • Golem XIV October 10, 2012 at 1:48 pm #

      Hello Alan and welcome.

      I can only agree with you about the way people don’t understand even the theories they claim to believe. And you’re right everyone does hyperventilate about inflation.

      I am planning in writing something about that soon.

      Please comment again when you have time.

      • John G October 11, 2012 at 6:03 am #

        The other way that government printing and fiscal stimulus is non-inflationary is that if it is spent into real people’s pockets, they will then save any excess i.e. pay down private debt, thus merely canceling bank credit.

        So there is no expansion of the money supply.

        Of course the banks don’t want this because it shrinks their balance sheets.

  7. LQ October 10, 2012 at 2:47 pm #

    “Keynesian, Austrian , Mainstream and MMT, all recognize that a sovereign government with its own currency can expand the supply of money (print). In fact they all recognize that when an economy grows, governments have to print. More economic activity needs more money/tokens of value. Pretty simple really.”

    Sorry but this conclusion is patently untrue. Rather than printing more tokens (inflation), the free market can simply assign a greater value to the existing stock of tokens (deflation). As banks are systematically short the value of existing tokens, the latter prescription is never the chosen one.

    • Golem XIV October 10, 2012 at 3:16 pm #

      Hello LQ,

      Of course you’re right both the free market and the government could let the value of the tokens go up. But I don’t think its a great solution because it will increase the apparent cost of exports and make everyday transactions difficult.

      If the free market is happy with a given ratio of tokens (money) to economic activity, and then the amount of economic activity goes up, then the market itself will be happy to print up more tokens to restore the ratio they had before.

      I don’t think doing so can count as inflation. It certainly wouldn’t cause inflation because it would not create more money chasing the same number of goods, would it? It would create more money chasing more goods, in the same ratio.

      • LQ October 10, 2012 at 8:46 pm #

        But the cost of imports would go down and the cost of exports for everyone else would go down. It’s a zero sum game at worst and a domestic efficiency prod at best.

        If “the market itself” is the indebted, yes, you are correct. If, on the other hand, it’s the savers, then you couldn’t be more wrong.

        Increasing the quantity of tokens is the very definition of inflation. Yes, it may not cause a decline in the purchasing power of the tokens should all things offered in exchange rise in quantity proportionally.

        Again, the debate should focus on the notion of que bono. It’s the savers vs. the debtors and banks are aligned with the debtors as they make unreserved loans today, at interest, which can only be reconciled tomorrow with the inflation of the base money stock.

        • backwardsevolution October 11, 2012 at 5:37 pm #

          LQ – yes, it IS the savers vs. the debtors – hard-earned money vs. easy money. Few understand the dynamics.

          I agree with what you’re saying. Please post more and provide some examples. I’ll try to dig some up too.

  8. James October 10, 2012 at 2:56 pm #

    Superb article so far, I have only one very small criticism. For me it would be better to keep to the facts and explanations of the theories, and avoid emotive language. I think the facts speak for themselves . Loudly.

    Cutting essential help for the most vulnerable in society, exposes the warped views of those who espouse it. I’m in very strong agreement with your view David, but I think a balanced tone is more effective. In almost all of your blog this is how you present your articles.
    To me this gives it far more credibility than most “political” pieces.

    I hope I’ve expressed that properly and you feel encouraged to continue. The specific data, and analysis you give is the best I’ve encountered on the web. Best wishes.

    • Golem XIV October 10, 2012 at 3:17 pm #

      Thanks James.

      I know you’re right and I do take what you say to heart. But sometimes….

    • YankeeFrank October 13, 2012 at 11:29 am #

      I don’t agree. Certain ideas are reprehensible and it is appropriate to point that out. I’m so tired of the idea that everything must be couched in dry technocratese to be considered serious. Its a stale, tired and decadent culture that must deny emotion in our public debates. Offensive ideas couched in calm language are no less offensive.

  9. LQ October 10, 2012 at 3:14 pm #

    And, regarding this string:

    “There are two points of argument. The first, is how long you can leave extra money sloshing around trying to stimulate growth before its failure to do so will instead create inflation. MMT seems quite sanguine saying other factors are more important. The Austrian school is not at all sanguine. Neither knows for a fact how long is too long. They are theories. The second is who is best suited to invest the printed-up money in order to stimulate growth, government or the private sector? In other words if you are going to create new money to invest in growth who should control the investment of the money, government or the banks? And this is where our present policy is different from the text book story of FDR and The Great Depression. It is also where our economic situation becomes poisoned by ideology.”

    If the free-market is left to assign greater per token exchange value of the existing stock of money, then it will be those who in some sense prudently saved who now will be the marginal controllers of new investment. For better or worse, this clearly would be a subset of the private sector.

    The real debate comes down to the battle between savers and borrowers. That banks’ interests are aligned, as I say above, with the latter. So is it for the public sector.

    • Golem XIV October 10, 2012 at 3:23 pm #

      Not quite sure I understand what you’re saying here. Sorry.

      But I would say that the financial sector of the free-market does far more printing and inflating of the supply of tokens than any government.

      The idea that governments are a danger because they tend to print is laughable. Not that governments don’t resort to printing. But the banks print far far more. They don’t call it money and they don’t call it printing but in fact it is both.

      3T in dollars. 50T trillion in credit. You tell me who prints like a madman and causes inflation. Why else did house prices double and triple? Inflation of the tokens in whch the goods are traded.

      • LQ October 10, 2012 at 3:34 pm #

        Yes, I agree that the major source of financial and thus economic instability through the ages has been unreserved bank lending.

        My point is that the “value” of the money stock can be inflated/deflated in two manners:

        1) A change in the NUMBER OF UNITS to which you allude exclusively. Central banks can effect this change via UNIT increases in the stock of base money and private banks can do so via UNIT increases in the stock of deposit money (a.k.a. unreserved bank credit) or, alternatively,

        2) The free market can assign a change in exchange value to each EXISTING monetary UNIT.

        In both instances, the exchange value of the aggregated money stock seemingly has been altered. But, the relative winners and losers are distinctly different. In the instance whereby the number of units is increased, those short the value of those units win (e.g. debtors and banks). In the instance whereby the value of each existing unit is simply increased, those long the value of those units wins (e.g. savers and unlevered bond-holders).

        • Golem XIV October 10, 2012 at 3:47 pm #

          OK I see now. Thankyou.

          Sorry if this question is daft but you say the market can assign a change in the value of existing tokens. How?

          And now that I think I understand your point I still don’t see how it makes what I wrote wrong. As I understand it you have pointed out that I was only presenting one part of what could be done. Fair enough.

          For my part I was not saying the theories advocated expanding the money supply only that they recognized that it could be done. I then suggested that in certain circumstances – increasing economic activity – any of the theories could not ony countenance it as a viable policy but might even embrace it. Not that they would but they could.

          I think that still stands doesn’t it?

          • LQ October 10, 2012 at 7:19 pm #

            The market can change the value of existing tokens by either increasing or decreasing the general price level.

            No, this doesn’t necessarily refute your claims but, very importantly in my view, augments them. To ignore this point is to play into the hands of the inflationists regardless of their political dispositions.

            While the debate is focused on rich vs. poor (a worthy focus for sure), it should focus even more so on the mechanisms by which such wealth disparities may arise. Bilking savers is at the top of that list I’m afraid.

    • penny bloater October 12, 2012 at 5:23 pm #

      Actually it is ‘printing’ by private banks that has led to the last three crashes – all of which were based on asset bubles based on housing and/or shares (1974.1987.2008). It’s laughable to suggest that government issuance of currency is automatically inflationary, while private issuance is not.

      As for the spectre of inflation Japan has been waiting for just that for 22 years now – inflation – like the great inflation of the 1970s depends on commodity prices and the level of spare capacity in the economy. Arguably, the UK economy hasn’t run at full capacity for nearly 40 years now. At present, there is massive spare capacity of labour and resources, compounded by policies aimed at demand destructiuon. Hyper-inflation ain’t gonna take off anytime soon!

  10. zerobs October 10, 2012 at 3:48 pm #

    . I argue Keynesian stimulus spending has not failed because, in the main, it hasn’t even been tried yet.

    What a bunch of bullshit. Solyndra, Government Motors, Alaskan bridges to nowhere, the military-industrial complex…

    You have to have your head in the sand to think the government HASN’T been doing the “Keynesian stimulus spending” thing almost non-stop for 80 years.

    • Golem XIV October 10, 2012 at 4:22 pm #

      Hello zerobs,

      Acouple of points.

      I was careful to say that I realized there had been spending on the likes of GM. I mentioned GM by name. So I was not claiming there had been no spending in to the real economy, But even the likes of GM and Cryster and the others taken together pale into nothingness compared to the sums pumped in to the banks.

      As for the Military while I agree whole-heartedly that such spending is as flagrant an abuse of government largess, not to mention corruption and kickbacks, as the human mind can imagine, I would hardly say it counts as counter-cyclical stimulus spending. It is a colosal pork barrel that the pigs have their noses in all the time.

      I think it is to be objected to – on moral grounds – but not as an example of what Keynes suggested as a policy for stimulating growth in times of recession.

      I think it is important to recognize that corruption infests government spending. But it weakens the argument to use such abuse as a reason for saying stimulus spending cannot work.

      Stimulus spending can work, has worked in the past in various countries BUT is as open to corruption as anything else. Being open to corruption is not restricted to governments is it? The `free-market has its own share of endemic corruption.

      Take Wall Street robo signing, or selling securities designed to fail or World Com or the S&L debacle or the flagrant faud that was uncovered when the Dot com bubble burst, or the BP/Halliburton Oil rig disaster.

      As I wrote above –

      “Those who have an ideological hatred of government and see all government as just a means whereby a small group of insiders can chose what is best for them at the expense of everyone else, are tempted to think it is progress simply because it cuts out government control. But take off the distorting lens of of ideological hatred and what have we really done? I argue we have exchanged one group of insiders in big government for another set in big banks. And worse they have a revolving door to shuttle from one to the other. So now we have a small group of men who control the 50 or so most bailed out global banks and their former colleagues now in government, who decide.”

    • YankeeFrank October 13, 2012 at 11:54 am #

      Your examples are examples of wasteful spending that does little to nothing to raise demand and growth. Building bombs to blow up and kill people is a complete waste of money (at best). Building things that foster and multiply growth (like schools, roads, tech infrastructure, energy infrastructure, etc.) are not wasteful, and yet we find that over the past 40 years we have completely neglected stimulus spending in exactly those areas. Hence our infrastructure is failing, we do not have enough universities for our students (I do not count for profit colleges as anything but frauds), failing roads that cause massive wear and tear, delay and disaster, failing public transport, failing electricity grids… etc. — all of these are a massive drag on growth and efficiency. And please don’t bring up “Solyndra”. Sure it was a failure. If we fail to invest because some investment fails we will continue our downward spiral. Solyndra and other failed investments happen. They are tiny in comparison to the successful investment our government makes when it invests in the areas described above. Bridges to nowhere are wasteful, but again, tiny in comparison to the interstate highway system. Should we scrap the latter to avoid the former? And finally, saving GM and Chrysler saved the US automotive industry from total collapse. If you think we shouldn’t build anything in this country then say so. I don’t think your view would be very popular. And not only did saving GM and its suppliers save the American car companies, but even our foreign car companies that manufacture in the US, such as Toyota, Volvo, and all the others, were in support of saving GM and its suppliers like Delphi because they rely on those suppliers as well. So we would’ve lost all of the foreign auto manufacturers as well.

      If we followed your advice (and Mitt Romney’s), the USA would not exist as we know it. The great manufacturing empire that once existed here — the electronics companies like GE, Zenith, Kodak, and a thousand other well known and lesser known companies would never have existed if it weren’t for the US government investing in and fostering technology development, financing assistance and coordination to allow huge factories and supporting infrastructure to be built. Frankly, it is from the right that we see all the negativity and “can’t do” spirit that is smothering our country, largely due to an irrational and horribly destructive hatred for government the public good itself. It is horribly un-American and almost treasonous this insistence that everything must come from the private sector. The private sector is great at some things, but it is terrible at others. Anything that doesn’t have a quick time to market is ignored by the private sector. We wouldn’t have NASA (and all of the technological development that came from NASA’s research), the interstate highway system, the electric grid, all of our dams, public education including hundreds of land grant colleges, our national parks, our healthcare infrastructure, our computer industry, shipbuilding, or really any modern industry, without the federal government. And since Reagan came into office and the Federal government has been denied its historic role in fostering our once great economy, we have continuously lost ground to China, Europe and many other nations in all of those industries. Many of those industries are GONE now, because our treasonous bankers demanded that companies outsource their manufacturing to low-wage nations like China to avoid being heavily punished on Wall Street via stock price devaluations and other hostile financial attacks.

      So take your negativity and aim it somewhere else. You claim to love your country, all you right-wing blowhards, but in the end what you really love is your hatred and negativity, and let the nation go to hell as long as you can claim your false moral high ground and its irrational foundation in hatred of government. The US doesn’t need external enemies. We have so many internal ones and they have done more to weaken and destroy this once great nation than any external foe ever could.

  11. Trent October 10, 2012 at 4:25 pm #

    It really all boils down to power, if the governments actually stood for the people the pretend to, they could have saved all depositer money in failing institutions and let the stockholders and bondholders go bust. The entire system is built on fraud, even by saving depositers many innocent people would have lost great wealth. Essentially our society is built on fraud and in place to perpetuate it

  12. keekster October 10, 2012 at 4:44 pm #

    Yerk October 10, 2012 at 8:54 am
    This is the key point, and I totally agree.

    As for modern thinking I think Steve Keen has a real handle on the cause of the problems, but I’m not convinced of his solutions, yet, and he ignores Yerk’s point.

    • Jamie_Griff October 12, 2012 at 11:19 pm #

      It’s not so much that he ignores it but that he acknowledges it and fails to engage – which seems rather silly. Why bother trying to devise an intellectually sound footing for capitalism if the whole enterprise is clearly doomed to failure?

  13. Andrea October 10, 2012 at 4:52 pm #

    Great post! It shows what an state of utter confusion we are in. Perhaps I’m prejudiced because if there is one set of pol. parties I can’t stand it is the center left, Labor,
    Socialists, all that lot. No 1 party in my country…argh…

    Pointing out that the uber-rich and generally wealthy are invested in ‘banks and finance’, and are aware that they are (whereas your pensioner whose pension depends on
    ‘growth’ and ‘investment’ is not) is most welcome, ppl tend to forget.

    There seem to be two main driving forces:

    The first might be called ‘class war’ – too many ppl and dwindling resources leading to growing inequality with the invention of new domination mechanisms –

    The second the pervasiveness of bad, inadequate, lame economic (or socio-economic, political economic) models.

    They interact. How…?

    About money. If it is seen as a measure of value or a token of exchange it cannot affect the real economy on the ground. (I’m not referring to inflation or debasing currencies etc. although that exists, I’m speaking more generally.)

    If it is seen as ‘stored (a – hem) capital to invest for something new’ – perhaps, in some
    measure, with many constraints.

    Then the ‘new money’ (or tax breaks, stipends, etc. which are equivalent) is a political decision, or a decision from non-State dominant groups, which favors some (e.g. renewable energy, green housing) to the detriment of others.

    Those investments, in our present system, have to ‘pay off.’ How or in what terms (stimulating baking (sic), preserving employment, favoring innovators, etc. etc. ) is completely opaque to put it mildly, as there are no guiding principles and ultimately the ‘breaks’ go to those who fight for them and have the most ammunition. Such as banks and the wealthy.

    • Golem XIV October 10, 2012 at 5:07 pm #

      Hello Andrea,

      You identify what are for me two of the major things we need to think about: The nature of ‘money’ and what ‘growth’ we want.

      At the moment we take such basic notions for granted without thinking about them. We must stop asuming and start thinking.

    • John G October 11, 2012 at 6:32 am #

      I think it’s important to differentiate between socialists and the other groups you’ve lumped them in with.

      There are very few, if any, socialists in the Labour/Social Democrat parties of the west these days. That’s part of the problem. Those “left” parties have completely failed to provide an alternative to predatory neoliberal capitalism.

      • Andrea October 11, 2012 at 4:29 pm #

        Yes they are just handmaidens for the dominant right or center right and neo-lib mirages, and count on votes – which they get, and it then gives them positions, power, monies – as they add a little touch of ‘caring’ for what ppl want or claim – a fair deal, employment properly paid, etc.

        Under this cover they are more controlling and racist and war mongering than the far right or libertarians. They concentrate on social issues to cover up the corruption, under ground dealing, etc.

        • John G October 11, 2012 at 10:27 pm #

          Indeed. Liberalism has always been imperialist by nature. The term itself has been corrupted but the intrinsic “ideals” remain the same. As you say, war and racism are major planks.

  14. JB October 10, 2012 at 6:04 pm #

    “In fact they all recognize that when an economy grows, governments have to print. More economic activity needs more money/tokens of value. Pretty simple really. The question at the moment is should government expand the money supply (print) when economies are shrinking as a way of kick-starting growth and if so how?”

    I’d like an answer to this – If money supply MUST grow as economic activity expands, why must it not CONTRACT when economies are shrinking? Money supply must always constantly expand under all conditions thus robbing savers through inflation and artificially low rates? How about this – ALL debt bad! Savings & investment good!

    Also, no discussion of our current problems can be productive without addressing restoration of Rule of Law and effect of monolopies. Theory is nice but these practical considerations are rarely discussed within the same context.

    • backwardsevolution October 11, 2012 at 7:00 pm #

      JB – very good points. It appears that doing without and saving so as never to be a burden on anyone is NOT the way to have gone. The true payoff has been in not saving for a down payment, not living within your means, getting in on the lowest mortgage rates ever, and then just sitting back as it’s all magically inflated away, and you’re left (the saver) mowing their lawns.

      As Karl Denninger points out repeatedly (and I’ll try to get one of his articles), capital should come from savings. Anything else is just a Ponzi. We would not live through these ridiculous inflationary cycles if that were the case.

      Of course money supply should contract (while making sure no one is starving) because the excessive debt that most people should never have been allowed to get their hands on (as they would have been a bad risk and their mortgage rate would have reflected this, to wit, they couldn’t have afforded the loan) must be extinguished.

      Of course, by allowing everyone who could breathe the ability to get a cheap and easy loan forced the price of things up (supply and demand) into the stratosphere. The first ones in are fine (as always), but eventually, even with the low rates, it all ends as prices become too high.

      Every single time the government (and here I may see things differently than others, as I believe the government is purely a puppet for the financial elite – so it’s really the financial elite that are running government) gets involved in “helping” homeowners, or anyone for that matter, you had better stop dead in your tracks and follow the money because, as sure as I’m sitting here, it’s not ever for the benefit of the little guy. They may instigate programs under the guise of helping others, but the biggest benefit will always go to the elite, otherwise it just isn’t done.

      The banks lent money to people they KNEW couldn’t pay it back. Why? Well, they got their fees, bonuses, bundled up the mortgages and sold them off like the hot potatoes they were to unsuspecting investors. The people eventually lost the homes they couldn’t afford, but the banks made out like bandits on the way up and, now that they’re being bailed out, are making out again on the way down.

      If the government were being run by benevolent people who actually cared about the nation and its citizens, I’d have no problem with government, but the way I see it is the “government” is merely a “front” for the real owners of the people.

      I’m on the people’s side; it’s just that we’ve ALL been set up to lose.

    • penny bloater October 12, 2012 at 5:32 pm #

      ‘I’d like an answer to this – If money supply MUST grow as economic activity expands, why must it not CONTRACT when economies are shrinking?’

      I’d say this failure comes about through the greed of the private banking system, the short (term) electoral cycle and the failure by central banks and politicians to drain off excess demand through raising taxes – we’ve lost sight of how the tax system interacts with the money supply and the velocity of it’s growth/contraction.

  15. The Dork of Cork October 10, 2012 at 6:49 pm #

    You can make this very simple.

    People need to understand what true fiat is.

    The King says this is fiat ,the king taxes the fiat – thats it.

    Banks either of the central or commercial variety should have nothing to do with Fiat money…..this is the post cromwell false republic road we have been led down.
    The state should produce fiat completly outside banking usuary,,….which means no sov debt.

    The MMT crew refuse to truely understand that this is a classic 19th century free banking crisis but with a central bank at its centre………it follows that we need to junk central banks and simply install a Fiat King who will promise to break all banks over a money (rather then credit millstone)

    You take away their leverage power over us when the king produces pure fiat.

    • patma2003 October 12, 2012 at 12:45 am #

      “You take away their leverage power over us when the king produces pure fiat.”

      Makes perfect sense as it makes for proper competition for that fiat, what a marketplace should look like… as it stands the nature of money production is geared against the majority of the population in any western state.

  16. The Dork of Cork October 10, 2012 at 6:58 pm #

    Steve of Virgina breaks it down very well here………

    he uses the word fiat in a broader (to include bank credit) context but you should get the meaning.

    Steve from Virginia:

    “Credit money expansion (Banks) replaces a great debt with another, greater debt. There is never a net reduction in the debt, only a perpetual increase. ( Dork – we are reducing our debt in ireland by exporting our debt/symbolic wealth via goods- export elsewhere destroying internal commerce)

    Treasury money expansion is repudiation of debts => repudiation of (pre-existing) money, institutionalized default (expansion includes purposeful inflation).

    Finance offers fiat debt then demands repayment in circulating currency (gold clause effect). Fiat currency offered by the government to retire fiat debt: both the debt and the currency are extinguished at once.

    The creditor says, “You owe us, you must pay with circulating money!”

    The debtor says, “There is no circulating money, the creditors refuse to lend …”

    The creditor says, “We will seize your property instead and destroy your economy!”

    The government (which is also a debtor) says:

    – “We will create money without borrowing and repay the loans as they come due. We can do this because we are the government, our money is paid to our army.”

    – “The loans are fiat — they were created by the lender with the stroke on a keyboard, they were not made from circulating currency. To act as if they were is a crime, a false claim. The lenders will be repaid by a stroke of the keyboard, in the same form as the debts were issued. If you or other lenders touch our property or our citizens we will throw you into prison and decide later whether to feed you or not.”

    – “Because lenders have impoverished our country with endless false claims we will punish you severely whenever we can get our hands on you. You are our enemy and we will destroy you if we can, because you have sought to destroy us!”

  17. pogohere October 10, 2012 at 8:58 pm #

    re: All theories agree it is not a disaster to inflate the money supply as long as the new money promotes real growth. What is important is the ratio of money to economic activity.

    All the theories agree if new money helps create new economic growth then that growth will soak up the extra money and the ratio of money to real economic production stays the same. Thus the argument should not really be about how much money has been printed up but whether it has been spent on things that will create real growth. THAT should be the debate.

    see: “The Myth of Japan’s Lost Decades”

    Mises Daily: Friday, April 15, 2011 by Kel Kelly

    http://mises.org/daily/5170/The-Myth-of-Japans-Lost-Decades

  18. orville October 10, 2012 at 10:10 pm #

    Hello Golem, good to have you back, I’ve missed your informed passion.

    How many readers do you have? I imagine that most people, like myself, are very much interested but lack the knowledge to comment constructively and I wondered what the numerical difference is between commentators and readers.

    • Golem XIV October 11, 2012 at 8:43 am #

      Hello Orville,

      Its not possible to say with any accuracy I’m afraid. But the stats I get show that when I write I get between 2 and 3K ‘unique visits’ a day (whatever that means). And between 800 and 1K readers who are regular ones.

      Some of the regular readers are quite interesting. Of recent times I have had a lot of interest from the US Department of Defence Intelligence Network. Most days betwen 3 and 6 different parts of it. Plus US Airforce and US Naval intelligence.

      Among the banks, so far this morning, I’ve had Commerz, Lloyds banking Group and Citi.

      Two new ones from last night – The Dubai Ministry of Education and from Adelaide, The Office of the Chief Information Officer ( What a title!)

      • orville October 11, 2012 at 11:29 am #

        Fascinating stuff. You must be pressing the right buttons, and long may you continue to do so.

      • backwardsevolution October 11, 2012 at 7:09 pm #

        Absolutely fascinating, the U.S. Department of Defence Intelligence Network, no less!

        I don’t know about anyone else here, but this is tantamount to the best novel ever read.

      • penny bloater October 12, 2012 at 5:38 pm #

        I would probably be worried if the US Department of Defense Network and Naval Intelligence are visiting this site – unless of course you/we are converting them to the ideas being put forward!

  19. The Dork of Cork October 10, 2012 at 10:12 pm #

    The Big Bang of 1986 is at the heart of this.

    The UK went into current account deficit in 1984 , this was the cover for the this massive malinvestment episode.

    http://www.youtube.com/watch?v=Pbj9auFz9Ck (3.20)

    The city credit banks ran North Sea & other oil through former nation states such as Ireland & Spain making a interest return on grot investments turning them into extreme market states.

    Now that the oil is mostly gone the city must drive these vassal states into current account surplus so that the city can remain in real goods deficit.

    need I say the income side of the current account is usually positive in the UK.
    Its Q2 income was negative by £5.5 Billion (a record number) in Q2
    It real goods deficit was also a record number, £28 ~ billion

    Also the UK is talking about reducing its transfer deficit by reducing the EU farming subsidy thingy which will affect France and Ireland in a big way.

    There is no rational trade between countries as there is no final settlement , this creates massive real economic externalties.
    London ,Paris & Frankfurt needs these vassal countries to be in a permement state of bankrupcy so that they can extract what little remains.

  20. gatopeich October 11, 2012 at 1:35 am #

    Thanks for another great series.

  21. Anon October 11, 2012 at 3:16 am #

    Thank you, outstanding series.

  22. Daniel October 11, 2012 at 3:50 am #

    The people are the real creators of a nations wealth by their productive work.
    It is production that boosts an economy and creates real wealth. Without production there are no jobs and wages to buy goods. No taxes to be collected,to improve the social support structure.
    There is a link between credit, economic growth and debt build-up. Credit to the real Industrial sector grows the economy literally in tandem, while credit to the financial sector creates debt.
    This means that the present bail out of the banks by the Federal Reserve in the US, QE by the Bank of England and the credit extended to European banks by the ECB, is in fact counter- productive and adds fuel to an already raging fire of financial speculation.
    This is proven by the failure of the banks to spread this credit into the Real economy, instead they have continued to play the derivatives casino and invested in Insurance (credit default swaps), betting on the Sovereign debt default of Greece,Spain ,Italy et al.
    The Industrial sector is starved of investment and thus the Real wealth creating economy shrInks
    The end result is unemployment ,recession, austerity and social unrest..
    Lending to the real economy should be constant in proportion to the size of the economy..
    Debt build-up, is due to credit flowing to the ‘finance, insurance and real estate’ or ‘FIRE’ sector. This includes property and myriad financial assets and instrument – connected to pension funds, savings institutions, credit unions, funding corporations, mortgage pools, exchange traded finds, private pension funds, money market mutual funds, and the like. This is credit to the ‘asset’ sector, issued from banks and absorbed up front by the nonbank financial sector. None of this ever enters the real wealth creating sector or directly finances Industrial investment or wages; its principal effect is to raise property and asset market valuations, and to increases the debt in the economy.
    Money is not wealth. It is a means of exchange, a token, a tool to assist trade and industry,
    And is a utility, such as water, food. We can not live in a modern world without it.
    Money in the form of debt is 97% created by the private banking system. This debt has mainly been used for speculative purposes, without any social use and has outstripped the GDP by multiplies, in effect a bubble.
    The power to create this debt money must be removed from the private banking sector and returned to Treasury control.
    The control of the issuance of money cannot be invested in the hands of politicians, who will misuse it for Political party ‘pork barrel’ causes.
    Instead a democratically elected independent Monetary Panel is required be to keep the issuance in balance in the economy. Checks and rigid regulation oversight are required to prevent corruption of this panel.

    • Patrick Donnelly October 11, 2012 at 10:41 am #

      All correct, but still mis-analysed!

      Fractional reserve banking is the cause and always has been, in every Depression! Reread economic histories and weep silently!

  23. wikispooks October 11, 2012 at 10:13 am #

    I’d like to push Yerk’s earlier EROEI comment (10 Oct 8:54) a little further because it seems to me that EVERYTHING else is analagous to rearranging the deck-chairs on the Titanic, with all that cliched analogy truly implies. Uber-wealth/power remains (and will remain) grimly determined to maintain – even extend – its privilages no matter what.

    Precisely where our predicament sits in the period just before – to the unreality of the hour or so after, hitting the iceberg, is what this article is really about. And I mean that constructively since I often ask myself how I would have behaved had I been either a state-room ensconced VIP on the one hand or one of its third class Rif-raf on the other.

    So far as I can ascertain from extensive research on the complex of issues that define it, the correlation between classic economic growth and human/industrial consumption of energy, has remained as close to unity as makes no difference throughout history. That being so, future REAL economic growth will requires similar 1:1 growth in energy consumption. That is one big BIG problem folks. It is the elephant in the room of pretty well any and all MSM/Establishment discussion of our predicament – for public consumption at any rate.

    An increasing EROEI implies an increasing proportion of economic activity (let alone ANY growth) being required to stand still – so-to-speak – until, well before EROEI’s own magic 1:1 ratio looms on the horizon, the whole construct hits its so-called ‘energy cliff’ and slowly (or rapidy) subsides into total collapse.

    There are those who invest their faith and hope in the so-called ‘sustainable’ alternatives of wind, solar, tide, and – heaven forbid among our manifest follies – nuclear. I find myself pondering these issues extensively too. My conclusion? they cannot, even in the widest of optimistic imaginings, fuel ‘business as usual’.

    • backwardsevolution October 11, 2012 at 7:18 pm #

      wikispooks – good post. We CANNOT have perpetual growth, people. We are living on a finite planet. Open your eyes.

  24. Patrick Donnelly October 11, 2012 at 10:39 am #

    The system is based upon immoral acts that should be made unlawful.

    Inflation by borrowing money and then allowing that asset, in the books of a bank, to be treated as an asset is foolish. We are repeating history, again! Many well paid off commentators will ascribe reasons why this and that will “not work”. As usual.

    Without limited liability banking based on totally unacceptable accounting practices, abetted ‘in extremis’ by regulators as TBTF arises, we have the present system.

    So what? People stupid enough to vote in politicians who legislate this system deserve the consequences. Make money from it! Tell everyone what you are doing! And have a secure exit plan! Mind you, the time for that exit is rapidly approaching! Marc Faber has Chiang Mai!

  25. Patrick Donnelly October 11, 2012 at 11:03 am #

    “After Franklin gave explanations on the true cause of the prosperity of the Colonies, the Parliament exacted laws forbidding the use of this money in the payment of taxes. This decision brought so many drawbacks and so much poverty to the people that it was the main cause of the Revolution. The suppression of the Colonial money was a much more important reason for the general uprising than the Tea and Stamp Act.”

    http://21stcenturycicero.wordpress.com/fraud/how-benjamin-franklin-made-new-england-prosperous/

    Now ask why the media are all owned by the odious and corrupt?

  26. shaun s October 11, 2012 at 11:20 am #

    Hi Golem

    This is slightly off topic (?), but is very interesting nonetheless. Irish debt bubble – scary. It says that the Irish Government has a smaller debt load than those it is trying to “save”. (We are not out of the dirty water of the bubble bath)

    http://www.zerohedge.com/news/2012-10-10/ireland-really-poster-child-europes-austerity-plans
    (Confession – I have only read part one at the moment – but I just love these “series” where we actually learn something, thanks)

  27. Arvind Damarla October 11, 2012 at 1:00 pm #

    I could not disagree more with your statement “At least those of the true right wing, much as I dislike them , are consistent. They say bail the banks but save money by cutting everything else.”

    If being on the “true” right wing means subscribing to the theory that Capitalism works better than Socialism, then the above statement is from the “fake” right wing. The “true” right wing calls for insolvent banks to be liquidated.

    By the way, the “true right wing” also calls for a “free market” in MONEY, where the Federal Reserve (or the Federal Government for that matter) have no say in prescribing what money should be. The market process will automatically select the commodity with the slowest declining marginal utility as the preferred unit of measure for circulation.

    • Golem XIV October 11, 2012 at 3:35 pm #

      Hello Arvinda,

      Thank you! You are quite right I got my trms in a muddle. I have corrected it now.

      I was quite careful to identify what the real supporters of a Free market believe (banks to go under like any other failed business). But then when I got to talking about left and right parties the terminology got confused. I have sorted it now.

      I meant the traditional, mainstream right wing parties, such as the Tories and the Republicans were the ones who wanted to save the banks but cut verything else. I have made it clear now. Thanks

      Your point about what a ‘true right wing’ would like to see for money is interesting. I have been thinking about this too. Though I suspect my thoughts might be at arience with yours. But perhaps in a constructive way?

      • JB October 11, 2012 at 6:32 pm #

        True Left Wing – virtually all Democrats within the Federal government – have been and continue to support the banks every bit as much as the Republicans do. Not a dimes with of difference between them. So let’s agree not to muddy up the waters any more than is necessary.

        • Golem XIV October 11, 2012 at 8:22 pm #

          JB

          I think we’re agreeing aren’t we? I class the Democrats, as I do Labour, as the centre left. There is not true left wing party of any size in the UK nor in the US

          • JB October 12, 2012 at 5:37 pm #

            We don’t agree. Leftists always try to equate their own positions to the centre or centre-left and their opponents as “radical” right. When, in actuality, they are the on the far left. They just don’t want others to view them that way – they’re just trying to create a perception.

          • Phil October 14, 2012 at 9:53 pm #

            Sorry JB, but that’s nonsense. How can there be any correlation between the Conservatives and the Socialist Workers’ Party? They are quite obviously not all the ‘far left’. You’re talking of course about socialising losses but since when has that been about Socialism (that the means of production are held in common)? Socialising the banks’ losses has benefited only a tiny minority – which is exactly what I would expect Conservatives at the very top to do. The Left believes in equality, the Right believes in inequality. A bit simplistic but true. Our banking friends then are very much on the Right.

  28. Arvind Damarla October 11, 2012 at 1:18 pm #

    Regarding: “what all economic theories agree on. Keynesian, Austrian , Mainstream and MMT, all recognize that a sovereign government with its own currency can expand the supply of money (print). In fact they all recognize that when an economy grows, governments have to print. More economic activity needs more money/tokens of value. Pretty simple really.” … this is utter bollocks. Those who propose a “free market” in money do NOT require ANYONE (government or anyone else) to print money.

    MONEY growth is NOT the same as CURRENCY growth. CURRENCY is anything of value that gains favour in everyday transactions. Currency (such as Real Bills) can grow and expand as production expands and subdivides without the need to create more money.

    MONEY is the ultimate liquidator of debt – that which debt is denominated it. The word “money” comes from Latin “Monetas”, which means “Vigilant”. By denominating debt in money, creditors are are being vigilant against the debasement of its value.

    In a “free market” only a Real Asset (Gold, Silver, Salt, Oil, etc) can be MONEY. CURRENCY on the other hand can be a debt/credit instrument, but it MUST be convertible into a MONEY of the MARKET’s choice.

    The biggest problem with our “modern” monetary system is that it equates MONEY and CURRENCY. Bank deposits are no longer “convertible” into anything, except into Federal Reserve Notes. And these are not convertible into anything, despite the term “Note” denoting convertibility.

    Besides, there is nothing “modern” about this system. It has been tried before by the Mongols, the Assignats n France, the Continentals in the US South, etc, etc. All previous experiments with debt-based paper money systems has collapsed and this one will too.

    Of course it can be argued that the modern “money” already has collapsed in Real Terms – given that the US Dollar has devalued 98% since the formation of the Fed in 1914. In the 100 years previous to that it pretty much held up its value to 100%.

    • Golem XIV October 11, 2012 at 3:50 pm #

      Hang on there. You say yourself that mainstream monetary system equates money with currency. I was writing about what all the theories agree on and suing teh term money in the sense in which everyone understands it. Used in that sense what I said is true and amakes sense.

      Don’t forget I was not saying everyone was in favour.

      As for the distinction I do understand it. The whole issue of money versus currency, units of actual value versus tokens of exchange is interesting.

      As is the relation between the accepted value of a nation’s floating currency and the real value assets that nation is perceived as having at its disposal.

      Who should issue currency if we chose to have one? At the moment it is mainly the private banks who issue iot in the form of credit.

      All interesting questions which never fail to raise passions raised on all sides of the debate.

  29. steviefinn October 11, 2012 at 1:45 pm #

    Matt Taibbi – US sues Wells Fargo :

    “Munger, if you might remember, is the same gazillionaire dickhead who two years ago ripped people experiencing post-crash economic hard times, saying they should “suck it in and cope” and that anyone who wants to complain about the Wall Street bailouts should realize they were “absolutely required to save your civilization” (Munger thinks a lot about “civilization”). He added that even if you didn’t like them, “you shouldn’t be bitching about a little bailout. You should have been thinking it should have been bigger.”

    http://www.rollingstone.com/politics/blogs/taibblog

    • JB October 11, 2012 at 6:44 pm #

      What that blog posting fails to mention is that these are CIVIL suits – not Criminal. Government collects a fine amounting to a very small percentage of the ill-gotten gain and gets to look like they’re actually doing something. If you robbed banks and only had to pay a 10% fine IF CAUGHT, would you go on robbing banks?

      Executives keep their fat comp & bonuses, shareholders pay the fine, politicians keep getting their campaign contributions and regulators get jobs after leaving office – all good. Economic theory, in this context, is next to meaningless.

      • steviefinn October 11, 2012 at 6:57 pm #

        I agree, a pretty short article by Matt’s standard, but I remember him having previously covered what you rightly say is true. I just thought it was a timely reminder of the attitude of some of those who are at the root of the problem & the reason why we visit this blog.

  30. backwardsevolution October 11, 2012 at 8:24 pm #

    Golem – great article, very thought-provoking. Great comments by everyone too! Compared to a few years ago, the picture is much clearer and more focused now. Thanks to everyone for sharing your views. Exceptional!

    • Golem XIV October 11, 2012 at 9:12 pm #

      Yes, as usual the intelligent, thought-provoking and generous comments are what make this blog what it has become.

      Thanks to you too.

  31. backwardsevolution October 11, 2012 at 9:36 pm #

    Karl Denninger wonders about the Libertarian Party in “The Libertarian Party: A Rothchild Hack?” Could it be the best way for the elite to control the opposition is to start the opposition themselves? If so, it’s another brilliant move. That way lots gets said, but nothing really ever changes.

    http://market-ticker.org/akcs-www?post=212587

    http://thedailyknell.wordpress.com/2012/10/08/how-money-power-controls-the-libertarian-movement-in-the-21st-century/

    “But what few people realize is that the entire Libertarian movement is still controlled by a handful of individuals who are directly connected to the highest elite circles, including the Rothschild dynasty. In this article, we will shed more light on these connections and expose the elites’ control of the Libertarian movement in the 21st century.”

    Is there something to this, or is it just the writing of a crazy person?

    • Jay D October 11, 2012 at 10:45 pm #

      Most Libertarian drivel/comment that I have encountered could be summed up as ‘survival of the fittest(richest) ‘ so it would come as no surprise.
      Regarding left,right,different economic models etc… my take would be to concur that the whole notion of perpetual economic growth has been and always will be a non starter and so I have always done my best to live quietly in the shadows, despairing and living within my meagre means……..and as alluded to by an earlier commenter I do literally mow their lawns!!….while my mind drifts/fantasises towards revolution and waits for chickens to roost.

    • Phil October 14, 2012 at 9:59 pm #

      Thanks backwardsrevolution for that. I’ll be reposting that to the Slog where quite a few ‘Libertarians’ hang out. Ruth Porter and Mark Littlewood at the Institute of Economic Affairs might get a copy too. I do like to stay in touch with them.

  32. richard in norway October 11, 2012 at 10:25 pm #

    Fantastic work yet again David, was nice to see you quoted by Karl at market ticker as well

  33. shaun s October 11, 2012 at 11:03 pm #

    Perhaps we should consider “flow” and not the concept of money as an “asset”.

    Flow; Increasing the money supply (print), by Central Banks giving or lending to Banks directly, which should have the result of increasing loans etc. to small businesses further down stream. Irrespective of the means chosen to increase the quantity of money, the net result is that the Banks do NOT lend further (for whatever reason. CDO’s, rehypothecation, gambling)

    Thus the Banks control the supply of money by stopping it – and not the “Central” Banks.
    But they also need a “flow” to operate. One way is or was, that of forcing increasing debt loads on those who also need money-flow. (Personal and small business debts)
    This has reached it’s limit.

    To continue operating, a new supply or “flow” is necessary. One way is to get into the flowstream is by increasing sovereign debt and purloining the taxable income of the taxpayers by the bias of “austerity” measures. Another is by QE’s to eternity. (queues to eternity?). Simply standing around and getting “gifts” from the minions in the form of bailouts is another. All these are “one-way” movements and finite, so they also reach a limit.

    Banks therefore do not allow money to be converted into “assets” by others. ie some other form, simply by their damming the flow or offshoring it. (or by converting it into corporate “assets”, – paper promises)

    So Government “stimulus” has not been the “Keynesian counter cyclical spending, which simply means that the government, as printer of the money, can help stimulate growth by providing money and investing it in order to off-set times of private economic contraction” (your quote). Simply because it can’t get through the Bankers nets.

    One possible answer is not to tamper with the “flow” of money, but to change it’s direction, and the best one I can think of is for Governments to lend DIRECTLY to small businesses.
    Actually I think Golem, you may be the the one that suggested it ! Basically, damn the Banks.

    All that is left is to convince the corruptocracy by one means or another, to actually allow it .
    (Maybe I’m just wishing aloud.)

    PS. I appreciate your “rants” against the rotten. I too get a bit fed up of all those ultra-polite marionnettes in power and their adulating serfs ondulating left-right.

  34. FallingLeaf October 12, 2012 at 10:53 am #

    David, wonderful posts, would love to hear more about inflation and worries surrounding it, as you mentioned above in your reply to Alan.

    Whilst theories agree that hyperinflation won’t occur as long as the economy grows, there is apparently also a suggestion that the money supply in the US is some $4 trillion LESS than it was in 2008 so inflation wouldn’t occur anyway, or would be trivial. The figures are apparently in this report but I don’t know enough to be able to locate it: http://www.ny.frb.org/research/staff_reports/sr458.pdf

  35. The Dork of Cork October 12, 2012 at 4:50 pm #

    Again I think the UKs reals goods trade deficit has a much bigger impact then little Switzerland.
    It was £100 billion in 2011 and 28.1 billion in 2012 Q2 although God knows what goes on in the hidden Gold market.

    ITS THE NORTH SEA DUMMIES

    The UK ONS has some mildly interesting documents on capital accounts

    entitled
    Capital stock, capital consumption and non financial balance sheets, 2003 ,2004 ,2005 etc etc.

    The caveats are interesting
    These Chronicle the change from a nation state war economy to a extreme market state.

    1961 : British telecom & post office reclassified as public corporations

    1983 :start of privatisation era (1984 – Uk enters current account deficit ,coincidence ? )

    1989 : water and sewage privatised.

    1992 : NHS restructured into trusts.

    Heres how it works : the UK goes into current account deficit , in particular real goods deficit – the real resourses from these external goods is used to bid up the price of non productive assets such as houses and stuff via credit hyperinflation.
    The capital assets of the country appear to increase but the internal productive capacity of the country tanks. (the house price rises are the result of external increases in productive capacity)
    Eventually after 30~ years of this policey the external resourses from other countries is exhausted (also the North Sea oil the conduit states were consuming) , to keep up its “asset” prices it must lay waste to other countries consumption – think Ireland & Spain.
    This surplus consumption is directed into UK asset prices ,sustaining the Ponzi for just a bit longer.

    It may just be in the UK & US narrow interest to sustain their monetary policey if you are of a zero sum like game disposition given their extreme real goods trade deficit.
    The UK for example has got Germany by the balls as so much excess luxury car capacity flows into the streets of London.

    This is game theory played at the highest level possible.

    Once banks played nation states off against each other , now its playing market states against each other – at its core it is the same Phenomena

    http://www.ons.gov.uk/ons/dcp29904_241335.pdf

    refer to 1. : A more detailed stat bulletin

    The first graph is very interesting.
    Residential buildings & financial assets of households forms the bulk of these assets.

    But if you think of these assets as claims on external wealth or productive capacity outside the UK the extreme nature of the UK becomes all too real.

    This is why the Q2 net drop in income of £5.5 billion is so important for the UK.

    It must destroy Ireland and Spain to sustain real goods coming into the UK but this action also destroys its income.
    Its a Catch 22.

    We are witnessing the failure of the Anglo model ,the Anglo world.
    It has stripped Europe of its wealth…….the jewel of its crown , the eurozone is now a deadzone.

    http://www.youtube.com/watch?v=MYnGAZl3pjs

    Its clearly in the short term interest of the UK to continue its policy of burning every village as long as its internal asset prices rise faster then its loss of external income.

    But that is a Malthusian dynamic……in the past it lead to a thing called WAR.

    What happens in this world of market states is anyones guess but most states were market states prior to the Great war.
    That war was caused by a run on the BoE as America became both China & Saudi Arabia in one monster package.
    No such country exists today.

    Just because the UK is not in the Eurozone or is not offically “Europe” in some people eyes does not make it go away…
    Much of German surplus production flows into the streets of London.

    I can’t believe how this is ignored by these “economists”

    Its all
    “For Christ sake, John. Don’t be scared.  Go on and eat your cookies.”
    EAT YOUR FUCKING COOKIES

    UK sucked in a Net 28.1 Billion sterling or 42 billion Francs worth of stuff and fuel in Q2.
    France is also in major real goods deficit…..

    Hello – anybody home ?
    They are sucking the PIigs dry.

    Forget about the claims on wealth which is mixed up in the current account figures – these claims are showing negative figures in the UK anyhow.
    Look at the real goods trade balance , and I am not talking about banking “services”

    This is a race for real goods
    http://www.tradingeconomics.com/france/balance-of-trade (go to Y2000)

    Real Resourses are simply crossing the Pyrennes.

    http://www.tradingeconomics.com/spain/balance-of-trade (go to 2000 again)

  36. The Dork of Cork October 12, 2012 at 4:57 pm #

    PS
    Just to add – Switzerland has a large surplus current account.

    I think the plan is to shut off the Med by only exchanging the declining monetary / energy credits in the zone between London and the Alps

    Need I say this is a form of modern market state warfare.

  37. The Dork of Cork October 12, 2012 at 6:39 pm #

    What people don’t get it is the productive investments that Spain made as well as the housing Junk.
    In some areas its richer then the North.
    es.wikipedia.org/wiki/MetroValencia

    However the North has conspired to extract currency units and transport them north of the Pyrennes.

    Spain needs to be come sovergin again.

    Public transport number declines in a energy crisis is almost strictly a monetary flaw (see below) i.e. the people don’t have enough national tokens.
    Although the external shock of less tourists plays a part.

    What British town of this size has 146.7 KM of metro and tram lines ?
    It ain’t Edinburgh thats for sure.

    Yet its passenger numbers have declined from 68.275 inY2008 to 65.074 in a so called energy crisis.

    Once Spain learns to ditch the private car and thus its internal car industry and external imports from the North it will be fine under a sov system.

  38. John Souter October 12, 2012 at 9:20 pm #

    Well David, having read parts 1&2 and by doing so broken my solemn promise not to read another word related to the absurdity of the financial/political toxic swamp, I have to admit your observations and points raised verge on the profound. Yet still you strive to make sense out of a catch-all theory called economics which has less substance than water and less scientific principles than fluid dynamics.

    This is not a criticism. In fact, the depth and thought attached to this and previous articles are admirable for the tenacity employed in order the peel away the layers of the odious and toxic financial onion. But, no matter how it’s prepared, cooked and served it ‘s still toxic and if smothered by a gravy of greed is fatal for all who are forced to feed from it.

    In essence there is nothing new in either the cause or the tactics employed in the handling of this present crises (at least from the onset of the industrial revolution) other than the acceleration technology has allowed to spread their web of manipulated confusion along with the size, depth and complexity of its subsequent implosion when the theories of myth mett the substance of reality. With the result, while the financial shamans have utilised these technologies the perplexed politicians have jumped on the nirvana wagon of limitless growth and perpetual acceleration based on a nonsense of psychopathic greed where price was everything and the values of humanity and their governance could be bought, sold and marketed within the corrals of debt servitude.

    This is the new imperialism, where conquest is not restricted to national boundaries but to the globalisation of a class system of despots and serfs; with the latter seduced into apathy by the religious promises and threats of credit ratings. So much so, for the UK at least, the only result on offer to the ordinary citizen is they must pay for all the advances of technology by working for longer, be infinitely more adaptable and save more while being paid less and subsequently expect less from their savings. Is this progress?

    If we allow this devaluation of humanity to continue its downward and accelerating cycle it is not hard to predict the eventual outcome.

    Those that prize profit over value, will value their price over that of the zero priced serf and their diminishing market value. The claims of democracy and the cries of freedom alongside the slaughter of wars and the continual stoking of the infernal flame of terrorism will be no more than PR sirens calls designed to fill the coffers of the Alpha Dogs; and all for the price of a myth which has no substantive cost at all.

    In effect the Rat Race has developed a race of of rats, which, aided and abetted by our political representatives, have gained a degree of dominance so great that they have assumed a hubris towards humanity of evaluating wheat from chaff and no doubt in the not too distant future will ponder on the cost/value ratio of the human plague.

    The sad part is, it isn’t the fault of the rats. They are merely driven by an addiction to their basic instincts, it’s the political free loaders that have let us down by their incompetence, lack of vision, integrity and moral fibre; but most of all their avarice for power within a rodent tyranny that will in the end dump them in the same plague bin.

    You want to call a halt to this idiocy! Forget the machinations of the money game, that’s merely a tool turned and tuned by alchemy into a myth. Demand your democracy, whether your right, left or centre, without democracy the ten years of austerity will become the fifty of normalcy and the slippery slope to no where.

    • backwardsevolution October 13, 2012 at 9:48 am #

      John Souter – well said.

    • shaun s October 13, 2012 at 12:16 pm #

      Lyrical and well thought out.

      I would disagree with this however, “globalisation of a class system of despots and serfs; with the latter seduced into apathy by the religious promises and threats of credit ratings.”
      Why do you think there will be apathy?
      Rather the opposite. One reason for mass employment was to keep the serfs quiet. An occupied serf had a vested interest in continuing the status Quo. One reason for an army (aka pre WWII) was to train them to obey as well. Once the level of serfdom reaches up to the middle (classes) they will react, probably violently (it pre-supposes that credit ratings are lost, and religion is NOT seen as the solution)

      Which is where the problems start. As the “Obey authority” command is now being enforced by an auto-reductive police and para-military set-up. (Greek soldiers and police are on both sides as they get paid less and less. Which is why Lagarde is panicking?). The “work and all will be well syndrome” is also on an end-timeline. One; is because robots are replacing humans, and two; is because the remaining workers get less reward for work. The thorny question remains of who, exactly, will buy the robots’ production. (Asian and Chinese consumers? – joke).

      Apathy is not a long term choice.

      It could be mitigated with a “drop-out” (self sufficiency) culture. But even that is not sure as resource availability is in inverse ratio to the numerical value of the population. (value = quantity x calorie and non renewable commodity consumption)

      • John Souter October 13, 2012 at 8:23 pm #

        Shaun – I agree, but it is how its being spun by the PR machines of politics and their tame media hacks. Its all ‘move along now folks, little to see here but minor first aid and touch-up on some scrapes.

        And, in my own defence, i did class the promises as ‘religous’

        You state – ” Apathy is not a long term choice.” On that you’re more than right; in fact the state of apathy is the election of no choice at all.

      • richard in norway October 14, 2012 at 12:21 pm #

        Im developing an interesting theory that mass unemployment is being used to increase the labour supply, it sounds paradoxical I know, but when wages drop because of unemployment people try to compensate with increased hours which can develop into a vicious cycle. I’m not sure but I think that if everyone could afford to work a 40 hour week rather than the 60 hours that are common for many there would be an acute labour shortage. In Norway we are facing a serious problem with not having enough folk to work in old age homes, I was talking to someone about this and realized that probably the only way to solve this problem is to reduce wages to such an extant that carers are forced to work much longer hours, the problem is that once you have folk working longer hours than they want to the only way to maintain it is to keep unemployment high

        • John Souter October 14, 2012 at 8:22 pm #

          Richard -then to what purpose do we gain from the advances of technology – are they only for the cost/gain ratios of the rich?

          Perhaps we should be looking at a 20 hour week and everybody having to work for at least a year in the social/care industries in order the have some insight into social needs and values.

          Not by itself such a radical proposal, when you consider the present goveratti find it perfectly acceptable to have a large section of society start their careers with a large burden of debt.

    • steviefinn October 13, 2012 at 7:21 pm #

      John, it’s brilliant to see you back & in such great form. It always gives me a kick when those such as yourself, Charles, Hawkeye, Mike & lots of other contributors return from an absence to once again present your insightful beautifully written comments. Collectively you are like a brilliant backing band that perfectly compliment David’s soaring solos.

      Rave on !!!

      • John Souter October 13, 2012 at 8:47 pm #

        Hi Stevie – I had a few day’s on Rannoch Moor – then on further north.
        Never listened, read or watched anything that wasn’t delivered by nature.

        Familiarity doesn’t lessen the beauty but the real pleasure was the freedom from the continual gnawing angst of weighing up whether or not you’re being ripped off. (Well apart from the petrol )

        Regards

        John

  39. simoncz October 13, 2012 at 1:20 am #

    http://globaleconomicanalysis.blogspot.com/2012/10/imf-admits-it-prescribed-wrong-medicine.html

    IMF admits austerity policies are totally dangerous and counter productive. Big oops.
    Maybe, just maybe, the lights will start to go on again.

  40. simoncz October 13, 2012 at 1:29 am #

    Incidentally, watched this.
    http://www.bbc.co.uk/iplayer/episode/b01nd1w5/Servants_The_True_Story_of_Life_Below_Stairs_No_Going_Back/

    Some lovely bits. An article in a magazine exhorting the gentry to release their servants so they can fight in the trenches in WW1.
    The upper crust complaining that the women won’t come back into domestic service after WW1. Complaining about women receiving the dole should be refused it and directed into domestic service. Campaign in the Daily Mail against the dole.
    It’s like reading yesterday’s Telegraph, nothing changes.

  41. Mike Hall October 13, 2012 at 11:38 pm #

    Something interesting that has largely crept under the MSM radar….

    Head of the UK Financial Services (regulatory) Authority Lord Adair Turner made an interesting speech at the Mansion House last Thursday. Quotes from BBC’s Stephanie Flounders’ piece:

    “….Given that Lord Turner is one of two leading contenders to succeed Sir Mervyn King, I’m wondering what “still more innovative and unconventional” monetary policies might look like.

    The outgoing FSA chief doesn’t spell it out in his speech. But in the past, he has talked privately about the possibility of pure money financing of the deficit.

    The most well known example of this is the so-called “helicopter drop”. For example, the government could simply send every family in the country a one-off “Christmas Bonus” of £1,000, directly financed by money created by the Bank of England…..”

    http://www.bbc.co.uk/news/business-19925013

    In the blog piece Founders otherwise demonstrates again that she is clueless as to how the monetary system & banking work, but Turner’s speech is all the more interesting as he is on the shortlist to succeed Mervyn King in the soon to be merged BoE & FSA.

    Turner apparently was quite sanguine about the Eurozone too – it cannot survive without banking union, Eurobonds & a significant amount of fiscal union.

    Looks like Turner is well aware of the full operational possibilities of a sovereign fiat currency system (per MMT & other Post Keynesians) & why a shared currency system like the Euro is destined to fail without major reform.

    • shaun s October 14, 2012 at 10:23 am #

      Try this for “innovative”. Stealing $100 dollar bills from a Federal reserve plane transfer.
      “Not only that but the stolen shipment is of $100 bills that will be introduced into circulation next year, giving counterfeiters a solid head start on preparations to further assist the Fed in diluting the US currency in circulation”

      http://www.zerohedge.com/news/2012-10-13/beta-testing-qe-4-large-amount-100-bills-stolen-federal-reserve

      Unconventional monetary easing. The proverbial “helicopter drop” and distribution by car, are so passé, are they now going to use airplanes?
      “A month ago, just before the launch of QEternity, we caught a rare glimpse of what may be the beta test of one of the Fed’s latest ploys in “unconventional monetary easing” when bank robbers decided to throw money out of their car in central LA during a police pursuit.”

      At that, is there any realistic difference between counterfeiting and issuing rubbish-money?

    • Mike Hall October 15, 2012 at 1:10 pm #

      A bit more on this story here:

      http://blogs.ft.com/gavyndavies/2012/10/14/will-central-banks-cancel-government-debt/?#axzz29Mdb5VE1

      You have to register for ft blogs, but they are otherwise free access.

  42. Kate Hudson October 14, 2012 at 4:02 am #

    We owned a small very successful and world famous business and had to deal with the sociopaths at banks for 20 of our 30 years in business. Nasty. I wrote a book about it – http://www.amazon.com/Whats-Mayfair-Got-With-Recording/dp/144997773.

    Thank you Golem. Brilliant blog.

    Nobody has mentioned the Iceland solution – putting the bankers responsible in jail and forgiving debt over 100%. Was that the way the governments should have gone or should go?

  43. LogiclEmpiricist October 14, 2012 at 6:35 am #

    That word “we”… I don’t think it means what you think it means…

  44. Kate Hudson October 14, 2012 at 8:47 am #

    Hi LogiclEmpiricist, Yes I know what you mean. I wonder why we don’t get it. Until the last penny is paid THEY own it. We were only ever up to 50% of worth borrowed but it was still hell. About 15 years ago the banks became very predatory and our company sat on some prime real estate so we spent most of the time protecting our fabulous asset from banks that were getting into trouble – not that we realized it at the time. We just didn’t get how mad these people actually are.

    What do you think about Iceland’s solution? Interesting that it was not reported in the press very much. I wonder why!

    • Jim M. October 14, 2012 at 3:14 pm #

      Hi Kate,

      I think your link above is broken.

      I was a chauffeur in London all through the nineties and on into the noughties, specialising in work for the music industry.
      I well remember the studios in Primrose Hill and how highly various artists would talk of working there. Robbie W, Jazzie B. and TT to name a few. It’s about the vibe, man!
      So sorry to hear of your difficulties with the studio. I hope things turn around ok for you & John.

      Good luck with the book!

      • John Souter October 14, 2012 at 8:30 pm #

        Kate -re: Iceland – sometime’s you have to ignore the minnow when you’re trying to save the whale.

        As for the banks – they are the same except it’s when they’re trying to entice the whale.

  45. Kate Hudson October 14, 2012 at 10:44 pm #

    Thanks JimM,

    Those were the days. We had a wonderful business for 30 years surrounded by wonderful people – maybe it doesn’t get any better than that. Must be thankful. We’re ok – under sunny skies and warm weather with no money. could be worse.

    Here’s the link again:
    http://www.amazon.com/Whats-Mayfair-Got-Recording-financial/dp/1449977731/ref=sr_1_1?s=books&ie=UTF8&qid=1350250082&sr=1-1&keywords=what%27s+mayfair+got+to+do+with+it

    The relationship between small businesses and banks is fascinating. We could never have built our business without them, and there were some very good bankers involved in our early years. But somewhere in those 30 years they turned from being careful thoughtful and helpful people to predatory monsters and the whole culture turned toxic. Dreadful shame because there must have been thousands of good vibrant businesses like ours which got needlessly killed.

    Strangely enough it wasn’t a bank which killed us – although one halved our overdraft overnight (because we were not using the full facility) and another charged us £97,500 penalty fees because of a paperwork mess which was their fault.

    It was the accountants and lawyers that did us in the end. They are almost as bad if not worse than the banks.

  46. Daniel October 15, 2012 at 9:20 am #

    Yes ,indeed. The silk gloves have finally come off the bankers , to show their steel claws underneath, It was always thus.
    We are approaching the end game in conventional banking and finance. The local friendly bank manager has been replaced with a faceless, avaricious,technocratic Shylock,who wants his pound of flesh ,no matter what the damage to the economy,or social fabric.
    Pillage and financial plunder is a good description,we are deep in an ongoing Financial coup d’etat.
    They are prepared to leave a wasteland behind in their search for profit., but the pot is becoming smaller by the day.
    Indeed RBS is the Genghis Khan of finance. We are just missing the pyramid of skulls, but there are many broken lives left by the RBS trail of fraud and destruction.
    Maybe they ought to change their logo to the skull & crossbones.

  47. Daniel October 15, 2012 at 9:37 am #

    Check out this link for a representation of the kind of people we are dealing with in banking circles.

    http://rowans-blog.blogspot.co.uk/2012/10/why-we-should-have-absolutely-no.html

  48. Mike Wooding October 15, 2012 at 10:42 am #

    I’m looking forward to the final part but please stop referring to QE as it is nothing of the sort. What we have is pure debt monetarisation.

    QE requires central banks to sell back into the market at a future point in time but the sheet scale of the money created means this can never happen in any meaningful way.

    The MSM accept this lie, and that should surprise no one but when questioning the perceived wisdom of the ruling elite, it seems strange to accept a term specifically designed to disguise the truth.

    • Golem XIV October 15, 2012 at 1:19 pm #

      Fair point. QE is one of those slippery and trojan terms. Perhaps I have not been careful enough when using it.

  49. Roger Lewis October 31, 2017 at 5:07 pm #

    http://letthemconfectsweeterlies.blogspot.se/2017/10/missing-clues-first-time-around-careful.html Revisited this post and spotted a clue I had missed first time around EROEI.

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  1. Why are we bailing out the banks? part three – Lies and Opposition | Golem XIV - Thoughts - October 15, 2012

    […] related posts found ← Why are we bailing out the banks? Part two. Theory, Ideology and Failure. No comments […]

  2. Why are we bailing out the banks? part three – Lies and Opposition [Golem XIV] « Mktgeist blog - October 16, 2012

    […] 16, 2012 by mktgeistmike Leave a comment At the end of part two I suggested that the mainstream justification for bailing out the banks, namely that by so doing […]

  3. Why are we bailing out the banks? – Part Four – What happens now? | Knowledge Wealth Centre - November 5, 2012

    […] part two I argued that while the simple selfishness answer is true there are also theoretical justifications […]

  4. Why are we bailing out the banks? – Part Four – What happens now? | - November 5, 2012

    […] In part two I argued that while the simple selfishness answer is true there are also theoretical justifications (albeit flawed ones) for the bail and cut policy. The two aspects of their policy ‘bail and cut’, they will insist are not contradictory at all. Simply put, they will say they are loosening or increasing the  money supply (QE) in order to invest in growth (classic Keynesian) while simultaneously cutting those expenditures which they feel do not generate growth and which are in fact ‘drains’ on productivity – in their view any ‘public’ expenditure (Classic Free-market). Growth, for them, equals the free-market/private sector, while drains on growth equal government, public spending….Basically – Private Debt good, Public Debt bad. […]

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