Currency Crisis In A Nutshell

INFLATION-DEFLATION IS THE PROBLEM, & COMMAND THE SOLUTION:

Abstract: A situation similar to the one we have today developed in the Third Century of Imperial Rome. Rome’s economy had outgrown its currency. There were three solutions to the problem. One was chosen by the Tang, paper. Another by the Franks, invasion.

Rome, under Diocletian, unable to grow the currency, chose the third way. Command and control of a barter economy. So, ironically, those who advocate the gold standard in the USA, such as Paul Ryan (candidate VP) are partisan of a Soviet style economy. Instead we have to make banks and financiers regurgitate the money they create just for themselves.

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Starting in the Third Century, Rome, the world’s largest economy, was increasingly run on the gold standard. With disastrous results.

Gold Solidus: JULIAN THE PHILOSOPHER EMPEROR.

Caption reads: FLavius CLaudius IVLIA NVS (Flavius Claudius JULIA NUS) P P AVG (Princeps Populus AUGustus). VIRTVS EXERCI-TVS ROMANORVM (Strength Roman Army). (Pearl-diademed, draped and cuirassed bust right.) 

A Franco-Australian collaboration on Greenland ice cores showed that from 366 BCE to after 36 CE, a period when Rome was at its peak, 70 percent of the global atmospheric lead pollution came from the Roman operated Rio Tinto mines in southwestern Spain (that can be seen from some characteristic isotopes ratio).

The Rio Tinto mining region was the richest source of silver in Antiquity. Some 6.6 million tons of slag were left by Roman smelting operations there. Rio Tinto was exploited by slaves with extremely short life spans. It was a vision of hell, the sky was black, fires everywhere, to the horizon. The rio ran red, still does.

The Romans worked Rio Tinto until Rio Tinto was exhausted with the technology they had (shortly after 36 CE). The mine re-opened in recent times, with powerful machines replacing slaves (and ‘Rio Tinto’ is well known to precious metal investors). 

The demand for silver increased dramatically after precious metal coinage was introduced in Greece around 650 BCE (although Sparta insisted to use iron for coinage: that was paper money, Fiat Currency, Spartan style). Ionian Greece, in particular Phocaea, and Lydia used Electrum, a naturally occurring alloy of gold, silver and other metals.

Interestingly, judging from the Greenland ice cores, the peak of Roman mining pollution was in 79 BCE. That is nearly two centuries before the maximum of the extent of the Roman empire under Trajan (originally a Spanish general) and his successors, the Antonine emperors. 79 BCE was not the peak of the Roman economy, that was reached later. But it is about when Sulla became dictator. This is an important hint.

Just when the commons ran out of coinage, greedy plutocrats monopolized worth. A co-dependency pattern repeated nowadays.

The smelting of lead-bearing ore declined sharply after the fall of the Roman Empire but gradually increased during the Renaissance of the Middle Ages. By 1523 CE, the last year for the Greenland ice analysis, atmospheric lead pollution had reached nearly the same level recorded for the year 79 BCE, at the Roman peak.

So what happened? Rome used three precious metals: gold, silver, and copper. The first was used to make a coin, the Aureus, renamed the Solidus under Diocletian.

The Roman currency crisis of the Third Century was caused by Rome being, de facto, on the gold standard. The Romans had run out of the most precious metals to make small coins with. That left a currency too small for the growing Roman economy. Diluting the precious metal content of the coinage commoners had to use was no solution: it created obdurate inflation (while the gold solidus kept on being made and used for another 7 centuries, it was used only for big transactions).

Diocletian and his colleague “solved” the crisis with a command barter economy. In other words, Diocletian invented the Soviet system. So ironically, that is what going back to the gold standard would force the economy into.

Around 284 CE, the Roman economy had become too big for the amount of currency that could be created from precious metals. Emperor Diocletian solved this with a command barter economy. Even armies started to get paid in kind (say with food instead of coinage; that led to a de-professionalization of the army; soldiers had to marry and live with their families; the Franks under Charles Martel, four centuries later, would re-professionalize the army by getting precious metals in churches).

In the Seventh Century the Tang dynasty in China solved the problem in the modern way, by creating a “fiat currency” from paper notes. (It would lead to catastrophic inflation under the Yuan, six centuries later, and a reversion to metal, when the silver from Potosi became available). In the Eight Century, the Franks solved the currency problem for their growing economy by going where the Romans had not dared to go,  and seizing silver mines in Eastern Europe.

For all its grand philosophy and thinking, Athens would probably not have amounted to much, if not for its silver mines. It’s actually the discovery of a new silver mine that allowed Themistocles to propose to build a 200 trireme fleet to fight off the Persians with. Thanks to her silver, Athens could buy a lot, including wheat far away, in the Black Sea region (hence the far flung Athenian empire).

We are presently in a crisis similar to what struck Rome, a dearth of money for the real economy. Indeed,  banks have diverted money creation away from the real economy, which is starved of investments (that is money and credit, from banks, for private industry).

The situation is even worse in Europe. In the Eurozone, states are supposed to be borrowing from banks. And the banks are unwilling to lend, as they have better things to do with their money, such as investing in derivatives. The result is a dearth of Euros (relative to the size of the Eurozone economy) and an overvaluation of the euro relative to the USA Dollar.

At least in the USA, the UK and Japan, central banks create as much fiat currency as needed. it’s all backed up by the mighty Pentagon, creating a virtuous, and, or vicious circle (depending upon one’s perspective).

In early 2011, Mr. Paul Ryan, chairman of the House Budget Committee, gave Ben Bernanke, the Federal Reserve chairman, a warning: “There is nothing more insidious that a country can do to its citizens, than debase its currency.”

Never mind that France clung to the gold standard in the 1930s much longer than the USA, Britain and Nazi Germany, with disastrous results. This essay demonstrates something even more insidious that a country can do to its citizens: not having enough currency. And this is what is happening now. So Mr. Ryan is as wrong as wrong can be.

The unwillingness of banks to lend to the real economy, and the division of the economy between real and virtual makes us presently suffer both from deflation (in the real economy) and inflation (in the fake economy)

The way out is to print more, but, using command to send money that is created to the real economy and not to the fake world of derivatives and the like (as is presently happening). A good way to start is by taxing financial transactions, just like any other transaction is taxed in the real economy. The French financial transaction tax passed in France on August 1, 2012.

However banks did not fall on the heads of the French. According to The Economist, August 18, 2012, the French real estate market is still twice more overvalued than the British real estate market. In Britain, finance reigns, contributing 10% of GDP, in endless conspiracies.

And the other great temple of greedy financiers who give society meaning, the USA, sees, according to The Economist, a real estate market undervalued by 20%. Thus the real estate index is at 80 in the USA, and 145, in France.

Now remember that the wealth of common people is mostly in real estate. Hence a country where finance is repressed, such as France, sees much more wealth going to commoners than it does in the USA.

Some are sure to come up with GDP per capita at this point, and point out that the USA GDP is larger than the French. But that means nothing: a country with more traffic jams and expensive health care and education will see a big GDP, just like somebody with dilated cardiomyopathy, will have an enormously enlarged heart.

(Moreover the French GNP numbers are 10% higher than the GDP numbers…)

And it gets worse, because the French true ownership rate is higher than that of the USA. There is only that much wealth to go around (as the Gini Index observes). If most of the wealth goes to plutocrats, it does not go to the People, and vice versa.

Conclusion: The People on which the Wall Street empire reigns is naked, and that is because the financiers stole it. At least, relative to the French. Everything is relative, as long as there is life and it breathes… A Soviet style economy, as unknowingly advocated by the likes of Mr. Ryan, would bring with it the attending ominous fate of tyranny and theocracy (Stalin, Ibn Saud, Putin, etc.)

To come back to the situation in Rome, the increasing debasement of the Denarius, the common currency, relatively to the 80% pure gold Solidus could have been solved by introducing paper money. But that would have required a stronger state. It was, precisely, an occasion to get a stronger state. The Tang were able to organize a paper money currency, precisely because they had a strong state, with formidable sovereigns such as empress Wei.

Rome did not seize the opportunity to go to paper money. instead Rome went for theocracy, and its living descendants are Putin’s Russia, and various Islam theocracies, wobbling between cretinism and civil war.

And thus what the fanatics of the gold standard are proposing is actually a weaker state. It does make sense: most of the right wingers in the USA who are for the gold standard are also proposing to weaken the state.

They much prefer the jungle, and its law. 

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Patrice Ayme

Banking Demons.

MONEY CREATION BY THUGS = CIVILIZATIONAL COLLAPSE.

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 People of more than zero influence are waking up to the fact that they have to admit that there is something  wrong with the banking system as it is. A delicate task: something has to be revealed, but not so much that the pyramid upon which the wealthy rest, would crumble.

 Paul Krugman, long extremely partial to private banks, wrote an editorial in the New York Times on the subject of how outrageous banking, as presently practiced, is. Krugman could have written this years ago. But he did not. Instead he waited until the plutocratic party went one outrage too far.

 In Dimon’s Déjà Vu Debacle, Krugman focuses on the fact that the state insures the banksters. Of course the state does much more: it reassures the banksters, thus encouraging them in their crimes. But not just that. The state gives trillions to banks so that they can play with each other. Krugman will not tell you that. For years he has been pushing stridently for Quantitative Easing, giving trillions to banks, no strings attached.

 Same idea as Reaganism, or Sarkozism: give to the rich, so that the rich will give to you.

 The bank JP Morgan Chase lost 3 billion, or maybe 5, or 100 billion. No problem, says Romney: it’s not their money, it’s theirs! If it’s not to some banks, that money, it’s to some other guys. Guys like me, guys, say romney, and he beams with pride.

 In truth, though, that money is neither to the banks, nor to those other guys. That money is yours. Private banks are in charge of creating public money, in guise of private credit.

 Some will say: this is how capitalism works. No, that’s how a particular form of fractional reserve based financial parasitism works. Proof: the Nineteenth and Twentieth century revolutionaries (Marx, etc.) did not talk about it. Instead they mostly talked about the abuse of workers by great capital. (Now there are not even workers to abuse…) At most Marx complained a bit about the monopoly of banks. The scam existed already at the time, but it was discrete.

 Romney lauded the plutocratic doctrine in relation with JP Morgan’s loss. Milder partisan of the established order, such as many in the democratic party, feel that Romney is going too far. More importantly, he wants to take their place. So, to their regret, they have to mention a bit of what’s wrong with banks.

 Romney said that JP Morgan’s loss was excellent, because it benefited somebody else, namely an evil plutocrat laughing all the way to his private jet. Romney conveniently forgot to mention that, ultimately, it’s the taxpayer who foot the banks’ bill (as Krugman finally points out, when, as I already said, he could have done it years ago). Romney is pedagogical.

 Extolling the theft of taxpayer money by hedge funds may look like a blunder on Romney’s part, but of course it’s not. Romney and his operators are clever, they know what they are doing. What they are doing is to prepare the minds to finding this sort of reflections part of the natural order of things. Instead of a blunder on Romney’s part, it’s an attempt to have all Americans become friendly to the notion of rising, shining, and boasting in the glory of that evil plutocracy is best to bring a better world.

 In other words, Romney is not just running for himself, but also, deliberately, on the behalf of plutocracy. It looks clumsy, but it’s crafty, and manipulative at the emotional, “subconscious” level.

 I immediately sent (a version) of the following comment, which put the problem in a wider context, to the New York Times (a context readers of this site will be familiar with). It should have appeared among the very first comments, thus influencing thousand of readers, and endangering the established order. Instead something happened, and it was published in # 195 position (!) Typical treatment given to my comments, when they are too clever by half.

 ”It is of foremost importance for the plutocratic order that the following is not understood by the masses. What Romney and the class he campaigns for do not want the simple minds of the People to comprehend, is that BANKS ARE ACTUALLY PUBLIC INSTITUTIONS.

 OK, if a number of individuals put money together, and then lent it, that, and only that, would be a true private bank. Instead what is happening is that banks, especially very large banks, lend much more capital than they truly possess. They can do that, thanks to the full complicity of the government, which, then, in turn, become their accomplice and creature.

 Such is the nature of the Fractional Reserve Banking System. Banks, using leverage, something only possible with the backing of the state, create all the credit, and therefore, most of the money. Money creation, a basic public function, has been farmed out to private individuals.

 Just as tax collecting was farmed out to “general farmers” under (some of) France’s Ancient Regime, and (some of) the Roman empire. However, in France and Rome, money creation stayed an exclusive activity of the state.

 So let me rephrase it: instead of calling banks private, one should realize that any bank using leverage is a public institution. It’s a fact, not an opinion. It’s a crucial fact. That is why, on his first day in office, president Roosevelt could, and did, close all banks in the USA.

 Insisting that banks are private is like insisting that public money making is private, a monopoly the state give to unsupervised, unelected individuals.

 That public character of leveraged banks makes all bankers, including Mr. Dimon, head of JP Morgan, and loudly admired by Obama, into public servants. As they lend to their friends (in finance, or their collaborators in their class (hedge fund managers who use leverage, as they all do), that makes those bankers and the banking they do, fundamentally corrupt.

 When banking executives pay themselves immense amount of money, they do so with public money. The head of the unit of JP Morgan which was playing with derivatives, Ina Drew, a blue eyed blonde, earned more than 31 million dollar in 2010-2011 alone. (She has now been fired to the regret of Dimon, who did not want to fire his “sister“… Said the New York Times.)

 This nature of banking, the exploitation of the public sphere, by a few self selected private individuals, has grave implications on Quantitative Easing and the like. The USA’s central bank gave (or lent at such low rates, it was like giving) trillions of dollars to the very banks and managements which caused the 2008 financial crisis (example: Goldman Sachs). It was quite a bit like paying off the mobsters who just burned your house. Payments are ongoing, and explain why the likes of Dimon fill Obama’s mind with awe.

 In Europe, the central bank lends at 1% to banks which then lend that exact same money to the states at 6% or 7% (Spain, Italy) or well above 50% (Greece). In other words, the public finances the plutocrats rather than the real economy.

 Merkel then barks, and push to cut off funding for public transportation in Greece, so common people cannot go to work anymore, but can, instead, be accused of laziness (feeder trains from suburbia into Athens have been often stopped, and the tracks overgrown with weeds. Meanwhile Merkel sells Porsches to her friendly plutocrats in Greece). Why does she do all that? Because she is protecting the leveraged banks by shifting blame to the common Greeks.

 (Not that the Greeks were blameless: tax avoidance was a tradition in Greece, something that forced the country to live on credit more than could be sustained.)

 The fundamental nature of the present crisis is the rise of plutocracy, naturally accompanied, as it always is, by the crushing of democracy (see all students having to pay colossal tuitions, so that only the children of the hyper rich can study, just like in the middle Ages; and if you protest, the Quebec government will come to arrest you, so please, approve!)

 The present “fixes” only make the situation worse. (As was demonstrated, say in Greece!) Those “fixes”  consist into shuffling ever more money to banks which then lend that money to their friends, or then to states at usurious rates, while augmenting stratospherically the public debt to said banks. This only augments the power of banks, hence of the financial plutocracy, and thus the crisis.

 Is it deliberate? Probably. I have mentioned it on Krugman’s blog for years, but Krugman, who is very intelligent does as if he did not notice. Why? because if he did, he knows he would sitting in the hot, ejection seat. So he bids his time while munching on caviar, and sipping champagne.

 The only way out is a general default, as advocated in:

 http://patriceayme.wordpress.com/2011/09/14/to-save-the-world-please-default/

 Radical, sure. We have to grab the problem by its roots. Otherwise, we face collapse of civil society, while drowning and boiling.

 Accompanied by a stiff regulation of banking, along the lines of president Roosevelt in 1933. Instead the Roosevelt laws were dismantled under president Clinton, a greedy critter, well rewarded since.

  A few little men of modest extraction, get absolute power, and they want to keep some thereafter. That echo of power is provided by the Lords of Finance. As long as they took the right decisions. Singing hypocritically with U2 lead singer, the so called Bono (not his real name, just a bon mot to make him sound good, bon, bono, bueno, etc.) will help.

  Bono, like Bill Gates, sings about the misery in Africa, while raking the billions in one of Goldman Sachs’ latest conspiracy (he was on the Facebook IPO, and made nearly two billion). Warren Buffet has served the public buffet of forbidden evil foods, and they splurge. Those all too visible plutocrats also make the same lethal mistake as the tiger in Kipling’s Jungle Book… Hopefully their public splurging may attract attention from the destituted commons.  They don’t know that the Lord of the Underground, Pluto, makes itself invisible, for very good reasons. They are blinded by the very goodness they perceive in themselves, after inverting all values.

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Patrice Ayme

Essence Of The Civilizational Crisis.

 

THE PRIVATIZATION OF MONEY CREATION IS THE ENGINE OF PLUTOCRACY.

To understand the present financial and economic crisis, we need the clarity of deep philosophy.

The situation is actually simple, in its grossest outline. To create public money, the money everybody uses (be it cash, electronic transfers, swaps, whatever) we use a private system, with proprietary money creating devices inside (say subprime, or derivatives). Civilization has never worked this way before, as the state was careful to stay the one and only money creator.

Thus society, worldwide, uses now a privately managed public money creating fractional reserve system. That puts huge power in the hands of underground private individuals we don’t even know the names of. Those cloaked powers in turn corrupt the visible political socio-economy, from below. The whole metastasis is not even described, because intellectuals would have to do so, but most are paid by institutions subservient to the present global corruption.

We saw a similar situation in the Roman empire, when the intellectual class was at its richest, but its critical ability had been corrupted.

The modern banking system is a Faustian bargain with the bankers; in exchange for the immense powers the private bankers were given with money creation, they were supposed to loan it back to society for its development. This worked reasonably well in the Nineteenth Century. But in the Twentieth Century, bankers observed they could support fascism regimes, and get away with it (only Dr. Schacht, one of the “Lords of Finance”, sat in Nuremberg tribunal, and he was exonerated). Now bankers think they can engineer a depression, and get even richer from it: just keep the profits, and make taxpayers pay for the losses.

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Patrice Ayme

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Note 1: Paul Krugman observes, with many others, that the crisis of the West needs "intellectual clarity" to be resolved, and, meanwhile we are "overmatched". I made preceding comment in answer to Krugman’s cogent remarks. (The New York Times had the kindness to publish what I wrote within two minutes! )

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Note 2: HOW THE FINANCIAL CRISIS IS TURNING CIVILIZATIONAL:

China just established another train speed record for "unmodified’ train sets (481 km/h). OK, some will claim China stole a lot of Japanese and European technology. And some French engineers have sneered that the very high speed system in China is not as high performing as it looks (France has much higher average speeds, the highest in the world). However, this is not the point. The point is that China is trying very hard to progress and improve. Meanwhile some of the colossal technological edge of the West is eroding away quickly. The result will be world war, or global plutocratic peace (as plutocracy furthers its deal with China).

How does China improve so much and so fast? Because Chinese banks, the largest in the world, operate according the fiduciary duty, the Faustian bargain, that the fractional reserve system ought to impose, and used to impose in the West.

Top Chinese bankers know all too well that if they cheated, they may end up with a bullet in their skull. China is led by scientists and engineers who turned to politics, but know that they cannot make mistakes in their calculations. Mao made many mistakes, and dozens of millions died.

The history of China, in the 26 centuries before that, was spoiled by well meaning, but meek philosophy, which left too small a place to progress of the material, and intellectual kinds.

Civilization is not about "leaving it at that", the way Confucius mostly had it. Civilization is also about the dream, and implementing it. Indeed, civilization cannot stand still, anymore than a biker can stand still, because resources run out always (as Rome and the Mayas found out). Thus moving on is the price of sustainability. Progress is the price of sustainability.

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Note 3: It may seem a curious thing that Karl Marx did not make a strident version of the preceding critique (instead he modestly accused tangentially bankers of “monopoly” powers).

But this Marxist discretion proves the point I alluded to above, namely that bankers were better behaved in the 19C. So Marx talked about other things.

Ironically, early American presidents had perfectly well seen the danger bankers posed, and worried more about them than Marx himself! And let no one call Andrew Jackson a communist: that would be serious mistake…

In the 21st Century, by capturing the states (USA, EU), and various institutions above them (IMF, World Bank, BIS), the bankers have established a monopoly of power early American presidents rightly feared (and Jackson, wounded at 13 by an English sword, later a proud carrier of several bullets, and a general in the field, feared very little). The wise know what to fear. The mentally simple just smile, thinking only about themselves, as they can’t think much further than that.

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THREE DRASTIC SOLUTIONS FOR THE USA TO GET OUT OF A SELF DESTRUCTIVE SOCIOECONOMIC COLLAPSE:

Money creation and destruction is highly non linear, and depends upon mass psychology. As of March 2008, the USA is threatening to plunge into a classic self perpetuating deflationary spiral. A complicating factor is the US debt held by foreigners, in a situation of trade deficit (the latter for the reason of a dearth of industrial infrastructure, hence a dearth of production of real products that mean something when exchanged in the world economy). While, simultaneously, the US Dollar is not anymore the sole world reserve currency (at the present rate, it will soon be displaced, not just by the Euro, but even by the Pound!). In other words, the USA is affected by problems reminiscent of Japan in 1990, and also of Argentina much earlier (when Argentina enjoyed the world’s second highest GDP per head, before collapsing in a classic currency run when the foreigners which held Argentinean debt had enough of its self indulgent profligacy). To boot, the USA is stuck in a disastrous war which sucks away all the investment which could leverage the economy up with investments profitable in the long term to the US socioeconomy in general, instead of being sown somewhere on the other side of planet, among dunes and minarets.

Here is a short term solution to the US financial crisis: what about reevaluating all principals on recent residential mortgages 50% lower? (Tapering off the reevaluation in a crafty way.) That would be an enormous shock, but a heart gets out of fibrillation through a shock. There would be problems with municipalities, through some tax receipts readjustments, but this should be addressed as they happen, with localized federal bail outs, etc.

And now for how to solve the long term socioeconomic problems affecting the USA: starting with Nixon (debasement of the dollar, creation of HMO plutocratic health “care”), the basic problem of the USA became that it wanted to be the Wild West. And what happened to the Wild West? Well, it disappeared, right. And why did it disappear? Because it was not compatible with modern civilization. The Wild West was legislated, and regulated out. Now the world economic community is doing the same to the entire USA, or more exactly the USA is doing it to itself: making itself disappear everyday ever more as the US currency sinks quickly into irrelevance.

The present world economic situation calls for new regulations and solutions, and the rest of the world has been implementing them (Kyoto Treaty), boosting world wide efficiency. The USA has been innovative in some fluffy picturesque details of the world economy (Google clicks, iphone, hedge funds, etc…), but missed the big picture for incredibly long.

So here is the one and only long term solution for the USA: to get a modern economy one needs to change to a modern behavior, which one gets from behavioral (Pigovian) taxes on consumption and energy. The US economy, after decades of stuffing its face with SUVs and inefficient houses, transportation, and everything inefficient one can possibly imagine, has become not just deeply inefficient, but obsolete in its habits and short of around one hundred trillion US $ of past infrastructure investment that has never happened (to understand what is going on, start to consider what it would take to build a modern railway system in the USA; a little detail: the Swiss and Franco-Italians are building three very high speed trans Alpine tunnels for 30 billion US $; Europe is investing hundreds of billions in very high speed rail (up to 250 mph); US rail was obsolete 50 years ago, but still, it is crucial to the US economy).

Oh, yes, and that would be the third solution dimension, it would also help to have a hyper efficient health care system, and that means a legislated single payer basic system, as all other advanced countries have (not having this puts the US at a deep economic disadvantage). People’s life should not been held hostage to the rich. Real health care reform does not mean the pathetic tinkering Hillbama has been reduced to, before they even started. Nixon did not have only bright ideas, and, contrarily to what he asserted, he was a crook. (His) HMOs got to go.

Patrice Ayme
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