Fitch is sending New Zealand a message

It is hardly surprising Fitch has signalled a credit watch on account of our current account deficit.

The Greens have been pointing out the seriousness of our overseas deficit for many years. There is not much compassion in international circles for people who have been living beyond their means for many years and expecting others to save on their behalf.

John Key needs to realise that not all types of economic stimulus are the same.  Instead of random spending on pet projects the stimulus needs to be targeted at areas that will make our economy more resilient in the long term by reducing our current account deficit.

For example, reducing our bill for imported oil,  which currently  only costs us some $8 billion but is set to rise to twice and eventually three times that if the recession lifts and oil demand resumes its growth.

For example, the Buy Kiwi Made programme, axed by this Government, which encourages people to feel pride in buying from NZ business rather than imports.

For example, investing in the infrastructure to reduce our climate change emissions which will cost us dearly in future, addressing the climate change crisis at the same time as the economic crisis.

This is what the Green New Deal stimulus package, launched in May, was designed to do. I won’t insult you by repeating it all – you can find it here.  How would it, and wider Green policy, address Fitch’s concerns?

Investing in improving energy efficiency would reduce the need for new power stations, stimulate new businesses with expertise in energy efficiency design and products, and make businesses more profitable and resilient.

Setting fuel economy standards for vehicles entering the country would reduce our fuel import bill and the costs of doing business.

Keeping unemployed builders and other trades and supply industries in work by building more state houses for the 10,000 families on the waiting list would reduce those claiming an unemployment benefit with less need for the Government to borrow.

If we are afraid of another housing bubble, as reported this morning, it is a great time to introduce our Capital Gains Tax. It wouldn’t raise any money just now as house prices have fallen, but would warn speculators planning to buy now and  reap huge capital gains, to be careful how much they pay, and consider investing in productive assets instead.

Investment in tertiary education and training would leave us with a stronger economy with more skills and higher incomes.

The Government could issue high quality infrastructure bonds to encourage saving and investment in secure New Zealand assets rather than overseas.

Instead the Government has thrown stimulus at the economy in a scatter gun way, with most of it going into new motorways. That will stimulate demand for imported machinery and vehicles and oil and greenhouse-intensive concrete and provide very few jobs. It will not increase economic resiliency, a major objective Key outlined in his speech on Monday.

Investing in improving public transport – more and better services, upgrading stations and ferry terminals, integrated ticketing – will employ 40% more people than putting the same money into roads. And it will lower our oil bill and our climate change bill in the future as  people have options and choice.

The April tax cuts were targeted at those who are most likely to spend them overseas rather than here. Not quality spending, especially as we had just had the October tax cuts.

And of course reducing the employer contribution to Kiwisaver didn’t help build a savings culture.

An approach to all the credit rating institutions with a package like the Greens’ Green New Deal, explaining the intention to set the economy on a sustainable path with eventually a lower current account deficit, a stronger productive sector and more skilled workers would surely have reassured them that there is no need for a downgrade.

72 thoughts on “Fitch is sending New Zealand a message

  1. BJ,
    Ok, that makes more sense.
    If you had said that so eloquently in the first place this thread would be significantly shorter. Though, assuming that turnips definition was the definition you support, there has been no actual change in my opinions toward non-FR because my opinion was already for non-FR. lol.
    What I wonder is why something so obvious and apparent was not apparent to me immediatly. Though in my defence most of your arguements were to sidepoints essentially irrelivant.

  2. Sapient

    At any given instant interest is owed on every dollar in existence and borrowed.

    The money to pay it does not exist.

    When it is created, interest is owed on it.

    respectfully
    BJ

  3. BJ,
    I agree that FR, under Turnips definition, will tend to create bubbles which then pop and cause much pain.

    I do not beleive in things for which i cannot provide an arguement supporting my beleif. I do not, for example, beleive that it FR does not need growth but likewise I can see no arguement that means it must.
    I acknowledge that loans are essentially promises of work and that money thus created is a promise; it is after all an evolution of the certificate of deposit.
    I am sorry, but i can just not see why growth is neccesitated if the currency continues to circulate through the economy. If person A takes out a loan totaling 100 and pays interest of 10 and person B takes out a loan of 110 and pays interest of 11, person A earns that 110 from B and pays back the loan in full, person B owes 121, person B earns the 10 interest paid by A through working for the bank as well as promises (his own) equal to 111 and uses this 121 to pay back his loan. The money has come full circle and has not neccesitated growth at all, though the bank does use promises to pay, in a system with more actors it would likely be someone elses promises. I still dont seen the need for growth.

    Creditor Bank A B
    0 210 0 0
    (+210) (-210) (0) (0)

    0 0 100 110
    (+210)(-210,+210,+21)(-100,-10) (-110,-11)

    0 110 0 0
    (+210)(-210,+11,+110) (0) (-110,-11)

    0 99 0 121
    (+210) (-210,-110, (0) (-110,-11)
    +110,+11)

    0 210 0 0
    (+210) (-210) (0) (0)

    210 0 0 0
    (0) (0) (0) (0)

  4. In other words, it is not the transaction between the landlord and tenant that is important.

    It is the transactions that involve the banks, the ultimate source of ALL money in the system.

    No matter how long and involved the chain is, if the person dealing with the bank must pay the bank interest on the loan, then that interest, being money, bust be created by someone else’s taking out a loan for the same amount plus the interest and paying interest on that amount.

    It is a never ending story… until the amounts get ridiculous and people can’t pay. It is almost axiomatic that it will create bubbles in all manner of commodities.

    BJ

  5. What matters is what the money IS.

    If the money is debt, which is basically a promise of work or a promise of future work or if you wish a claim on future wealth – and demands interest:

    The $250 paid to the landlord comes from someone else’s promises.
    The $200 the landlord pays is in service of his own promise (canceling the 200).

    As long as the money is backed by debt rather than “wealth” “savings” “work” “gold” ( NOT the promise of same ) each one of those promises (money) includes a demand for interest and forces the next player to earn more money but the “more” money earned is itself “created” somewhere attracting interest. The amount of money must grow.

    If the money is real (not FR) then money is not created by borrowing (whether or not there is interest). The next player’s money earned is not created by “debt” and therefore does NOT include a demand for interest to be paid on it.

    If the money is thought of as a claim on wealth it isn’t obvious. If it is thought of as representing work, then any engineer will see the problem almost instinctively.

    My assertion that it represents my work has its basis in a reality… in the absence of money, if I desire something that someone else possesses I must exchange my work (either directly or something created that contains my work) for that thing, and the thing they possess is theirs by dint of their own work.

    ______________________________

    This is why the Fed is so terrified of deflation and has been lending and guaranteeing loans like mad to try to prime the pump and force the system to resume its controlled inflation. It has been trying every trick in its repertoire to persuade people to borrow and spend and get consumption growing again.

    FR based economics don’t work without growth.

    Right now the real unemployment in the US is North of 10% and deflationary pressures are massive. Instability remains, and the overhang of retail space and housing along with the unemployment numbers do not bode well for the “green shoots’ rhetoric. I rather expect a second collapse of the economy later this year… maybe not as visible in terms of the banking world, but the man-in-the-street will feel it fully.

    Unemployed and scared people aren’t borrowing and consuming more anymore, they are saving and staying home. Empty houses and ghost malls exist all over the country.

    Goldman will recover. The jobs market? Nope… The people on the street are watching their standard of living disappear, but do not have any idea how or why, or how much of it was false.

    “I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

    Thomas Jefferson,

    respectfully
    BJ

  6. BJ,
    I can see where you are coming from but it does not seem to stack up to me.
    The $100 initially introduced inflates to $1000 assuming a reserve requirement of 10%. If interest is charged at a rate of 5% per annum then a total of $50 is charged.
    This is the same amount as if the $100 dollars was lent out only once at a rate of 50%: $50.
    Likewise if the land lord pays $200 per week in interest and collects $250 per week from letting the propety a profit of $50 is made.
    To me it all seems the same, I cant see why the source alters the way the the interest effects the economy. You could charge a billion dollars interest and it would just mean the person needed to do some dodgy deals or default, it wouldint mean the economy needs to grow purely because of this.

  7. I fail to see how the ROI (interest) generated is different to the ROI of rental properties, shares, or business;

    The rental property isn’t borrowed originally, it actually exists. The shares in the business are shares in something that actually exists. Neither the rental property nor the business are borrowed into existence in the first instance.

    Every dollar in the system however, must be borrowed into existence. Which means that the interest paid has to be added to the system continually.

    BJ

  8. BJ,
    I agree that bankers create money under a FR framework.
    I agree that the banking system acts to redistribute wealth to the bankers because the competition is too small and the regulation to loose given the lack of competition. This allows profits far in excess of what is ideal.
    I agree that FR allows banks to charge interest several times over on what is essentially a single unit of currency.
    What I dont understand or agree with it the assertion that growth is necessitated by the charging of interest. I fail to see how the ROI (interest) generated is different to the ROI of rental properties, shares, or business; though granted on a different scale entirly, a scale which would not vary in the presence of proper competition or regulation.

  9. Those actors were reduced to that so that the fact that the totally debt backed currency requiring interest on every dollar be paid, requires growth in order to function. I could not make it any simpler. It is easy to make it more complex.

    My point is that in FR banking the bank DOES create money through lending, as banks around the world continually do. The bank’s money to pay expenses, being money, must originally be created through borrowing, which attracts interest.

    You cannot get away from the requirement to borrow to create money if debt is the thing behind the money.

    Asserting that all debts attract interest, such a system MUST grow or someone cannot get enough money to pay the interest on their debt.

    The transfer of wealth effect outlined by von Mises is real. The system is broken in ways that are so fundamental that I was nauseous when I first learned about it.

    I doubt that most bankers or banks realize how the paradigm is broken, and I reckon that most of the people in the trenches are passably honest. Hell, if YOU don’t understand it what chance does Joe Six-Pack have?

    I don’t doubt however, that some people at the very top… the ones who profit from it most, understand very exactly how this house of cards is built.

    Fractional Reserve without interest payments on debt, does not require growth.

    Fractional Reserve plus interest on debt however, does.

    The inputs and outputs CAN NOT balance otherwise.

    respectfully
    BJ

  10. BJ and Turnip,
    I am fully aware that much of what I have been saying is already known by you. They are the basics and that is why they are worth repeating.
    The first matter:
    Turnip, you make a distinction between on-call accounts and accounts to which access is denied. I have made this distinction previously and have stated that on-call accounts should have a full-reserve requirement due to the potential for bank runs and the like while accounts with denied access – timed deposits – should have no such limitations. I have been defining FR as including both such accounts and talking about a non-FR world as one in which both these types require full-reserve. You seem to define FR as only relating to on-call accounts. If we define it thus then we have been arguing past each other as I too believe that there should be a full-reserve requirement for such accounts.
    If we work off your definition then my statement as to the social and economic effects of removing it is rendered void; if we work off my definition then it is entirely legitimate because of the inhibition of entrepreneurship and the favouritism for the status quo.

    The second matter:

    As I have said many times money isn’t wealth but rather a claim to wealth.

    And as I have maintained this entire time: money is not wealth but a claim to wealth.

    If they supply of money grows at a rate bellow the rate at which the demand for that money grows then there will be deflation. That we have not observed this is because, as you say, money is constantly being created. If it were not then we would observe this phenomenon.

    Yes, if you print enough money it will eventually become so worthless that it is no longer a valid currency and a net currency will need to be established. The total value of money still does not exceed the total wealth of society for any prolonged period. It is true that it can for a short period following massive issuance.

    The third matter:

    Not true as either she will need to default on that debt or repay it by handing over her own wealth. FR debt is the enabler for governments, it is a drug especially for democractic nations as it enables them to spend money without taxing the citizens

    And I repeat: This is not the fault of FR, this is a fault of those whom govern the FR system; the bankers and the politicians and as such it is irrelevant as an argument against correctly managed FR.

    The fourth matter:

    Lets take it down to an economy of 2 people and a bank *and a “reserve bank”. The bank borrows 11 from the reserve bank and loans 100 to person A, 10 to person B. Person A is on the hook for 10 bucks, he sells goods to person B and gets his 100 + 10 (profit) and pays back the bank (incidentally destroying the money). Person B has to come up with 11 bucks and has no source for the extra $1 unless the system is growing (either by inflating or actually producing more). It doesn’t matter. The GROWTH is built in.

    Three actors can hardly represent an economy unless those actors also represent the cyclic nature of the economy and a accurate model could hardly be explained in a book due to the complexity of the money proliferation and the effects of any withdrawal or transference on this proliferation. I would propose an alternative model but it would take far too much time to create. First, the bank cannot create 110 from 11 itself but must do so through lending, it itself still only has a net wealth equal to that 11. Second, the money is only temporarily destroyed when the bank is paid back, the bank soon lends that money out all over again and the money is recreated. Third, this assumes it works one way, the bank too must pay for expenses and in this way the money cycles and is made acquirable to person B, that the money is recreated means that the same amount is still cycling assuming a constant rate of ‘money in pocket’ among all actors. Fractional reserve does not require growth; it requires redistribution of money, and by extension wealth.

  11. sapient:
    “Interest on a loan is no different from paying rent on a house, paying mark-up on goods, or dividends distibuted through shares. It is simply a redistribution of wealth.”

    You are both right and wrong. Interest like rent, markup and dividends IS a form of redistribution of wealth, a redistribution UPWARD. The greater the margins, the more wealth is redistributed upward. That is why a true free market is so important, because it puts a limit on those margins and as a consequence reduces how much wealth is vacuumed up by the rich.

    “That the USA has a reserve ratio of 3% IS the problem.”

    Smart individuals will ALWAYS find creative ways of avoiding impediments to their drive to accrue wealth as amply demonstrated by the Muldoon era of dictatoral control of the economy.

    It was an absurd mix of ad hoc rules, made up with very little input from anyone other than Robert Muldoon, the finance minister and prime minister.
    http://www.chrislee.co.nz/index.php?page=20th-july-2006-nz-finance-sector-under-muldoon

    They already do so even to avoid such minimal capital requirements in the current monetary regime.

    “There are a number of ways through which financial intermediaries find reserves beyond their formal or legal lending capacity—ways that have come to be known as “liability management”
    http://www.cbpa.drake.edu/hossein-zadeh/papers/HowFinanceCapital.htm

    “Moreover, even where banks still issue loans there is a trend to “securitisation”. This means that the loans are sold to non-bank investors who are not subject to reserve requirements.”

    “Yet the evolution of private clearing mechanisms like the US net settlement system CHIPS threatens to erode the central bank role even here. The combined results of all these developments could well be to reduce, perhaps to the point of elimination, the need for bank reserves and even the need for banks and cash altogether.”
    http://www.samuelbrittan.co.uk/text14_p.html

    This letter that I link to, corraborates that a similar regime is in effect here in New Zealand.

    All the recent twaddle in the press concerning the RBNZ using too tight a definition of CPI to regulate interest rates is totally insignificant, when the government of the day employs the RBNZ through a contractual arrangement with the Debt Management Office to enter the market via its daily OMO to monetise authorised private financial credit created when the same banking institutions purchase New Zealand Government Stock.

    These banking entities only have to retain a maximum of 4% capital adjusted by the 10% credit weighting for tier 1 capital and as much 8% adjusted by 10% for tier 2 capital to raise an international short term forward sale money market liabilty on their balance sheet to purchase Government Stock at tender from the Debt Management Office via the RBNZ on behalf of the Government (taxpayer). In return the RBNZ will supply the same institutions the full amount in cash for a marked to market amount of bonds using reverse term repos conducted on a daily basis for a total current rolling amount near $2.5bn.
    http://www.omo.co.nz/NZ%20Minister%20of%20Finance%20Letters.htm

    It is NOT fractional reserve banking as in such a regime the government through its Central Banks has a measure of influence on the monetary supply growth in the economy. Such a regime was abandoned in the 1980s with the introduction of the Reserve Bank Act. We live under an almost completely credit fueled economy.

    “The wealth and power held by bankers is not due to fractional reserve itself but rather due to, in the first instance, the lack of competition which allows for cartel-like opperations and, in the second instance, lack of government regulation to account for this lack of competition.”

    This is as true of ratings agencies as of banks.

    “The rating agencies were originally research firms. They were paid by those looking to buy bonds or make loans to a company. If a rating company did poorly it lost business. If it did poorly too often it went out of business.

    Low and behold the SEC came along in 1975 and ruined a perfectly viable business construct by mandating that debt be rated by a Nationally Recognized Statistical Rating Organization (NRSRO). It originally named seven such rating companies but the number fluctuated between 5 and 7 over the years.”
    http://seekingalpha.com/article/58304-time-to-break-up-the-credit-rating-cartel

    “There is a fundamental conflict of interest that — if you’re being paid by the person who controls your hiring, then you do have a real incentive to tilt your report,” said Dean Baker, co-director of the Center for Economic
    and Policy Research in Washington.

    Naturally when there is a State charter for a certain function, especially in such a crucial one as rating the quality of financial securities, they will be free from the discipline of the market should they fail to deliver a quality service. Free from such discipline of course they have no incentive to perform and are instead are prone to the conflicts of interest and outright criminal negligence that was highlighted by the current crisis. They are in effect free to fail and fail again no matter how many times it occurs.

    “It wont be supplied past the limits of the availible wealth because every additional dollar created devalues the other dollars, the actual wealth stays the same and the actual wealth represented in dollars stays the same; only the value of each dollar changes.”

    Its important to distinguish between different types of wealth and between wealth and claims on wealth. I’m beginning shift towards turnip’s way of thinking. Wealth are goods and services that are beneficial to humanity, that make life more enjoyable. Money and its approximates such as securities and legal contracts are merely claims on wealth enforced by the State. They do not add wealth, but instead destroy it as it restricts the consumption of wealth already produced. Since the 1980s government policy has skewed the economic regime away from the former in favour of the latter. Enriching a few at the expense of the many.

    New Zealanders have only been able to maintain our standard of living by paying off current maturing debt by rolling it over into new debt issuance by other lenders. The party is now over. The creditors are now about to demand their pound of beef.

    “Prime Minister John Key has revealed China’s US$200 billion ($349 billion) sovereign-wealth fund has signalled its interest in a stake in NZ dairy giant Fonterra if it changes its capital structure.”
    http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10569671

  12. “I hold that it is fundamentally the same thing. There can be no loans in a non-fractional reserve world for the very act of creating a loan requires a non-full reserve requirement.”

    Ok Sapient it seems clear to me that you don’t quite understand FR. The above statement proves it. In a Non FR world there are two types of deposits Timed and On Call. The Bank in a NON FR world is free to lend the timed deposits and in return for not giving you access to your money the bank will pay you interest. You CAN”T access that money for the ENTIRE length of the deposit, The reason why you can’t access that money is because IT ISN’T in the bank it has been lent out.

    The On Call deposit can be accessed by you at anytime as the money never leaves the bank, this account also doesn’t pay any interest.

    So as you can see by the above statement lending in a NON FR world is POSSIBLE.

    “If you invest $100 in a bank and it has to keep all of it (full-reserve) it is IMPOSSIBLE for it to then create a loan from your deposit. Its no different if you were to lend that $100 to a friend.
    As soon as the bank can lend out even a small portion of that $100 it is operating in fractional-reserve and the money creation starts.”

    If I invest $100 I will decide how much to keep on call and how much to place on time. Lets say I keep $20 on call and put $40 in a 1 year CD and another $40 in a 5 year CD. The bank can loan $40 for 1 year and $40 for 5 years. No FR lending has taken place in the above scenario. If I walk down to the bank I can only demand $20. A RUN on the bank is IMPOSSIBLE, In 1 years time I might get bank my $40 and in 5 years time I might get back $40 dollars.

    “In the absence of the loan option society and the economy will stagnate, as will scientific advance. I hold this undesirable and as such the elimination of fractional reserve is undesirable.”

    I am sorry but your logic fails one statement does not lead to the other. Society has functioned fine without fractional reserve banking, science does not require fractional reserve lending to prosper. If you believe that the fractional reserve banking of the 20th century was the reason for our great technological achievement, well you have no EVIDENCE to back that claim. My personal view is that you are overlooking OIL and its net energy effect to a civilization.

    “No, it is possible for a country to use more than its wealth by borrowing the wealth of others but the value of any currency is defined by the willingness of people to accept that currency in exchange for goods.”

    As I have said many times money isn’t wealth but rather a claim to wealth.
    The money will only operate as a claim on wealth as long as the people believe in it.

    “If the money supply grows without an increase in productivity then inflation takes place as the currency is now in greater supply relative to the demand for the currency.This change in the demand vs supply means that goods cost more currency despite having the same value”

    The money supply grows all the time, periods of deflation are non-existance and in fact rather destructive for a fiat currency. Your just repeating something both BJ and I are very aware of.

    “You can print as much currency as you like but it will not exceed the total wealth of the society. To take an example from Russia: people would sooner steal the wheel barrow than the money contained.”

    Of course you can print as much money as you like, however at a point this money will stop being money, you will no longer be able to exchange it for wealth, at this point it is no longer money, you will then need to either issue a new form of fiat money. History provides ample evidence of fiat currency that can no longer be redeemed for wealth.

    “That your daughter was born with debt is irrelevant. That is not the fault of FR but of the government. That the government is in debt is the result of the government borrowing and that debt is offset by credit to others. ”

    Not true as either she will need to default on that debt or repay it by handing over her own wealth. FR debt is the enabler for governments, it is a drug especially for democractic nations as it enables them to spend money without taxing the citizens.

  13. That extra $10 is profit, no different to if you sold a hammer and some nails.

    Take the economy as a whole Sapient. Someone else had to HAVE the 10 in order to pay you 10. Over the whole economy EVERY dollar is backed by debt. The 10 is borrowed money somewhere else. Borrowed from the fed and then multiplied by the lending, and ultimately paid to you but still borrowed, and still owing interest.

    Lets take it down to an economy of 2 people and a bank *and a “reserve bank”. The bank borrows 11 from the reserve bank and loans 100 to person A, 10 to person B. Person A is on the hook for 10 bucks, he sells goods to person B and gets his 100 + 10 (profit) and pays back the banlk (incidentally destroying the money). Person B has to come up with 11 bucks and has no source for the extra $1 unless the system is growing (either by inflating or actually producing more). It doesn’t matter. The GROWTH is built in.

    If the economy has stalled or goes down, person B defaults. Over the larger economy, steady-state rather than growth MUST drive some people bankrupt. Mathematical certainty.

    “If you invest $100 in a bank and it has to keep all of it (full-reserve) it is IMPOSSIBLE for it to then create a loan from your deposit. Its no different if you were to lend that $100 to a friend.”

    No, it is possible to borrow, but the lender has to give up control of the money while it is lent, EXACTLY as you do when you loan it to your friend.

    The bank may still balance accounts to allow money to be aggregated and disbursed in amounts different from the amounts that people deposit in the bank (lend to the bank), but this does not release the bank from maintaining deposits that match its lending overall. It is not possible for the bank to lend from a DEMAND deposit, like a checking account.

    If the money supply grows without an increase in productivity then inflation takes place as the currency is now in greater supply relative to the demand for the currency.

    If you assume a perfect market and people with perfect knowledge making rational decisions in a closed system. That isn’t the case.

    Your key phrase was here – “borrowing the wealth of others”

    What would be the value of the $US if the Chinese and Japanese abandoned their support of it? Are they acting rationally? I think so, but not within the context of the US economy. They are taking losses every day…. for reasons related to their own requirement to grow.

    (( You keep explaining inflation to me… I know how it works… probably knew before you were born! … just stop already :-) ))

    Fractional Reserve creates debt based money. How much depends on the reserves. I have just shown that debt based money in combination with the requirement to pay interest (not all cultures permit “interest” payments, other arrangements are made) requires perpetual growth.

    I am Green Sapient. Perpetual growth isn’t an option on my planet, and is a particularly nasty problem for us right now.

    Hence the “evil” connotation.

    Mises showed how FR generates boom and bust cycles which are predictable and favors the banks and the borrowers earliest in the cycle of money creation.

    http://mises.org/story/2882


    ” – Monetary expansion is a massive scheme of hidden redistribution. ”

    I don’t much care for the libertarian view of money privatization and their total mistrust of government itself, but the portion which analyzes the effects of fractional reserve on the various players in the market for money is spot-on.

    respectfully
    BJ

  14. BJ,
    I have only read the first page of that forum, it was so cyclic and pointless it bored me; I only read those sort of arguments when I’m participating in them :P .
    There seem to be two main points to the first page.
    First; A bank receiving a deposit of 1000 may lend out 9000 with a reserve ration of 10%. This is blatantly false as FR requires that only money or certificates of deposit which the bank receives may be lent out. While ultimately it may inflate to 10,000 through people taking out and spending loans which are then re-deposited, it is not created all at once by the bank and 1000 does not allow a single bank to create it instantly in the manner cited. If a bank did practice this it is not a fault of FR but of regulation of the banks and is in-fact a incident of fraud.
    Second: A bank collecting interest on money created through FR require growth. Again, not necasarily true. If the bank loans out $100 and gets back $110 including interest that does not mean money has to be created. That extra $10 is profit, no different to if you sold a hammer and some nails. That $10 goes to the bank, which uses the money to pay the banker or the cleaner or some other contractor whom then uses it to pay for food, to purchase goods, or to pay contractor for property improvement. If the banker, the cleaner, the grocer, or the contractor had taken out the loan then the money has come full circle. It does NOT require a growing economy. That money is created as part of a growing economy by a central bank is an effort to control deflation and thus allow the growth to continue. Yes, defaults will be higher in a non-growing economy but those defaults are the result of slack reserve requirements and credit rating requirements.

    On to your post;
    I fail to see how interest paid because of real money and interest paid because of money created by FR is any different. In each case the interest is ROI and is paid because the recipient of the loan expects to gain greater utility from the money than the utility lost through interest. So long as the utility is present there exists no difference. And the utility IS present because the population can not tell the difference between real money and money created thus.
    That FR creates inflation is irrelevant as that inflation is in actuality created by the Fed intentionally and takes account of the FR effect; it uses the banks as a method of distribution.

    No, and this is where we are getting off the rails.

    I hold that it is fundamentally the same thing. There can be no loans in a non-fractional reserve world for the very act of creating a loan requires a non-full reserve requirement.
    If you invest $100 in a bank and it has to keep all of it (full-reserve) it is IMPOSSIBLE for it to then create a loan from your deposit. Its no different if you were to lend that $100 to a friend.
    As soon as the bank can lend out even a small portion of that $100 it is operating in fractional-reserve and the money creation starts. In the absence of the loan option society and the economy will stagnate, as will scientific advance. I hold this undesirable and as such the elimination of fractional reserve is undesirable.

    Sure it can be. All that is required is additional promissory notes issued in the name of our children.

    No, it is possible for a country to use more than its wealth by borrowing the wealth of others but the value of any currency is defined by the willingness of people to accept that currency in exchange for goods. If the money supply grows without an increase in productivity then inflation takes place as the currency is now in greater supply relative to the demand for the currency. This change in the demand vs supply means that goods cost more currency despite having the same value. You can print as much currency as you like but it will not exceed the total wealth of the society. To take an example from Russia: people would sooner steal the wheel barrow than the money contained.

    That your daughter was born with debt is irrelevant. That is not the fault of FR but of the government. That the government is in debt is the result of the government borrowing and that debt is offset by credit to others.

    You are taking your strife against a system when that system is the very thing that enables you to take strife against the system. What your strife should be directed against is the practices of those whom run the system, the bankers and politicians, not the system itself.
    Yes, fractional reserve allows for the creation of currency from the issuance of debt but you have yet to provide any reason why fractional reserve would be bad compared to other systems if fractional reserve was in-fact managed correctly.

  15. Also relevant to the message that Fitch is sending –

    http://www.huffingtonpost.com/ralph-gomory/manufacturing-and-the-lim_b_227870.html

    Let us by all means do the things in which we have the greatest advantage. But let us make sure the new things we do, together with the things we continue to do, add up to enough to make us a rich nation. Vague talk about future innovations, about a post-industrial society, or of an enormous explosion of services exports to where they can balance the manufacturing trade deficit is not the stuff on which to bet the prosperity of a nation. This vagueness disguises our real situation and the need to rethink both our fundamental economic goals and how they can be attained.

    respectfully
    BJ

  16. Banks act as intermediataries, in the absence of government intervention.

    Of course they do and I don’t mind this at all, and I understand the function perfectly well. You have explained it nicely too, but… in the case of money, they create the damned stuff.

    No, borrowing and debt is the same beast as borrowing and creating money. They are exactly the same process.

    No, and this is where we are getting off the rails.

    Borrowing and going into debt requires someone else to save in a non-fractional, redeemable system. Interest paid does not require the creation of additional money and it is merely the fee for the time-value of the money. It comes from someone else spending their savings somewhere else.

    When money is backed by debt however, borrowing is itself the source of money. Since ALL debt attracts interest, all the money in the system has interest being paid on it. This REQUIRES a constant flow of additional money (debt) into the system. The system is only stable as long as there is growth. As soon as growth stops it is mathematically certain that some people are going to default because there is no way to provide enough debt for everyone to pay their obligations.

    Which is why the Fed is so desperate to create new debt.

    This problem stems from the money being based on debt ( assuming the interest rate is different from zero ).

    Without growth the system is broken. Debt-based-money is EVIL.

    I find it hard to separate fractional-reserve from the debt-as-money paradigm. They go together. It (fractional reserve) is by definition, a way to expand the money supply through creation of debt. Thus SOME “money” is debt (attracting interest) in fractional reserve systems and the reserve requirement tells us what percent of the money it might be.

    http://forums.randi.org/showthread.php?t=127497

    “I want a fractional reserve savings account where I earn interest on $1000, but only have to front $100.”

    On such a point the bank’s advantage in this system becomes more clear.

    A redeemable currency (not based on debt) imposes some discipline on the system but I asserted earlier that it has to be coupled with an end to the fractional reserve habit if we are to regain power over our currency, our country and our future.

    The currency gets its value not from gold but from the fact that other parties, particuarly the government, are willing to accept it in exchange for goods, services, and the payment of tax.

    Of course. This isn’t really relevant to the issue.

    The economy must continually and relentlessly expand and create new money to pay the interest. The money supply MUST grow whether wealth increases or not.

    It is inflation if the wealth does not grow and this is fundamentally an indication of the system being broken. An inflation rate of zero should not have the government panicking about deflation or entail the destruction of jobs. It does.

    It is growth if the wealth does grow, and this is also a broken paradigm from a deep Green point of view, because the growth of wealth is tightly connected with additional energy being consumed/controlled per capita and such growth cannot go on in perpetuity on a finite planet… or in a country with finite resources.

    Growth without the capture of additional work is something I have never ever seen an example of. I don’t care if it is inflation or not.

    It wont be supplied past the limits of the available wealth because every additional dollar created devalues the other dollars, the actual wealth stays the same and the actual wealth represented in dollars stays the same; only the value of each dollar changes.

    Sure it can be. All that is required is additional promissory notes issued in the name of our children. Whether they can pay or not is for THEM to find out. The system doesn’t know how much work they will have accessible to them. It bankrupts them without even noticing.

    The additional money created is a glut. People don’t even know what to do with it, they build stuff they don’t need, expand production to meet nonexistent demand… malinvestment is rampant. Consume-consume-consume isn’t just a feature of the culture of the USA, it is required by the damned money itself.

    Much of it winds up in the hands of those who already had lots, without them doing anything at all. They are the collectors of the interest, the loaners of the money. The entire system favors this result.

    With peak-oil and the climate both apt to crunch that available work, real growth is going to be difficult to manage.

    The supply cannot expand without limit as there is a reserve ratio but even in its absence if individuals choose to keep small change in their pocket then there is a very real limit on the abilit of banks to inflate the money supply.

    You are joking? Well sort of… the reserve ratio of 3% is a joke to be sure. The Sweeps make it a bigger joke.

    My Daughter was born with over 200,000 dollars owed. That number has only ever increased. Trust me, they can inflate as much as they like, yet their ability to do so is not the problem I care about.

    I care about the fact that the definition of the currency enforces growth of debt, thus growth of the money supply. This can be inflationary or not. If inflationary it is damaging because it is theft from all. If it is not inflationary it is damaging because it entails increased production, increased consumption of energy and relies on increasing (somehow) consumption for stability.

    BJ

  17. BJ,
    Banks act as intermediataries, in the absence of government intervention when a loan is defaulted on that default is absorbed by the bank itself. When the defaulted loans are too large in number and size, as is the case with the present crisis, the bank is unable to absorb the losses and depositors take a hit; in both instances the debt disappears along with the credit; in the first instance the credit is the banks and in the second the credit is both the banks and the depositors.
    I have said previously that the problem is not fractional reserve but the way it is opperated due to cartel like behaviour and lack of redeeming legislation. That the USA has a reserve ratio of 3% IS the problem. This reserve ratio allows FR to create far more money than is needed and because of this, and the motives of the managers, loans which are far more risky than should be taken are taken. If these loans were not allowed then there would be no problem. If the reserve ratio was higher or the required credit rating was higher/present then the bubble would have been far smaller and the decline far less steap. Alternativly, removing government backing or making the shareholders personally accountable would also assist in this respect.

    No, borrowing and debt is the same beast as borrowing and creating money. They are exactly the same process. If your engineering firm takes out a loan to purchase chips, boards, displays, or what-ever, as soon as the money is used to purchase those goods the recepient of the money is then able to deposit that money in their own account from which the bank may then lend out the money. It is the same process. So long as money cycles any loan can become credit in someones account which is then free to again be lent out.

    The currency gets its value not from gold but from the fact that other parties, particuarly the government, are willing to accept it in exchange for goods, services, and the payment of tax. The ‘creation’ of money through fractional reserve inflates the money supply and inflates the costs of anything in dollars. So the merchant demands more for each pumpkin, the government demands more in tax, the worker demands more in pay. If we moved from a full reserve to a fractional reserve then people would be victimised by the massive devaluation but that devaluation happened progressivly long ago. Fractional reserve does not decrease the value of the dollar at present, they are just as useful as if there was an equal number of real dollars instead of part real part created. And ultimatly since the Fed takes into account the inflation of printed cash due to FR there is no more inflation than the Fed desires.
    It wont be supplied past the limits of the availible wealth because every additional dollar created devalues the other dollars, the actual wealth stays the same and the actual wealth represented in dollars stays the same; only the value of each dollar changes.
    The supply cannot expand without limit as there is a reserve ratio but even in its absence if individuals choose to keep small change in their pocket then there is a very real limit on the abilit of banks to inflate the money supply.

  18. Debt cannot exceed the resources of society as every debt is backed by credit

    All this means is that someone signed up for credit, not that they can or will pay it back.

    The banks were responsible for extending credit (and creating money) and they did it with GREAT irresponsibility. It wasn’t as if it was “their” money.

    The society never had the wherewithal to pay back what was borrowed. This was obvious from square one. The houses built with that borrowed lucre stand empty or foreclosed in every corner of the country. The empty malls and testify to the cost of making money from nothing. The real unemployment is well north of 10% and the taxpayers have been forced to cover by taking on the debt themselves.

    http://tinyurl.com/nca6v7

    You are conflating the issue of borrowing and debt with the issue of borrowing and creating money. They are two different beasts. I don’t care if people sign up for debt and go deep to build something new and innovative. The system can take care of itself if the money is real.

    I DO care if when they do that, they are creating money.

    The thing is that if it is “real” money it will be in short supply when the actual available wealth of the country is fully committed to various investments. If it is ponzi-money, it will be supplied well past the limits of the available wealth and it will expand the available money without limit, continually chasing ever more elusive returns until the top-heavy structure breaks down. Because people WILL be finally discovered to be unable to pay. The only way they can pay is if someone else takes out loans somewhere else and creates money to pay them. The connection is indirect but the requirement is inexorable… otherwise they wind up unemployed and if the economy contracts it doesn’t just contract, it implodes.

    The difference isn’t academic. The reserve for demand deposits in the USA is 3% vs your 100% .

    http://tinyurl.com/d7dyfe

    respectfully
    BJ

  19. BJ + Turnip,
    Debt cannot exceed the resources of society as every debt is backed by credit, every loan by a deposit, the net debt will never exceed the net credit unless there is actual creation of debt in the absence of credit; not a result of fractional reserve but of dishonesty.
    To use the single bank explanation does not do justice to the matter. To take the gold example; I have 100 ounces of gold, I deposit 100 ounces with bank A, that bank then lends out 90 ounces of gold to another. I no longer have any gold but instead have a certificate of deposit worth 100 ounces of gold. If this certificate is itself accepted as payment due to its redeemability it may be treated as if the gold itself. Total gold: 100, total credit: 100 total debt: 100 (10 + 90). The 90 that is lent out may then be deposited with bank B in which exaclty the same process takes place and the same certificates are made: Total gold 100, total credit 190, total debt 190 (19 + 81 + 90). This repeats untill it reaches: Total gold: 100, total credit: 1000, total debt: 1000 (100 + 91 + 81 + …). There is still only 100 gold, the gold is not in two places and does not defy any laws of physics. (though to be purely pedantic it is theoretically possible to create gold out of thin air :P )
    The bank can give you your gold by foreclosing on the loans it has made, in collecting the money. That is of course assuming they hold no reserves, in reality, in the absense of a bank run, they can give you the gold as they are required to keep a significant portion of that ‘gold’ from deposits. It doesint matter if it is the same coin you deposited, what matters is that it is the same weight. I favour a much higher reserve ratio as this can almost entirly eliminate bank runs and vastly flattens out the crests and troughs.

    When you purchase a share issue you give the issuer of the share ‘gold’, this gold may then be used to fund development or, as is the case for mutual funds, to buy more shares, some of which may may be in other mutual funds. Each time the gold moves from where you have deposited it to another body opperating at effectivly a zero-reserve-ratio, this is no different than a bank and if you look at the historical evolution of funds in NZ those that were not designed to terminate tended to change to finance companies and then regional banks as the regulations changed; most of which were to do with capital volume. Each of those shares you brought are able to be traded and hopefully will hold more value than the you actually invested in the share; they are as good as money, esspecially in a market with high liquidity. This is also true of all the shares purchased by the funds in which you dirrectly and indirrectly invest.

    Put a collar on the dog, a choker chain if need be. But dont put it down just to protect your rose garden if doing so means you loose all the rest of your assets.
    I have no desire for a pre-guild society; and that IS what you are asking for. Banks and the fractional, or nihil, reserve that inevitably arises allows the new to replace the old and redundant, the innovative to replace the dull. as an engineer you should sympathise; I know of no small engineering business which could have obtained the materials to produce that they create in the absence of loans or a vastly wealthy proprietor. Society would be much poorer without such innovation.

    I propose a full reserve requirement for access/chequing accounts. A 90% reserve requirement for accesable savings accounts which require you to transfer funds to a chequing accoutn to use. a 66% reserve on defaultable term deposits, and a 0% reserve requirement for term deposits with no opt-out option. Choker chain; not the penta-whatever kill-you injection.

  20. Fractional Reserve Banking breaks just about every scientifc law known to man. Sapient please explain how something can be in two places at once,
    both loaned out to somone and at the same time sitting in another persons bank account. The answer of course is that it can’t.

    This becomes very clear if you pretend the currency is say backed 100% by gold. Then it becomes clear that all the bank is doing is comitting fraud. As its not possible for the bank to give you your gold since the bank has in fact given it away.

    If you make the argument sapient that the bank can give you someone elses gold, well then your system isn’t closed and is in fact open ended. This gold has been created out of thin air, something WHICH IS NOT POSSIBLE, note in the original discussion this gold was never specificed as being part of the system. As that is the case you can’t make it MAGICALLY appear in the system without correctly accounting for it.

  21. Fractional Reserve Sapient. Debt-based fractional reserve. The government can mess up too, but it is OUR government, not the bank.

    Debt is not good, bad or indifferent. If it exceeds the resources of the society it is a problem.

    If it is used to back the currency and create money, it is a disaster.

    http://www.youtube.com/watch?v=rC720Cl3N-0

    BJ

  22. Bj,
    While I understand your distaste for a system which inevitably focuses wealth and power in the hands of bankers I do not see the currency thus created to be fundimentally different to currency created through the will of government. The interest is no different, it mearly means more profits for the bankers. Debt is a part of any well functioning economy, the alternative is to keep your money under your matress and to work for 40 years before starting your company.
    The debt created by banks offers an alternative to doing a degree in finance for everybody whom earns money or seeks to borrow it. Like the money earned through creating shares and bonds issues, money earned through taking out a loan is backed by debt. Like shares and bonds the certificate of deposit, your account ballance, can be traded as if currency.
    The wealth and power held by bankers is not due to fractional reserve itself but rather due to, in the first instance, the lack of competition which allows for cartel-like opperations and, in the second instance, lack of government regulation to account for this lack of competition.
    Debt is good, debt is healthy; Interest is good and just; the problem lies with the cartel and the government.

  23. If money were not created from debt through the fractional reserve I would not care about interest, and you’d be correct.

    It isn’t the interest that is the problem, it is that it has to be created from additional debt in the system.

    BJ

  24. BJ,
    Ive refrained from commenting until now for the simple reason that i have no idea where you are getting your conclusion from.
    Interest on a loan is no different from paying rent on a house, paying mark-up on goods, or dividends distibuted through shares. It is simply a redistribution of wealth. If I put money in the bank it is a investment, they lend the money to someone else and act as an intermediatary; the return on investment is the interest just as if i were to instead invest the money in a house and rent it out the rent would be the ROI. No growth required.
    If I take out a loan I do so because i beleive I can make a greater profit using that money than the interest which is charged on that money. if growth is required anywhere it is in this step and, even then, only if you assume that every such withdrawal makes a greater profit; that is, growth is only neccesitated if you assume growth.

    Sleepy,
    It doesint, that is one of Bliss’ hobby horses and part of her/his basic misunderstanding of the nature of capital and currency. Being a social creditor and such she/he is constantly in search of ‘B’.

  25. Bliss, the system is either closed or it grows.

    If it is closed there is ultimately source for the $0.10 as there is no sink for $0.10 except replacement based on value depreciation somewhere in the system. The two are not required to match, and can vary independently.

    The $10 is not attributable to improved productivity ( which can be regarded as an alias for increased control entropy flow of the country ) unless there is actual growth.

    It is money someone else had to pay and for them to have it, this money was also borrowed into existence.

    When an engineer looks at a complex connected system he often employs black box analysis. He examines the energy flows and relies on the physics which demands that those balance.

    The fractional reserve debt-based fiat system is NOT in balance unless there is external input. Moreover, the methods I use predicted this bust, though not its precise timing… and while they are similar to the Austrian school in some ways, they differ in some important ways.

    In particular I have no inbuilt antipathy to the state controlling the currency.

    I do however, require that the gozinta and the gozouta match when I build a system because if it doesn’t the system does not work. This is the same rule followed by Nature in its evolution of systems.

    I maintain that a monetary system that does not follow this rule is not going to work either.

    I don’t mind that money can be created, if its creation is actually coupled to the growth of the available energy (wealth) controlled by the society as a whole.

    I don’t mind that banks and bankers exist and that they play a role in the complex interplay of savings and investment that is needed for us to have a complex society.

    I DO mind that they have the ability to create money from debt and expand the money supply without relation to the growth of actual wealth… and I absolutely abhor the power that this ability to control the currency has given them over governments throughout the world

    Jefferson and Baron Rothschild both made this same point from opposite sides of the issue, though they did not use an engineer’s tools to illustrate it. The inflation suffered since we allowed this system to overtake us is a perversion that corrupts our democratic systems and punishes everyone… except the bankers. If the banks are in control of the currency, the people are doomed.

    respectfully
    BJ

  26. bjchip

    No… there is no link between the depreciation of assets and the interest charged. They MIGHT balance, the odds are slim. The depreciation of the asset is money that is taken out of the system but depreciation isn’t useful to replace that $10 until an asset has to be replaced.

    There is none so blind.

    The economy is a complex connected system. It grows in some places shrinks in others. I explained where that $10 came from but you are shutting your eyes and blocking your ears.

    The $10 comes from the productive activities of the customer.

    No… that activity is the growth, and most of it is created by borrowing somewhere else (and the rest by depreciation/replacement) – in ever-diminishing circles. For it to work as you assert it can, the banks would have to charge a hell of a lot less interest.

    Yes that activity is growth,often very temporary – it may be increased services. (A masseuse borrows $100 to to buy a massage table and then gives 100 massages and from each fee saves $1.10 and pays back the $110 a year later. How evil is that?)

    Good things should grow! Let bad things shrink (ie have some control over *where* banks lend, or incentives to lend towards parts of the economy that need to grow or maintain themselves).

    peace
    W

  27. “No… there is no link between the depreciation of assets and the interest charged. They MIGHT balance, the odds are slim. The depreciation of the asset is money that is taken out of the system but depreciation isn’t useful to replace that $10 until an asset has to be replaced.”

    How can depreciation (a mere accounting convention) take money out of the system? Only paying back loans does so. Perhaps with capital equipment (production machinery, vehicles) become less efficient and perhaps cost more, but that only increases production costs for the firm. It either decreases profit margins to the owners or is passed onto the customers, but on a system wide basis nothing changes. No additional money comes into existence when prices rise, it merely means that some products or services will remain unconsumed. New production is merely paid for either by retained earnings (which directs money away from the consumption of goods or services created by other firms) or is debt financed.

    Credit is merely additional rivalrous claims for already existing resources i the economy. It is this which causes inflation, but this can be offset after a timelag by the higher prices stimulating additional production. Hopefully this returns prices to their former level, but with an important qualification IF there are no barriers of entry to competition. Unfortunately in the economy as it is, there are many many barriers to competition those being worse in some sectors of the economy. This is why we have such persistent inflation, which also exacerbates the above situation.

    Interest paid by the production sector does not reward any contribution of money to wealth creation. It must derive from money newly created in the banking system, which means that it must be loan-financed. Someone must become indebted to the banking system for it to be possible to sell for 110 krónur goods whose production cost only 100 krónur.
    http://mises.org/story/3391

    That doesn’t even factor in rent, which is merely a claim on the labour product of workers especially if they live in housing thats financed through speculation on the secondary real estate market. As house prices rise it causes cost-push inflation as workers demand higher wages to offset increased rent costs.

  28. Sorry didn’t mean to post the above in that form, but my laptop went into hibernation.

    It was in reply to bliss’s contention that government issued money would be inflationary and cited the above to show examples in our country’s history where the government has ALREADY put the scheme into practice. Rather successfully I might add.

    “Inflation and the destruction of the private sector.”

    “The objection invariably raised to proposals for government self-funding is that the result would be dangerously inflationary. Addressing that issue in the Winter 2004 edition of the New Zealand Guardian Political Review, Stan Fitchett explored whether the New Zealand government’s 1930s approach would create price inflation today. He confirmed with bank officials that 97 percent of the New Zealand money supply is now created by commercial banks when they make loans. The year he was writing, the money supply increased by 18,527 million New Zealand dollars, or 16.8 percent; and 97 percent of this increase came from commercial bank lending. Fitchett confirmed with banking experts that if the Reserve Bank had created 100 million New Zealand dollars to build new houses in New Zealand, the sum would have had no noticeable impact on inflation, since it was only one-half of one percent of what was already being added to the money supply annually by private commercial banks.”
    http://www.webofdebt.com/articles/gm.php

  29. 1The $10 comes from the productive activities of the customer. Meanwhile there is another person in the economy who had $100 asset that depreciated to $90.

    That is the key. There is increase from productive investment and decrease from depreciation. If they balance you have a steady state and if they do not you have a growing or shrinking economy.

    No… there is no link between the depreciation of assets and the interest charged. They MIGHT balance, the odds are slim. The depreciation of the asset is money that is taken out of the system but depreciation isn’t useful to replace that $10 until an asset has to be replaced. The replacement rate is the real measure of non-growth spending.

    I note that in times of financial stress, stuff does not GET replaced. It gets repaired, patched, run-into-the-ground and abandoned when it is beyond fixing, but replaced? Nope.

    …but I think that you’ve shown how they CAN balance in theory.

    The $10 comes from the productive activities of the customer.

    No… that activity is the growth, and most of it is created by borrowing somewhere else (and the rest by depreciation/replacement) – in ever-diminishing circles. For it to work as you assert it can, the banks would have to charge a hell of a lot less interest.

    It is a system that requires growth to work.

    respectfully
    BJ

  30. The Democratic Labour Party was formed by John A. Lee and W. E. Barnard in April 1940 immediately after the former’s expulsion from the Labour Party. The party attracted many rank and file Labour Party members dissatisfied with the Government’s performance, particularly its failure to carry out its 1935 proposals for credit and currency control.
    http://www.teara.govt.nz/1966/P/PoliticalParties/DemocraticLabourParty/en

    “Where will the money come from?��?; the Government’s answers were never explicit, but in fact a good deal of the money came from State credit created by the Reserve Bank. This institution, by an Act of 1936, had become a fully governmental body; where these expensive programmes could not be financed out of current revenue or overseas funds, the Government simply borrowed from its own bank. Neither the housing programme nor the guaranteed price could have been financed without such credit.��?

    http://www.teara.govt.nz/1966/H/HistorySettlementAndDevelopment/193549 theLabourRegime/en

    According to a book titled State Housing in New Zealand, published by the Ministry of Works in 1949:

    “To finance its comprehensive proposals, the Government adopted the somewhat unusual course of using Reserve Bank credit, thus recognizing that the most important factor in housing costs is the price of money—interest is the heaviest portion in the composition of rent. … This action showed … it was possible for the State to use the country’s credit in creating new assets for the country.”

    But Fraser capitulated to the banksters and kicked out John A. Lee from the
    Democratic Labour Party was formed by John A. Lee and W. E. Barnard in April 1940 immediately after the former’s expulsion from the Labour Party. The party attracted many rank and file Labour Party members dissatisfied with the Government’s performance, particularly its failure to carry out its 1935 proposals for credit and currency control.
    http://www.teara.govt.nz/1966/P/PoliticalParties/DemocraticLabourParty/en

  31. Fortunatly or unfortunately I have a life and cannot spend the time required to answer all the confusion here about money.

    But I will deal with this:

    The simple example then , is that

    $100 loan @ 10% interest

    Bank creates $100 in form of loan

    Customer repays $110 a year later

    Where did the $10 come from?

    The $10 comes from the productive activities of the customer. Meanwhile there is another person in the economy who had $100 asset that depreciated to $90.

    That is the key. There is increase from productive investment and decrease from depreciation. If they balance you have a steady state and if they do not you have a growing or shrinking economy.

    peace
    W

  32. bjchip Says:
    July 19th, 2009 at 5:48 pm

    While I tend to agree with some of what you say, your expectation that corporations will plan properly for the whole of society is misplaced.
    ===========
    You can see that in urban planning where houses are laid out to maximise profit (sales /ha) and developers are the last to buy into any environmental thinking.

  33. Wat

    Ah… but I never once put Capitalism at issue. I did not question its value as a system at all. Capitalism works just fine for a lot of things, and I am happy to let the market work unmolested where it is appropriate.

    But there is no relationship between the planning made by companies and the planning that is necessary for a society to thrive long-term. Which is the point being made.

    Finally, the business about the Fed has (for me) a great deal more to do with the Fractional Reserve, Debt-Based Fiat currency that it underpins, than with the Fed’s ability to dance on a burning tightrope or its principle job of blowing bubbles for its real owner – Goldman-Sachs.

    I rather expect you to agree with me on most of this. I think you are just reflexively disagreeing because it is me. :-)

    respectfully
    BJ

  34. bjchip,

    What I wrote was “What have American companies, for example, failed to plan for long term, economically speaking? What are the goods and services which are unobtainable in the US because nobody planned for them (and which are available in Communist countries, thanks to their astute planning)?

    Your response doesn’t really answer that point: just because everything isn’t exactly how you would want them is completely irrelevant; and a lot of what you describe is social planning and expenditure, rather than issues of economic dynamism and efficiency.

    We are talking about the ability of two alternative economic systems to deliver the goods. The result, by a landslide, is Capitalism – using free markets and prices to identify and meet demands. Communism, Socialism and Fascism are not even in the same league.

    You then argue against yourself somewhat by alluding to the disastrous Federal Reserve Bank – the worst and most insidious example of central planning to date in the US.

  35. “Keeping unemployed builders and other trades and supply industries in work by building more state houses for the 10,000 families on the waiting list would reduce those claiming an unemployment benefit with less need for the Government to borrow.”

    for X% this is like building nesting boxes for starlings and leaving food around (the benefit) they will just become a state dependant species and we will need more nesting boxes (and jails) as their needs increase (which they will)..

  36. bliss

    Borrowing to place money in Kiwi Saver accounts is NOT capital formulation (whether invested in bonds, property or stocks) as

    1 there is no investment in new productive endeavour
    2 it is borowed money

    Capital formulation only really results from the opportunity to make profit (which is aided by access to R and D tax credits – this is why new successful companies launched here get sold to foreign buyers and then have their R and D transferred offshore, where these tax credits exist).

    Borrowing money to plcae it in Funds to buy up existing assets is one of the last things one should do if one wants productive capital accumulation.

    SPC – for example our housing asset bubble was financed offshore and our RB was unable to stop it.

    bliss – The RB could have stopped it if we had capital flow regulation.

    Would this not be a restraint on the private business sector’s access to finance?

    SPC – The government has options it has yet to use – one is to lend to itself at zero interest and tighten creidt to the rest of the economy to compensate for this (cheaper than borrowing offshore to finance its growing debt)

    bliss – Social credit.

    Is that an argument?

    SPC – Why not?

    bliss – Inflation and the destruction of the private sector.

    Why would it cause inflation if there was a corresponding restraint on supply to the private sector? Why would a corresponding limitation on the amount lent to the private sector be any more “destructive” than your idea of regulating capital inflow? Or any more destructive than the government borrowing on the market now in competition with private borrowers?

    This way at least the government borrows cheaper and reduces tax liability in repaying the debt. And if as I said this was to result in a run on the dollar – would this not boost export returns. An increase in return enables profits and profits drive the investment of capital in production.

  37. Don’t cross the bank you will get shot by a “loan” gunman.

    President Obamas chance to be shot 0% as long as he does what the bank tells him to do.

    Also as someone who as worked in corp-america I can tell you that any company listed on the stock exchange is entirely focused on quarters all that matters is the next quarter, they can’t see out 1 year let alone 10.

    I will never again work for a company listed on a stock exchange, share holders are far too short sighted to allow a company to grow or deal with any long term strategy.

  38. oops… I missed putting in the names of the other Presidents.

    Garfield, Lincoln and Kennedy all assassinated, all opposing the fed and its fractional-reserve habit. Jackson impeached. Also opposing.

    Jefferson survived his opposition to it, possibly because he was unsuccessful in moving the issue the way he wished.

    respectfully
    BJ

  39. While I tend to agree with some of what you say, your expectation that corporations will plan properly for the whole of society is misplaced.

    What have American companies, for example, failed to plan for long term, economically speaking?

    Coal burning utilities : The effects of acid rain.
    General Motors, Ford, Chrysler : Hybrid cars
    Banking industry : Just about everything, wouldn’t you say?

    Just a few examples. Some US industries are preparing now for AGW, which should have been on their radar a decade ago but they opted for quarterly profits first.

    Aerospace : Cheap Access To Space
    Everyone : Public transit systems
    Housing Industry : Too many houses (glut)

    I am pretty sure I can come up with a few more nasties, but it isn’t really necessary.

    The issue isn’t always the absence of a good thing, it is sometimes the presence of a bad one, and planning at the societal level cannot EVER be done by a corporation unless it is formed for that specific purpose and makes its profits from being correct in its planning. In other words, hiring people to do it. Who would pay for such a thing at the societal level? Government is the only answer that fits.

    If government pays for it, with bonuses for getting it right, then why not a government department instead?

    I don’t really care either way, just finding the limits of the idea. It would have to be done professionally no matter who did it.

    ===========
    Wat, you are correct, there is no requirement for a capitalist economy to grow, but that wasn’t what I was describing.

    I was describing an economy fueled by fractional reserve debt-based fiat currency. No matter what the underlying system, the fractional-reserve with debt and interest enforces growth or failure. Which is why –

    $73.29 in the year 1908 has the same “purchase power” as $100 in the year 1808.

    $2413.71 in the year 2008 has the same “purchase power” as $100 in the year 1908.

    http://www.measuringworth.com/ppowerus/#

    …. and if you want to wear the tinfoil hat you can think about what happened to Presidents who tried to stop the process and rein in the fed.

    1881: President James A. Garfield (The 20th President of the United States who lasted only 100 Days) states two weeks before he is assassinated,

    “Whoever controls the volume of money in our country is absolute master of all industry and commerce…and when you realize that the entire system is very easily controlled, one way or another, by a few powerful men at the top, you will not have to be told how periods of inflation and depression originate.”

    The Associated Banks of New York were led by James Gallatin, a resident of Switzerland and the son of Albert Gallatin.

    The Eastern banks had agreed to a $150 million government loan package just after the Civil War commenced in 1861. They would resell U.S. bonds in England with the Barings and Rothschilds, putting the United States at the mercy of the British aristocracy.

    In December 1861, President Lincoln’s own financial plan was presented by Treasury Secretary Salmon Chase (a free-trade liberal sweating and agonizing in the President’s harness), and by Lincoln himself. Its measures included:

    * a nationally regulated private banking system, which would issue cheap credit to build industry;

    * the issuance of government legal-tender paper currency;

    * the sale of low-interest bonds to the general public and to the nationally chartered banks;

    * the increase of tariffs until industry was running at full tilt;

    * government construction of railroads into the middle South, promoting industrialism over the Southern plantation system.

    When President John Fitzgerald Kennedy – the author of Profiles in Courage -signed this Order, it returned to the federal government, specifically the Treasury Department, the Constitutional power to create and issue currency -money – without going through the privately owned Federal Reserve Bank. President Kennedy’s Executive Order 11110 [the full text is displayed further below] gave the Treasury Department the explicit authority: “to issue silver certificates against any silver bullion, silver, or standard silver dollars in the Treasury.” This means that for every ounce of silver in the U.S. Treasury’s vault, the government could introduce new money into circulation based on the silver bullion physically held there.

    “Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves.”

    Jackson was the only one to survive, but he was impeached.

    Is the tin-foil intact?

    respectfully
    BJ

  40. bliss,

    – “Some body has to dispassionately calculate which parts of the economy have the best potential for development and should grow and which parts do not and should not. In Taiwan they have a cross party cross industry commision for the purpose and it has been very successful.”

    For every example you supply of supposedly successful central planning in a democracy (are there any?), there will literally be dozens of expensive fiascos which the taxpayer has to underwrite. It is a corrupt process risking other people’s money on politically advantageous projects which end up squandering huge amounts of wealth.

    – “I agree the government (being the entity completely controlled by a political party) should not do this. But this needs to be done.”

    Even if what you are calling for were not economically disastrous, you have here stated one of the other insurmountable objections; the process would inevitably be controlled by self-interested politicians and captured by organised special-interest groups.

    Look at the Republican and Democrat parties in the US – each owned and controlled by business and labour cartels.

    – “The market cannot form long term plans.”

    What have American companies, for example, failed to plan for long term, economically speaking?
    What are the goods and services which are unobtainable in the US because nobody planned for them (and which are available in Communist countries, thanks to their astute planning)?

    Let me put it this way: how would you like Winston Peters planning the long-term economic future of New Zealand; complete with the almost dictatorial powers required to force us to comply? Because a scenario like that is the political reality.

    Finally, let’s not forget that although Capitalism undoubtedly leads to a vastly higher standard of living for the average person compared to planned economies, its essential justification is not at all materialistic; it is that Capitalism is the only system compatible with liberty.

    bjchip,

    There is absolutely no requirement for a Capitalist economy to grow.

  41. Bliss

    The discipline is inherent. You can’t create money to represent work that you don’t have the available energy to back. Of course you can “inflate” but it becomes more explicit.

    There is a requirement that the economy grow, it is implicit in the system, in order for the economy to work. Growth without any end at all.

    That is not true and you cannot back that up with any sort of evidence.

    Begging your pardon but it IS true and it is inherent in the nature of the beast.

    First, this is how the federal reserve manages money creation.

    Reserve Requirements and Money Creation
    Reserve requirements affect the potential of the banking system to create transaction deposits. If the reserve requirement is 10%, for example, a bank that receives a $100 deposit may lend out $90 of that deposit. If the borrower then writes a check to someone who deposits the $90, the bank receiving that deposit can lend out $81. As the process continues, the banking system can expand the initial deposit of $100 into a maximum of $1,000 of money ($100+$90+81+$72.90+…=$1,000). In contrast, with a 20% reserve requirement, the banking system would be able to expand the initial $100 deposit into a maximum of $500 ($100+$80+$64+$51.20+…=$500). Thus, higher reserve requirements should result in reduced money creation and, in turn, in reduced economic activity.

    In practice, the connection between reserve requirements and money creation is not nearly as strong as the exercise above would suggest. Reserve requirements apply only to transaction accounts, which are components of M1, a narrowly defined measure of money. Deposits that are components of M2 and M3 (but not M1), such as savings accounts and time deposits, have no reserve requirements and therefore can expand without regard to reserve levels. Furthermore, the Federal Reserve operates in a way that permits banks to acquire the reserves they need to meet their requirements from the money market, so long as they are willing to pay the prevailing price (the federal funds rate) for borrowed reserves. Consequently, reserve requirements currently play a relatively limited role in money creation in the United States.

    http://www.newyorkfed.org/aboutthefed/fedpoint/fed45.html

    Two things stick out here.

    First: “reserve requirements currently play a relatively limited role in money creation in the United States” – this is because the banks can borrow reserves. It is the borrowing of reserves where your example of the reserve bank “destroying money” is effective. A bit indirect and with foreign inputs available to the banks, not as effective as it should be.

    Second: “Reserve requirements apply only to transaction accounts”

    Which is to say, it is personal. If I have money in a checking account it is covered. If it is in a non-demand account, it is NOT covered by even the miniscule fractional-reserve requirement. Did you look at the links I provided earlier? The you-tube one is fairly straightforward.

    What is clear from this is that Fractional-Reserve entails the creation of money as debt. It does not represent wealth, or value, it represents someone’s promise to pay the money back. Moreover, in the current system, it is debt with interest. That’s really where the sh!t hits the fan with respect to growth. So you are right. It takes a slight addition to the basic ideas of “Fractional Reserve” banking to make it truly evil.

    I imagine that interest free bank loans would be popular. I don’t imagine the bankers being all that eager to make them. So to my thinking, the interest is part of the mix.

    http://www.federalreserveeducation.org/fed101_html/policy/frtoday_depositCreation.pdf

    http://www.youtube.com/watch?v=vVkFb26u9g8

    The simple example then , is that

    $100 loan @ 10% interest

    Bank creates $100 in form of loan

    Customer repays $110 a year later

    Where did the $10 come from?

    Unless the total wealth of the system grew by $10, the system is broken.

    The conclusion is very very clear. Unless there is another source of wealth adding into the system but NOT growth, the system is broken. It is in fact doing exactly what I expect it to do based on the assumptions I have made and my conclusions from those assumptions.

    You cannot dismiss a school of study with over 200 years of continuous development

    Ah… but economists were not ALWAYS so dumb as they are now. I don’t dismiss all of them either. The problem is that the ones who make any sense at all (and who incidentally reject Fractional-Reserves), are not anywhere near government. The lunatics who caused this problem are running the recovery from it. I am not well disposed to the idea of giving the Captain of the Titanic another ship.

    I can write a contract with you for delivery of money in 5 years, then sell that contract. That contract itself becomes a store of wealth (one of the functions of money that does not represent work – geeze) and it becomes a valuble commodity that is traded.

    A. You can’t write that contract if you can’t deliver the work to back it up. You can of course, but that would be fraud.

    B. If you are writing the contract for money itself, that is perfectly fine but you can’t borrow more than the value of the contract against it.

    C. That contract is NOT currency. It is not backed by the government of NZ promising to provide some KWH at a standard plug. It is derivative, and all it is is a promise.

    D, If you swap it for $US there must be an exchange applied that actually involves transfer of energy resources. This is going to cost rather more than it would have if you were just swapping one fiat for another.

    E. If you swap it for a house (assuming in NZ) then the person who accepted the payment is accepting your promise, not NZ $.

    It is not the same as the currency anymore. What you said is true of money now, as one promise against abstract wealth is as good as another and who the hell cares.

    When the government issues redeemable money backed by KWH the government has to be able to show where those KWH can come from, what future generation provides them.

    Your “store of wealth” is actually a “store of work” but when defined that way (properly) the physical reality is that work cannot BE stored without losses. You have to invest it just to break even. The paradigm that the bankers rely on and have relied on for centuries is exposed as a violation of fundamental thermodynamics.

    Who is going to come up with the solutions? People who study economics or people who do not?

    I would think that it will be those who do not study economics on current form.

    If the graduates of some engineering school are designing planes that crash and bridges that fall, I will find someone else to design planes and bridges for me to use. Perhaps there are some decent economists out there. Stern showed some sense.

    Not all economists can be ignorant of science. The ones running things however, have shown that it definitely is not a required topic.

    I reckon that when economists are required to take Engineering 101 to go with their monetary focus, they will regain credibility.

    respectfully
    BJ

  42. Bliss: “Whether every dollar is backed dollar for dollar or the money system as a whole is backed by economic activity is immaterial. Creating money,on its own,will always cause inflation.
    Talk about stating the obvious everyone agrees if you create money you will get inflation. However there is a BIG difference between creating fiat money from nothing and creating money because you now posses more of the physical entity you are backing that money with. In the first case NO WORK had to be done to increase the money supply. In the second case WORK did have to be done.
    Bliss: “That is what the reserve bank does when it puts up interest rates, it is essentially destroying money. When it lowers rates it is being created. It has short term effects on prices and economic activity.”
    Not true Bliss under a credit based fiat currency system, raising and lowering the central bank interest rates does not create and destroy money. What creates and destroys the money is taking out a loan and of course paying back that loan destroys money. The US central bank would love it if it was as simple as you state, they want people to take out loans right now (Inflation) the problem is no one wants to take any loans out even with the interest rate at a historically low point. In fact the US central bank can’t lower the interest rates anymore; you can’t have negative interest rates. This is why they are now printing money in the US.
    Of course I would argue that a central bank should not be “price fixing” the interest rates within an economy. A credit bubble is impossible in an economy with a free market interest rate. As the credit bubble starts to expand the interest rates would naturally rise stopping the bubble from forming. In a centrally controlled economy if the interest rate “Wizard” fixes the rate to low for to long you will indeed end up with a large credit bubble which will be disastrous for the economy as it unwinds.
    Bliss: “But I can still borrow and lend. I can still aggregate. I can write a contract with you for delivery of money in 5 years, then sell that contract. That contract itself becomes a store of wealth (one of the functions of money that does not represent work – geeze) and it becomes a valuble commodity that is traded.”
    What has borrowing and lending got to do with a fiat fractional reserve lending monetary system and a physically backed one. The answer nothing, both systems have borrowing and lending of money, however the process mechanism is completely different in both cases. One thing that is true of both systems is that your simple example IS NOT possible in either system. You Bliss can’t write a contract to delivery money in 5 years because unless you back that contract with a physical asset (Collateral) or someone deems you to be a good counterparty risk no one would accept the contract. As to your counterparty risk if I was dealing with you well I’d have to say the value of your contract in my eyes would be 0.
    Neither BJ or myself is saying that money isn’t a store of wealth so I fail to understand what you mean by your geeze statement though I do find it funny coming from a fiat fan, A fiat currency is not a store of wealth, a physical backed currency is.
    Bliss: “I can write a contract that promises to deliver one gig joule of energy in 2015 and then sell that. Or I could swap it for $USA. Or I could swap it for a house. It becomes currency and is backed by a *promise*.”

    You can promise anything you like however, because of your counterparty risk; I won’t accept your contract. An individual can’t invent their own fiat currency on the fly. Fiat currencies require the force of a government to be accepted. You Bliss can’t force me to accept your worthless pieces of paper, so Bliss your promise is not money.

    Bliss: “All this stuff can still happen with a backed currency. IT MAKES NO DIFFERENCE!!! What I am trying to point out is that human ingenuity will find a way around any simple rule you create. It will be used to enrich the powerful.”

    Do you mean fraud can happen with a contract, then yes it can, but what can’t happen is fractional reserve lending and what can’t happen is printing money out of thin air, especially with BJ’s energy backed money. A asset banked currency requires a 100% reserve requirement but to anyone every talking about asset backed currency this 100% requirement is generally assumed, note assuming the bank is not committing fraud then a bank run becomes impossible under that scenario and no you still have credit under that system.
    Bliss: “You cannot dismiss a school of study with over 200 years of continuous development based on one bad experience in stage one. That is arrogant and foolish. I had similar experiences, still do. But there is a lot of very good work happening in economics right now. Who is going to come up with the solutions? People who study economics or people who do not? Would you fly on an aeroplane designed by anthropologists because those stupid engineers built the AIr Bus 300 that keeps crashing and the space shuttle that keeps exploding.”
    Hold on there boy please don’t insult the scientific method with you ignorance. Comparing an Engineer who adheres to the scientific method and an economist who doesn’t is absurd. The reason why I let engineers build airplanes is because they practice a discipline that allows them to make VERY accurate predictions about the future. Economists have yet to demonstrate this. If economists built airplanes, judging by their in-ability to make any accurate predictions with regard to the economy, their airplanes would be falling out of the sky everyday.
    Just as I dismiss people of religious faith I can also dismiss your economic belief system. When you provide me with some falsifiable experimental evidence maybe I will take you seriously. Calling us arrogant and foolish because I don’t care about your belief system makes you sound like a religious zealot pleading that I follow your ideas system.
    Bliss: “If you paid attention to what has happened in the last 20 years in economics you might be able to see the weaknesses in the Austrian school. Nobody in economics, till recent developments, has been able to apply “scientific method”. There are some simulation techniques that will allow “scientific method” to be applied. But “scientific method” is not that useful. Very little knowledge that we find useful was discovered using “scientific method”.
    Oh I don’t agree entirely with the Austrian school, I most definitely disagree with them in regard to the free market being able to make any long term plans. For example an Austrian free market economy can’t deal with peak oil or global warming, much more so with peak oil though as you are dealing with a net energy decline, something that ALL civilizations have found very difficult to deal with in the past.

    Nobody even today Bliss is applying the scientific method in Economics, your simulation techniques are not applying the scientific method, you are simply stating you are, very similar to the intelligent design creationists within the religious sphere.

    Scientific Method is still the best method we have for understanding the physical universe, of course very little information you have obtained used the scientific method mostly because you never found any useful information to begin with. All you have is a collection of peoples opinions not backed up by any evidence. A Christian can and does call the bible a place of much valuable information however I can freely state nope its just a pile of story’s, this doesn’t make me ignorant, you can have all the BELIEFS you like Bliss, of course I don’t have to believe them.

    An economy is too complex for you to simulate it on a computer. The fact your information is useless can be gained by your inability to predict the future. If you believe your economic opinions Bliss have merit then demonstrate it by giving us a 3 month economic prediction for NZ; USA, and the world followed by a 1 year prediction and a 5 year prediction. We will then in 3 months time match your predictions to what really happen and see if any of your ideas have any merit or if they are instead just hot air.

    Until such time Bliss as you can isolate an economy in a lab and experiment on it, you will continue to be unable to falsify or test any of your theories. I am very skeptical of your claims of modeling an economy within a computer, in order to do such a thing you would first need to model the human, something the computer science community is a very long way from doing.

  43. SPC

    I agree that cutting research funding was stupid. But so is cutting capital accumulation.

    Funds will largely bid up the price of existing assets land, commercial property, stocks etc.

    That is an assumption. From memory not many Kiwi Saver funds invest in property.

    BJ

    Once the money is redeemable and backed by something the question of whether the “something” exists to back every dollar in existence becomes valid and the ability to simply create money out of thin air is diminished.

    Whether every dollar is backed dollar for dollar or the money system as a whole is backed by economic activity is immaterial. Creating money,on its own,will always cause inflation. That is what the reserve bank does when it puts up interest rates, it is essentially destroying money. When it lowers rates it is being created. It has short term effects on prices and economic activity.

    There is a requirement that the economy grow, it is implicit in the system, in order for the economy to work. Growth without any end at all.

    That is not true and you cannot back that up with any sort of evidence. Our obsession with growth has very little to do with FR banking, or any economic theory. The only time when there is an economic imperative for economic growth is if there is population growth.

    Redeemable currency makes it HARDER. Nothing can completely prevent people from cheating.

    How? A very simple question but it cannot be adequately answered. It simply makes no difference.

    Actually I think we are close to agreement. The problems come from a system where any body with the means can do pretty much what they want, in the financial system. This has led to all sorts of dodgy deals. The prevailing paradigm, in finance, has been “if it is not forbiden it is permited”. This is a fine principle in social policy and in cultural policy generally, but in finance it is wrong. It should be the opposite. Banks and other financial institutions should be very closely regulated, as it is so easy and natural for them to become a means to enrich the few at the cost of the many.

    You can’t make one of those KWH do more than a KWH of work and you can never make it do less. There is resistance to the standard manipulations of the market built into the system. You can’t even easily take it out of the country.

    But I can still borrow and lend. I can still aggregate. I can write a contract with you for delivery of money in 5 years, then sell that contract. That contract itself becomes a store of wealth (one of the functions of money that does not represent work – geeze) and it becomes a valuble commodity that is traded.

    I can write a contract that promises to deliver one gig joule of energy in 2015 and then sell that. Or I could swap it for $USA. Or I could swap it for a house. It becomes currency and is backed by a *promise*.

    All this stuff can still happen with a backed currency. IT MAKES NO DIFFERENCE!!! What I am trying to point out is that human ingenuity will find a way around any simple rule you create. It will be used to enrich the powerful.

    I do not give a rat’s rear end what economists think anymore. I had a nasty experience in economics 101 with a professor who hadn’t a clue about thermodynamics, and less understanding of physics. Explaining to him that his beloved substitution didn’t work with respect to work and energy earned me a B- in a class where I aced every exam. So my respect for economists is basically preceded by “dis” and their definitions are ignored wholesale.

    You cannot dismiss a school of study with over 200 years of continuous development based on one bad experience in stage one. That is arrogant and foolish. I had similar experiences, still do. But there is a lot of very good work happening in economics right now. Who is going to come up with the solutions? People who study economics or people who do not? Would you fly on an aeroplane designed by anthropologists because those stupid engineers built the AIr Bus 300 that keeps crashing and the space shuttle that keeps exploding.

    It is worse than that, you have to live in the economy. You can avoid aeroplanes.

    SPC

    for example our housing asset bubble was financed offshore and our RB was unable to stop it.

    The RB could have stopped it if we had capital flow regulation.

    The government has options it has yet to use – one is to lend to itself at zero interest and tighten creidt to the rest of the economy to compensate for this (cheaper than borrowing offshore to finance its growing debt)

    Social credit.

    Why not?

    Inflation and the destruction of the private sector.

    Sleppy

    On what grounds should the government favour one group of individuals over another as would be constituted by favorable tax treatment toward a particular party merely because you or they consider those people to provide some form of benefit?

    Because if it does not the economy will stagnate (continue to stagnate). Some body has to dispassionately calculate which parts of the economy have the best potential for development and should grow and which parts do not and should not. In Taiwan they have a cross party cross industry commision for the purpose and it has been very successful.

    I agree the government (being the entity completely controlled by a political party) should not do this. But this needs to be done. The market cannot form long term plans. The market has an important role, but long or intermediate term planning is not one of them.

    Why should not the prospect of a fair monetary compensation suffice to reward them for their effort suffice as it does for everyone else?

    Because then they will all decamp to Australia. Duh!

    This in itself is not incompatible with a fractional banking model, but the empirical data tells us that credit money is created independently of fiat money: credit money rules the roost.

    Well yes. Which is why fiat/backed money does not matter. But are you going to outlaw credit? I agree with strict regulation of the finance sector, but not even I could go that far!

    “Moreover, even where banks still issue loans there is a trend to “securitisation”. This means that the loans are sold to non-bank investors who are not subject to reserve requirements.”

    That is my point. The regulation style allows this.

    Turnip
    I don’t listen to people who have studied economics 101 at university

    So who do you listen to on economics?

    If I do read economics I like reading from the Austrian school mainly because they admit that the scientific method can’t be used to reach conclusive and precise theories.

    If you paid attention to what has happened in the last 20 years in economics you might be able to see the weaknesses in the Austrian school. Nobody in economics, till recent developments, has been able to apply “scientific method”. There are some simulation techniques that will allow “scientific method” to be applied. But “scientific method” is not that useful. Very little knowledge that we find useful was discovered using “scientific method”.

    Keynesian spenders have two major problems with their analysis firstly they ignore the effects of their spending over the whole system and they also ignore the source of their spending.

    What? That is incredibly ignorant. They ignore neither. There is no substitute for study!

    Just pulling something almost randomly from your tirade…

    For instance we spend money to build a bridge in a town, that town gets rich we rejoice however we ignore the fact that in 200 other towns they are now slightly poorer.

    No. The bridge builders spend their money in the town, and in neighbouring towns. All those towns need more goodsand services that they get from yet other towns.

    This is generally covered in stage I and stage II macroeconomics. There is no substitute for study.

    (Of course Hayek believed there was no such thing as macro economics. But he was wrong)

    BJ Says so well…

    The benefit of those large public works depends on the plans associated with them It is insufficient to simply spend. What is purchased has to have lasting value so that the generation that actually pays for them (it is borrowed money after all) benefits from the purchase.

    Yes! Using judgement! Properly set priorities! That is the role of political parties (in our system) ad it is the Green Party project. Getting the priorities right!

    More BJ Goodness…

    and if the works built and bought are of long term value that wealth does not disappear.

    Agree!

    His underlying assumptions about the value to the society of continual growth (common to most economists) are anathema.

    This is an underlying paradigm, it is not an economic one. It is political!

    It is through politics that we will reset those priorities!

    peace
    W

  44. Goldman-Sacks-The-Planet – GSTP

    http://www.youtube.com/watch?v=VSwWy4E6I04

    Turnip

    The benefit of those large public works depends on the plans associated with them It is insufficient to simply spend. What is purchased has to have lasting value so that the generation that actually pays for them (it is borrowed money after all) benefits from the purchase.

    I grew up going to schools built in the 1930’s borrowing books from libraries built in the 1930’s traveling on roads built in the 1930’s and it didn’t occur to me until much later, just how much work was done by my Grandfather and his peers.

    I don’t think that work was all done by large corporations. It was administered so that the wealth was spread around. It wasn’t all focused on the private sector. This government, the Obama government, the Labour government, the Bush misrule… all have been in thrall to the big corporations. That wasn’t so true back then.

    So in the current environment I suspect that your estimate of what will happen is probably fairly close, but a real public works program would ensure that smaller firms and minorities got a piece of the action as well.

    We also fail to make long term measurements since the temporary spending will go away and we will then be back into the recession,

    Will we? Since when has this been the case in the past?

    since we still haven’t corrected the problems that got us into the recession in the first place we actually wont have achieved anything and will wind up back in a recession

    The depression ended. The recessions since have ended except for this last one which we are currently enjoying. The economic “cycle” has not really been changed. Correcting the problems that both of us agree exist, isn’t going to help people to find work today and if the works built and bought are of long term value that wealth does not disappear.

    Whether we find the political and moral will to end the abuses or not. People have finite lifespans, so the economy needs a plan now to fix problems now.

    I am all for fixing the structural problems of our economy, building infrastructure and projects that reduce our imports, but I am also about building housing and other buildings that my kids can use.

    The current generation of jerry-built housing isn’t likely to last long enough for them to inherit, particularly if the climate changes and typhoons become more of an issue. The amount of expensive real-estate that will go underwater doesn’t bear thinking on either. Reducing the need for imports has both economic and AGW adaptation arguments going for it.

    We know you don’t like Keynes, and I am not fond of him either, but for different reasons I suspect.

    “private sector decisions sometimes lead to inefficient macroeconomic outcomes” – I am in agreement with this tenet of Keynesian thought. His underlying assumptions about the value to the society of continual growth (common to most economists) are anathema.

    respectfully
    BJ

  45. This is an interesting discussion.

    Money

    Firstly I would just like to clear some things up about money. Fiat Money is not wealth anyone who thinks it is very confused. Fiat Money is a claim on wealth. You can’t eat fiat money, wear fiat money or drive around in fiat money. However you can redeem that fiat money for wealth.

    Wealth is goods and services or as BJ puts it better work. Wealth is very finite; fiat on the other hand is not. This often leads people to make some very fundamental mistakes such as they believe that if you increase the supply of money that therefore makes everyone wealthier. How can that be so when money isn’t wealth but only a claim on wealth. The only way you can make people wealthier is by increasing the available work. In fact by increasing the money supply you actually make people poorer since the supply of money when it is increased is never done so proportionately. This means that over time there is a natural drift of wealth towards the bankers and away from the common people.

    A money system that is backed by something real can never be arbitrarily expanded at the push of a button. It is tied to something real and tangible such as for example Gold or BJ’s example energy. I like BJ’s energy example because it is easier to audit the resource that is backing your currency, Gold audits are virtually impossible and there is a very long history of people falsifying gold.

    Economics

    I don’t listen to people who have studied economics 101 at university since everything they have learnt isn’t based on any actual observable evidence. It is the same reason why I don’t listen to Christians telling me about their belief systems. Christianity and Economics (all schools) have a lot in common; economics has much more in common with a religion than with science, hell as BJ pointed out many economists deny the theory of thermodynamics. If I do read economics I like reading from the Austrian school mainly because they admit that the scientific method can’t be used to reach conclusive and precise theories.

    Keynesian Spending to end a recession.

    Keynesian spenders have two major problems with their analysis firstly they ignore the effects of their spending over the whole system and they also ignore the source of their spending.

    The source of spending comes from 3 places, raising taxes, borrowing and printing.

    Raising Taxes takes money away from healthy well run business which could of used the rescission to increase their market share and hired more staff.

    Borrowing money passes the cost to a future generation and that generation never caused the recession so why are you asking them to pay for it along with the interest for it.

    Printing money simply reallocates the wealth and helps concentrate in the hands of the “connected” wealthy. It also steals wealth from responsible people who never engaged in the debt bubble to begin with.

    The measured analysis is always wrong because it’s very difficult to measure say taxing someone an extra 100 dollars a year, we say the effect of that is so minuscule that we can’t measure it so there fore it’s not important. Just because you can’t measure it doesn’t mean it doesn’t have an effect. We also target our analysis either by time or location. For instance we spend money to build a bridge in a town, that town gets rich we rejoice however we ignore the fact that in 200 other towns they are now slightly poorer. We also fail to make long term measurements since the temporary spending will go away and we will then be back into the recession, however since we still haven’t corrected the problems that got us into the recession in the first place we actually wont have achieved anything and will wind up back in a recession this time with more debt than the last time. The only hope the Keynesian has is that during the Keynesian spend up the central bank manages to kick off another bubble, even though it appears that you are now out of the recession it had nothing to do with the Keynesian spending and everything to do with the creation of another bubble, which in its self just means you are facing another recession down the road, this whole scheme/scam is very un-Green as is entirely unsustainable.

    Building large public works schemes during Keynesian spending, always favors two groups in society the rich and the poor, since we would of still feed the poor anyway, they really only favor the “connected” rich. Giving me But small business’s will get some of the money isn’t backed up by any evidence. Contrary to the “Socialists” ideas small business and big business hate each other and have very little in common. All you are doing here is being rather “God” like in choosing winners and looser and helping to conglomerate business into the hands of the rich and powerful, Often times recessions are very good times for well run small and medium size business’s to grow. However thanks to the statists big spending the large “connected” corporations are bailed out either directly or via government contracts.

  46. “Building homes does not change the current account deficit.
    We import more than we export.”

    Yes it does if it means that our capital market in too small (and expensive) to pay for them so banks must resort to borrowing from offshore. Its even worse since the majority of property purchases has been in the secondary real estate markets (already built and paid for houses), which means that they are a drain on the overall economy as they cost yet don’t increase spending power in the form of wages and purchase of materials.

    SPC

    “They have no R and D tax credits, they cut the Fast Forward programme…”

    On what grounds should the government favour one group of individuals over another as would be constituted by favorable tax treatment toward a particular party merely because you or they consider those people to provide some form of benefit? Why should not the prospect of a fair monetary compensation suffice to reward them for their effort suffice as it does for everyone else? Because you presume that they would feel obliged to lower their market prices to the public out of shere gratitutde? Me thinks you’re a little naive.

    “I have never seen an example of big government spending ever working. When the government directs investment, that investment has to come from somewhere else in the economy. Thats predicated on the “wage fund” theory of capital and the exogenous theory of money that underpins it, but the former was rejected by John Stuart Mill in 1869, which was further elaborated on by Alfred Marshall, the father of neoclassical economics in the 1890s.

    “Thus their error lies in assuming that there is a fixed Work Fund, a certain amount of work which has to be done, whatever the price of labour.” (Alfred Marshall, Elements of the Economics of Industry, 1892, page 383)

    You can’t “Magic” resources into existence.”

    Sorry turnip, I agree with you in most things, but this is contradicted by the evidence.

    The creation of credit for production whether by the government or private banks amounts to the same result. Increased economic activity. The problem arises when credit is issued for the purposes of consumption (indicating that insufficient income is being paid to those who do the work) or for speculation (pointlessly increases costs and directs money away from consumption of finished goods or services.

    “In the real world, banks extend credit. . . and look for reserves later. In one way or another, the Federal Reserve will accommodate them.” (as cited in Heilbroner and Galbraith, 1990, p. 383).

    There are a number of ways through which financial intermediaries find reserves beyond their formal or legal lending capacity—ways that have come to be known as “liability management”
    http://www.cbpa.drake.edu/hossein-zadeh/papers/HowFinanceCapital.htm

    There is no evidence that either the monetary base or M1 leads the cycle, although some economists still believe this monetary myth. Both the monetary base and M1 series are generally procyclical and, if anything, the monetary base lags the cycle slightly. (p. 11)
    http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=225

    BJCHP
    “The absence of a Capital Gains tax where it counts, is symptomatic, no government will take on the property investors and apparently none ever has, though I have not lived here long enough to be sure of that.”

    Why levy a tax thats going to be counterproductive anyway? If capital is taxed and they don’t get a desirable return on investment, why would they bother risking it? This would merely result in extra costs for those who needed it as supply would fall whilst demand will stay the same and thereby giving capital a scarcity premium. We lose they gain. Why not abolish the monopoly of capital and instead mutualise the credit creation process?

    “So tying the value of a $NZ to some number of KWH, which are redeemable at regional centers in power delivered at a standard outlet makes the $NZ a fixed value currency just as gold might have, but without many of the disadvantages of the gold. ”

    That I agree with aside from the fact that I disagree that it should be limited to regional centres. I’d advocate that it should be able to be issued by mutualised associations in the form of land banks and energy co ops that would issue a currency redeemable in use-value or digital energy tokens. Perhaps even individuals who have surplus energy to the grid from their small scale energy generators should be able to do so redeemable in energy tokens.

    Your system bears a certain similarity to that proposed by H.G. Wells in his book A Modern Utopia.

    It has been suggested by an ingenious thinker that it is possible
    to use as a standard of monetary value no substance whatever, but
    instead, force, and that value might be measured in units of energy.
    http://www.online-literature.com/wellshg/modern-utopia/3/

    A compelling rationale for the idea is also provided by M King Hubbert who came up with the Peak Oil idea in the first place.

    “On this basis our distribution then becomes foolproof and incredibly simple. We keep our records of the physical costs of production in terms of the amount of extraneous energy degraded. We set industrial production arbitrarily at a rate equal to the saturation of the physical capacity of our public to consume. We distribute purchasing power in the form of energy certificates to the public, the amount issued to each being equivalent to his pro rata share of the energy-cost of the consumer goods and services to be produced during the balanced-load period for which the certificates are issued. These certificates bear the identification of the person to whom issued and are non negotiable. They resemble a bank check in that they bear no face denomination, this being entered at the time of spending. They are surrendered upon the purchase of goods or services at any center of distribution and are permanently canceled, becoming entries in a uniform accounting system. Being non negotiable they cannot be lost, stolen, gambled, or given away because they are invalid in the hands of any person other than the one to whom issued. If lost, like a bank checkbook, new ones may be had for the asking. Neither can they be saved because they become void at the termination of the two-year period for which they are issued. They can only be spent.”

    “Every one of those giant local authorities was to be free to issue energy notes against the security of its surplus of saleable available energy, and to
    make all its contracts for payment in those notes up to a certain
    maximum defined by the amount of energy produced and disposed of in
    that locality in the previous year. This power of issue was to be
    renewed just as rapidly as the notes came in for redemption.”

    http://hubbertpeak.com/hubbert/hubecon.htm

    Bliss
    “This is a tiered story but fractional reserve banking is *not* the problem. Unregulated back channel banks (the “investment” banks of Wall St. mostly) are the problem. ”

    Well thats not true even if we did merely have a fiat based fractional reserve banking system, but we don’t. We have a almost pure credit
    economy with an almost insignificantl fiat economy tacked onto it, like a pimple on a backside.

    Instead, we live in a credit economy, in which intrinsically useless pieces of paper—or even simple transfers of electronic records of numbers—are happily accepted in return for real, hard commodities. This in itself is not incompatible with a fractional banking model, but the empirical data tells us that credit money is created independently of fiat money: credit money rules the roost.
    http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit

    “Moreover, even where banks still issue loans there is a trend to “securitisation”. This means that the loans are sold to non-bank investors who are not subject to reserve requirements.”

    “Yet the evolution of private clearing mechanisms like the US net settlement system CHIPS threatens to erode the central bank role even here. The combined results of all these developments could well be to reduce, perhaps to the point of elimination, the need for bank reserves and even the need for banks and cash altogether.”
    http://www.samuelbrittan.co.uk/text14_p.html

  47. The problem with “national” money management is the borrowing of funds offshore (and investment regimes which allow the inflow of money to buy up assets) – for example our housing asset bubble was financed offshore and our RB was unable to stop it.

    The government has options it has yet to use – one is to lend to itself at zero interest and tighten creidt to the rest of the economy to compensate for this (cheaper than borrowing offshore to finance its growing debt). This would of course result in a run on the currency (because the international credit controllers are a jealous and possessive lot) and improve returns to exporters (improving tax returns to government). Why not?

  48. Bliss

    While it is true that government can still play silly games with money no matter what it is backed with, it is NOT true that it can do so without the shell game being tracked and noticed by the public. Once the money is redeemable and backed by something the question of whether the “something” exists to back every dollar in existence becomes valid and the ability to simply create money out of thin air is diminished.

    That is a necessary change if the finance system is to be brought under control of government (the people) and it is not sufficient to JUST do that.

    The issue of fractional-reserve banking is a touchy one, but it is part and parcel of the same problem. Fractional reserves brought with them debt-based money. There is a requirement that the economy grow, it is implicit in the system, in order for the economy to work. Growth without any end at all.

    This is understood in a lot of places, places where this current financial dislocation was anticipated years before it arrived.

    http://www.federalreserveeducation.org/fed101_html/policy
    /frtoday_depositCreation.pdf

    http://www.youtube.com/watch?v=vVkFb26u9g8

    Unregulated back channel banks (the “investment” banks of Wall St. mostly) are the problem.

    No I maintain that they are a symptom.. the deregulation of those banks was perhaps the final act that broke the system, but the system was broken and the bubbles being blown, long before they were allowed to create all the toxic waste they sold each other. Make-believe-money is contagious, and it is a bad idea.

    Redeemable currency makes it HARDER. Nothing can completely prevent people from cheating. It isn’t foolproof, but it makes it harder.

    Government wants to inflate, it becomes obvious because there are counters on the board that can’t be printed, but have to be earned. You want to speculate? Good, try to hoard/save “work” without losing a chunk of it. You can’t corner the market. You can’t make one of those KWH do more than a KWH of work and you can never make it do less. There is resistance to the standard manipulations of the market built into the system. You can’t even easily take it out of the country.

    You CAN remove notes from circulation, but it scarcely bears comment. You’ve made my notes more valuable if you do. If they are destroyed, the same… though the danger of counterfeits is not changed.

    Money represents work: My work or someone elses and it is exchanged for someone else’s work when I buy something. Stored value? What value is that? It is the value of my work. It IS a medium of exchange. A proxy for my actual work to earn the desired whatnot that someone else is offering – which is a product of THEIR work. It isn’t something else, or if it is you’ve defined it poorly. Making it redeemable, and in fact redeemable as work makes it much much easier to keep score.

    One thing… I do not give a rat’s rear end what economists think anymore. I had a nasty experience in economics 101 with a professor who hadn’t a clue about thermodynamics, and less understanding of physics. Explaining to him that his beloved substitution didn’t work with respect to work and energy earned me a B- in a class where I aced every exam. So my respect for economists is basically preceded by “dis” and their definitions are ignored wholesale.

    I doubt that Marxism influences me much, he may have had a similar idea… his notions of revolutionary theory and class warfare seem to be fairly sound…. but he was dumb as a stump about people… much as the Libertarians can be. I think I read him while at University… but that would be 40 years ago now.

    Nor do I agree with the libertarians about who should control the currency. I cited Jefferson first. This power belongs to the state itself.

    As for the TV, it has done well as it has been knocked down to the floor 4-5 times and hung by its connectors twice. The connectors are the weak bit. They pulled out of the back of the set. It still works and the kids are mostly grown now, at least enough for it to be safe to buy another, but I have doubts about this one’s longevity. An LCD hung on the wall. That makes sense.

    respectfully
    BJ

  49. bliss

    The governments borrowed billion dollar subsidy each year for Kiwi Saver Funds could be better used in affording R and D tax credits, Fast Forward and developing SOE venture capital funds. Borrowing to fund Kiwi Saver is not the best way of ensuring capital formation/economic growth.

    In our economy the Funds will largely bid up the price of existing assets land, commercial property, stocks etc. Those selling the assets will then invest their cash in buying up other existing assets (whose value will also be bid up by Kiwi Saver Funds). So borrowing money for Kiwi Saver Funds to buy into our market – just creates an asset bubble, whether in our domestic housing market or in stocks/comemercial property etc.

    Development of new productive capital assets depends on expectation of profit – which is absent here because of our over-valued and volatile currency and lack of tax credits for R and D/Fast Forward. Thus there are few non asset opportunities for Kiwi Saver Funds apart from company bonds (simply helping companies finance debt more directly than borrowing from banks).

    I have no objection to encouraging saving – but Kiwi Saver should only be subsidised when we are distributing a budget surplus. Better still would be where Kiwi Saver was compulsory and any budget surplus was distributed into the accounts (this would diminish inflation pressure at the top of the economic cycle) – then all people would gain and not just the half of us with these accounts. Then we would at least be buying back our existing economic assets from foreigners (one cannot really do that with borrowed money).

  50. Interesting thread. But as usual a lot of confusion…

    SPC said

    In this environment how does anyone explain the government borrowing a billion dollars each year to place in peoples private savings/Kiwi Saver? The money invested by Kiwi Saver funds might push up stockmarket prices and realise capital gains for the richer investors?

    I agree that in the very short term it is not helpful. But beyond that one of the main breaks on developing the economy is a lack of capital. That is the problem (not superannuation) that Kiwi Saver addresses.

    SPC: Taxing only real investment gains (interest) is a very good idea.
    turnip28 is very confused.

    I know the green new deal is Keynesian big spending because the entire text is using the classic Keynesian code words “This will create jobs”. The government can’t create jobs since it must destroy jobs first before it creates them.

    That is simply not true. The government can do plenty to create jobs – or more accurately to influence the economic environment such that there are more jobs to do. Encouraging people to spend on New Zealand made goods (Buy Kiwi Made is an example). The money spent in NZ delivers the multiplier effect goodness here rather than overseas.

    I have never seen an example of big government spending ever working.

    None so blind as those that will not see. There are plenty of examples the world over. Golly, such wilful ignorance!

    Turnip does not understand that the role of Keynsian stimulus is to deal with a temporary slump in demand. If left alone the slump in demand causes the rest of the economy to slump after it. Where it stagnates. If the slump can be rectified then the things that caused the slump in the first place can be fixed. In the modern world that is an unregulated secondary banking system that came to dominate the world of finance.

    I am sorry but NZ is a failed economy, I call it Iceland 2.0, your debt ratio and current account deficit all point to massive pain down the road.

    A bit dramatic, but essentially correct. Which is why the Greens have been banging on *for years* about how we must get the deficit under control. That requires regulating the private sector as the public sector has been running surpluses for years.

    go buy something written by Hayek instead.

    Hayek again! Anticommunism is not now, and never was, a coherent economic philosophy! His ideas were taken seriously for a while in the 1980s and were a dismal failure everywhere they were applied. (Depending on the definition of success. If creating an economic elite and impoverishing those not in that elite is a success, then his ideas are great!)

    BJ

    reckon that they have their roots in fractional-reserve banking,

    This is a tiered story but fractional reserve banking is *not* the problem. Unregulated back channel banks (the “investment” banks of Wall St. mostly) are the problem. They are operated by people who beer none of the down side and a big chunk of the upside risk. A mindlessly stupid system that is not being changed. And changing it is *very* difficult.

    Redeemable, or non-redeemable, currency is not the problem either. There is no fault of the money system that would be fixed by being able to exchange a dollar for a bar of gold, a killo watt hour or a shell. Still get inflation, speculation, usury, waste… You name it, still happens.

    You said: The genesis of the idea was that money represents work. Money represents stored value and a medium of exchange. AFAIK the idea that “money represents work” is an original one of yours. On reflection you may be thinking about Marx’s ideas about value. I do not know much about those ideas.

    The best things that NZ can do now involve greater self-sufficiency. Removing the need to import fuel. Restoring some of the capability to make stuff for the NZ market alone, out of NZ & Aussie resources.

    That is true. And is not to say import nothing. It is no “fortress New Zealand”. But we should save our foreign exchange for what we cannot produce ourselves and export the things we do best.

    Since I don’t have a mortgage and I have a 5 year old wreck of a TV you aren’t the only one, though I am probably going to wind up with an LCD replacement sometime towards Christmas. Simply because the TV has been brutalized by kids growing up and soon it won’t work at all. The smaller the better as far as I am concerned.

    There is the problem in a nutshell. You only got 5 years from your TV before it was a wreck! (Mine is closer to 10 years old, can only be controlled with the remote!)

  51. You may remember that one of the signs of a breakdown is expected to be the substitution of “paper” for goods on offer on the various exchanges. In particular this applies to gold.

    http://www.bestwaytoinvest.com/stories/owning-gld-can-be-hazardous-your-wealth

    The recent decision that the comex is not obligated to deliver gold to fulfil futures contracts in gold is calling into question the structure of the market. Just how much of it is in fact real and how much of the massive short position by a few banks is a play to suppress the market itself remains a question.

    The fact of the Comex determining that it is not obligated to deliver gold in fulfillment of a futures contract is a very worrying sign.

    It may mean nothing, or it may signal that the paper chase is coming to a close and the GATA gnomes have the right of things. It is not a place to play, the big boys have the game rigged like an America’s Cup Contender.

    respectfully
    BJ

  52. Jezza

    This is something I have explained a few times here, not Green policy but certainly not opposed by the party (afaik).

    The genesis of the idea was that money represents work. My work in exchange for someone else’s goods (work). That means that “work” in the physical sense has an attraction as the medium exchange. It can’t be hoarded, the supply is theoretically limited to the total output of the Sun… and it is always useful, in fact doing exactly the same amount of work for each unit you have, no matter how many you obtain.

    Gold represents work indirectly, in that a great deal of work is expended to find and obtain it, and the gold can be thought of as captured work. It is not however, useful as anything but jewelry (or really expensive radiation shielding). It can be hoarded, its supply is limited.

    The “wealth” of a nation is I think, very tightly coupled to the net energy resources available/controlled by its citizens. This wealth is comparatively simple to understand, and most scientists would be capable of auditing a country’s books with or without the cooperation of the country involved. There is no likelihood of it being faked or hidden in vaults or counterfeited (gold CAN be counterfeited, and there is no way to tell if in some of the reserves held by nations, it has been).

    So tying the value of a $NZ to some number of KWH, which are redeemable at regional centers in power delivered at a standard outlet makes the $NZ a fixed value currency just as gold might have, but without many of the disadvantages of the gold. The disadvantage? is that the $NZ is not easily “redeemed” outside of NZ. Nobody can easily remove the work from the country. The thing can’t be redeemed and the work itself transferred outside the country so its transferability to other nations is difficult to assess.

    It shifts the paradigm. If helps to couple apparent wealth with actual wealth. It makes it a bit more obvious when something doesn’t make sense as the laws of thermodynamics can’t be cavalierly ignored as they are currently to our great peril.

    Coupling this with a removal of the fractional reserve system of banking would put the banks on the back foot for good. Government controlling the issuance of and creation of money? Surely I am mad, yet Thomas Jefferson said this

    “I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

    and Andrew Jackson said this:

    Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves.

    The bankers must be overthrown and their inordinate power over government and the people must be reduced to sane proportions.

    respectfully
    B J

  53. Hey BJ could you expand on this:

    altering our currency to something redeemable (my Kiwi = KWHs scheme) .

    The only thing I could think of moving NZ to a better monetary system was the government setting aside money in the budget every year to build up gold reserves and then when they had a certain amount tying the dollar to it or by Ron Paul’s idea of just letting currency become freely tradeable…

  54. I think WFF was the better option because it targeted tax credits to families.

    As a report out this week said, we would have had 30% of children in poverty but for WFF.

    Tax cuts alone – being across the board would have delivered less support to each family household because of the tax cuts to those without children -singles and younger couples, and older people post family (many of whom will recieve the tax creidts when they start families or who see their tax helping out their children raise their families).

  55. JH

    I don’t reckon that the numbers work that way. If I am paying net tax (and I pay a hell of a net tax), the Working For Families does not mean someone ELSE is paying for my living.

    In fact the only thing I noticed the WFF doing was making the marginal tax on each dollar earned a little less onerous for the folks in the middle class.

    Before WFF the marginal tax for a family of 4 could hit 90 cents on the dollar (between 60 and 80k) remember THAT? Yet the marginal tax on a dollar earned by someone on 200K income was 39 cents. The problem was obvious.

    I don’t think WFF was the best possible solution, IMHO the correct solution was more tax brackets including some higher ones, a smoother distribution of the taxes and benefit reductions as income rises. WFF is what we got but the people who get it are still paying tax and are not being supported by someone else.

    respectfully
    BJ

  56. Funny that… NZ is an island nation, perhaps that means it SHOULD be more insular? :-)

    Since I don’t have a mortgage and I have a 5 year old wreck of a TV you aren’t the only one, though I am probably going to wind up with an LCD replacement sometime towards Christmas. Simply because the TV has been brutalized by kids growing up and soon it won’t work at all. The smaller the better as far as I am concerned. :-)

    I am putting away money for it now.

    Using CNG or LNG for fuel might work a while because new cars aren’t required and battery manufacture isn’t needed. The flip side of that is it is inefficient to convert electricity water and air into CH4 and we still get gas from Maui. Electricity storage might be better if the tech permits it and Agassi has a model that might work for NZ.

    For farmers, the issue is more a matter of CH4 capture and manure collection and composting. They may well be able to have enough CH4 without buying any. When it becomes more valuable as a source of energy they will put more energy into capturing it.

    It will be the folks in the middle who will have the most transport trouble. Electric cars and other variants are almost all viable at higher petrol prices but transport costs apart from current electrical trains and buses, will go up regardless of the fuel.

    respectfully
    BJ

  57. BJC, I am onside with much that you say from a theoretical standpoint. Many of New Zealands internal problems would be solved at a stroke by becoming a more self sufficient (and thus insular) nation.

    I’m also onside that the contibution oil based products makes to our position. Given that NZ is a low wage economy, and that many New Zealanders live and work in places where there isn’t (and will never be) usable public transport, and the cost of fuel will rise above many of our abilities to pay for it, this will bring about enforced change at some point anyway. (I’m working at this from the other end by trying to make teleworking a general reality for my employer)

    The real roadblock is the NZ population being willing accept the consequences of the position of self reliance voluntarily. We’ve become a plasma telly society, I think I’m the only person left in NZ who hasn’t mortgaged the house for a big telly!

  58. I think half the point of stimulatory spending during a recession IS that the jobs created are temporary. The point is to limit the downturn, and once the economy picks up again those who have been employed in jobs created by the stimulus package will transfer over to the private sector again.

    This is an excellent post Jeanette, and typically I can’t really disagree with anything you say. The point about having to reduce what we import is particularly important in my opinion – there are two ways to improve a current account deficit: increasing exports and reducing imports. We should be concentrating on both these aspects – not just the export side of things.

    I wouldn’t call our $8 billion oil bill “only”. Take that out of our current account deficit and a lot of our problems would be solved. For some reason this never gets thrown into the mix when analysing the costs/benefits of transport policy.

  59. Turnip, DBuckley

    People have a finite working lifetime. Recessions and Depressions have durations. Stimulating the economy to provide jobs for people isn’t wrong and it has worked to a degree. For one thing Turnip, I think that you miss a point about the public works constructed in the 1930’s by the effort that Roosevelt oversaw. Much of that infrastructure still existed and was still benefiting the society 60 and 80 years later. It would not have been built without the government doing it, and people who had some work were grateful enough not to have NO work.

    Keeping people working is part of the equation but you must not omit the value to the society of what is built. Most libertarian thought does not reckon that the society even as an interested party… and benefits to the society as a whole aren’t counted.

    I don’t agree with the analysis of some, that the effort failed completely. I don’t reckon it was completely successful either, but in terms of investment, I lived with the results most of my life, seen them in various places throughout the USA. Things were built and their children derived benefit from those things.

    The “destroying jobs” part has already been done. Was done by the collapse of an easy credit housing bubble and government subservience to the external speculators and bankers who have been “working” so hard for us. (Reserved words deleted). The penalizing of productive work and the reward of speculation has a long history in this country. The absence of a Capital Gains tax where it counts, is symptomatic, no government will take on the property investors and apparently none ever has, though I have not lived here long enough to be sure of that.

    So destroying jobs has been done and you don’t wish to create any. Let the people starve is your solution. Better we should have let the banks starve.

    The REST of Green policies are more to the point of fixing the NZ economy in a more permanent fashion. Since you do not admit that any temporary actions are useful to allow temporary problems to be addressed I assume you don’t clean wounds and bandage them, or apply pressure to wounds to prevent people from bleeding to death?

    If you want to fix the whole thing you have to take the whole answer, not the part that addresses the issues of today.

    The idea that the problems in the USA have their roots in the 30’s probably needs you to connect the dots better.

    I reckon that they have their roots in fractional-reserve banking, followed by LBJ financing an unpopular war on credit and then Nixon taking the currency off the gold standard, followed by removal of regulations on the banks, in particular Glass-Steagall and the tag team of Greenspan & Bernanke running the Fed (which should not have had the power to create money in the first place, my first cause).

    The New-Deal and the Depression and the rest all followed those causes, but can only be described as symptoms of the disease that is fractional-reserve banking. The party doesn’t particularly like the way the system currently operates. It is not officially as pointed in its criticisms as I am, but there are a lot of heads nodding when these points are made.

    hopefully we will revert back to a “small village” civilization and places like New York city will be left to crumble.

    I hope for no such thing. The vibrancy and exuberance of a place like NYC is important to society. There is nothing quite like a good Broadway show… “the Arts” almost require such a place, and going “out on the town” means having a town to go out on – one that is actually open.

    Maybe NYC is a bit larger than required, but it has a heart and people do want to live together in a group that big, where ideas spark other ideas and critical mass can be achieved.

    DBuckley has it more correctly stated. “they are specific, fundemental, structural problemsl”. … not related to anyone’s New Deal. Not likely to be solved by temporary actions taken to alleviate misery by any party.

    To get “up the scale” however, the government has to do what we have been telling it to do for years. Quit rewarding passive investment, quit favoring the property investors and the speculators. The party has spoken out on this more than once.

    So while you may think that the Green party is all about “big government” you are simply mistaken on this count. We do have some “government should do” policies that appall Libertarians, but this isn’t one of those areas. We find Libertarians can often have appalling ideas as well. :-)

    Green policy doesn’t yet contain a line about a redeemable currency, but that could change. The difference from Libertarian thought comes in how the currency is then defined and controlled and guaranteed.

    As far as the message Fitch is sending, I regard it as increasingly irrelevant.

    The need to be a “first world” manufacturing powerhouse is not clear.

    There is only so much STUFF that the world can consume and most of it has been made several times over. The economic model that Fitch is working to (and that you are referring to when you say “debtor nation and thus be a loser economy” is already broken. Which is where turnip has a better answer than yours (or Fitch’s).

    The best things that NZ can do now involve greater self-sufficiency. Removing the need to import fuel. Restoring some of the capability to make stuff for the NZ market alone, out of NZ & Aussie resources.

    Reducing imports and increasing self-sufficiency prepares us for problems that are external to our issues with the financial world. Increasing our exports of non-agricultural OR agricultural products makes us more dependent on the rest of the world at a time when overcapacity is the pre-eminent problem of the global economy and the longer term future of the rest-of-the-world appears bleak.

    respectfully
    BJ

  60. I agree with much of what Turnip28 states. Although government created jobs are not necessarily illusionary, they dont generate export earnings and do give the newly employed workers (assuming they were previously unemployed) spending power which they use to make our balance of payments figure worse.

    In a very real sense the more NZers that are working and have spending power then the worse position NZ finds itself in.

    Once again, this is all rooted in what the OECD calls productivity, we as a country dont generate enough export earnings becauase we have too many of the wrong type of businesses, and in particular, reliance on agrioculture and tourism.

    Many decades ago, agriculture was a good business for NZ to be in. The important bits of the world were all less productive then, and thus we were in the right ballpark. However, in the intervening years the rest of important world has changed; businesses with the same value stream as agriculture have moved to low wage economies, and the important bits of the world have moved up the value scale leaving NZ behind, primarily with tech and service industries.

    Thus we can never attain our previous position with agriculture no matter what we do.

    And number two is tourism. Everyone knows that the oil based product that makes cheap travel possible is going to rise in price in the coming years, and cheap air travel will be gone in a couple of decades, along with our tourism industry.

    The problems NZ face are not simple questions of are you a Keynesian or a member of some other big school of economic thought: they are specific, fundemental, structural problems, and of the sort that no government can solve directly. At best a government can influence the private sector (which as Turnip28 indirectly points out, the private sector does all the wealth redistribution that allows the government to do its wealth redistribution) to point in some sort of direction guided by policy.

    And that’s the message Fitch is sending us. Get up the value scale to where you are a fully fledged first world nation that earns its place in the world, or be a debtor nation and thus be a loser economy.

  61. BJ I have read the Green New Deal and it just comes across as Keynesian “Think Big” spend up. I know the green new deal is Keynesian big spending because the entire text is using the classic Keynesian code words “This will create jobs”. The government can’t create jobs since it must destroy jobs first before it creates them. Keynesian rings well with people who have never owned or run a business, most of the green party, and communist statists since they believe that somehow they have been gifted with the foresight to direct and control society.

    I have never seen an example of big government spending ever working. When the government directs investment, that investment has to come from somewhere else in the economy. You can’t “Magic” resources into existence.

    Here is my break down of why the Green spending is a bad idea.

    Housing
    Costs: 1.250 billion
    Jobs: 10,400
    These jobs are temporary of course the Keynesian looks at the economy at a snapshot point in time and proclaims, rejoice we have created 10000 jobs, of course they ignore the fact that maybe someone else in the economy some jobs were destroyed or the fact that in a 5 years time those jobs have again disappeared. All the greens are trying to do is prop up the housing sector even though the market is sending signals that too many people are involved in this industry.

    Clean Water
    Refer above its just temporary employment it has no long term effect on the unemployment numbers since the job runs out.

    Community
    Again these aren’t real jobs. I don’t know where you get the idea BJ that the public sector contributes to the countries economic well being. ALL public sector money must come from private sector money. People in the public sector don’t really pay taxes it’s just an accounting trick. The government pays these people money then it keeps some of that money and calls it taxes. They could just as easily pay the person less in the first place.

    Transport:
    All about creating more jobs, the policy states we will build the labor intensive parts of the rail network now so as to provide temporary jobs.

    No where in the green new deal is the actual problem with the New Zealand economy addressed? Instead the plan seeks to create temporary employment because most people think all we have to do in NZ is get through this temporary recession and then everything will go back to normal and we can pile on more debt and push the debt to GDP ratio to say 1000%. I am sorry but NZ is a failed economy, I call it Iceland 2.0, your debt ratio and current account deficit all point to massive pain down the road. You can’t put this pain off with New Deal spend ups to save jobs, since the government can’t save jobs all the government can do is get out of the way and provide a safety net at the bottom so people don’t starve. In the US and NZ we are still paying for the mistake that was the 1930’s New Deal.

    When you factor the above with the baby boomers retiring and the fact some idiot politician’s promised them they could receive money at age 65 along with health care, which gets progressively more expensive the older you get. You have to ask a very simple question show me the money?

    Change is coming BJ and once we have progressed through this change I don’t think our society or civilization will look anything like it does today, hopefully we will revert back to a “small village” civilization and places like New York city will be left to crumble.

    Finally BJ I would suggest you throw out your Keynesian books and go buy something written by Hayek instead.

  62. Turnip28 says: Building homes does not change the current account deficit.
    We import more than we export.
    The people of NZ need to give up their computers,healthcare, cellphones,cars etc.
    A country that exports third world products can not expect a first world lifestyle.

    My gut instinct makes me think that in essence there’s not much to disagree with here – except for very different reasons, I believe. From now on there’s really going to be only one world…. and a very changed one at that. No-one will give a toss about ‘current account deficits’ in a few years, because every nation that spends to sustain an unsutainable olde worlde economy will have one….
    The recession won’t ever go away- global resources are too limited against the background of overpopulation, overconsumption and inflated money supply (even after the meltdown).
    Coping with the effects of climate change, ocean acidification etc etc will demand a huge slice of our ‘standard of living’ for ever and and ever, amen- if we are in time and lucky.

    Fitch, S & P. and the other audit agencies are just whistling in the winds of change.
    We need our leadership to acknowledge there is a huge paradigm shift occurring, and to help us to reprogramme our notions of ‘sufficient’ and ‘self sufficient’. We need to redefine concepts like ‘work’ and ‘standard of living’ and to begin on the hard task of sloughing off whatever aspects of our ‘lifestyle’ is irrelevant or unconscionable. Cuba had to do this in the 90’s as a result of geopolitical changes, and it was achieved though not with ease.

    I think this Fitch issue as media have delivered it is a massive (blue) herring.

    Or am I just a Jeremiah with unresolved anxiety issues?

  63. Fitch is quite right to be sceptical about the National’s policy line on our economic future.

    Mere cost cutting does not make our economy sustainable. What National is doing is a reprise of their 1990’s programme – it’s about enabling profit making by the private sector few at the expense of workers, the environment and public sector capability.

    It deliberately refuses to address speculation on assets – thus continues the discrimination against the productive sector of the economy. That this speculation is dependent on foreign flows of capital (to buy out our remaining assets or to finance our spending) should be of concenr to a credit ratings agency. S and P is of course the one of renown but has a poor track record (banking crisis).

    National panders to the speculative greed of asset holders and property speculators – it’s incredibly irresponsible. Frankly they are so unwilling to do the right thing by the people that it is not competent to govern.

    They have no R and D tax credits, they cut the Fast Forward programme and they have made little move to increase state housing stock as we move to a housing shortage (because of a decline in private sector investment and rising migration inflow) and rising rents (all to please their landlord mates with a property price recovery). This on top of power prices and food price rises (much higher than the CPI for years) will leave those on benefits suffering poverty not seen here before (WFF does not help these people).

    In this environment how does anyone explain the government borrowing a billion dollars each year to place in peoples private savings/Kiwi Saver? The money invested by Kiwi Saver funds might push up stockmarket prices and realise capital gains for the richer investors?

    So for the sake of these investors – public schools and hospital staff are to receive no pay increases let alone adequate operational funding and many of those on benefits will be left reliant on charity and we under invest in new house building (presumably the government wants a shortage to push up prices to help their landlord mates make untaxed capital gains)

    Why is there no move to increase domestic savings by reducing tax on savings interest – by removing the CPI level of the return before tax is assessed? Why is rental property not treated as a business and taxed accordingly – including tax on the capital gain?

    Why does a government that claims to believe in productivity want to handicap business by denying them any R and D tax credits (without which how can they compete with overseas companies in innovation)?

    Unless National is just incredibly incompetent, the only answer is that they do not govern for us, they govern in the interests of a few of us and their international capitalist monopoly playmates.

    Any reputable credit rating agency would have to note it’s not the way to run a country responsibly. It’s more akin to a pyramid selling scam. Its hardly a surprise that those who make money here later reside overseas with others of their class merely retaining holiday homes here (as do some of their foreign playmates).

    Anyone prepared to bet against John Key living in Hawaii during the term of his successor?

  64. Turnip

    I won’t address the public sector, the Green party wants lean and efficient government as much as anyone. This fails to impress.

    The second two paragraphs are interesting. What products do you suggest we export? Something everyone else can build and export?

    We’re too far away for that to work.

    What we have that others don’t is a country that can grow more than it can eat and produce more renewable energy than it can likely use. We haven’t exploited that second advantage as fully as we should, but it exists regardless.

    The keys to NZ financial security have to be in NOT importing stuff we can actually make here, and altering our currency to something redeemable (my Kiwi = KWHs scheme) .

    Our market is “too small” to achieve full independence, but moving to electric cars with something like this guy’s scheme

    http://greenprophet.com/2008/09/05/2522/electric-car-shai-agassi/

    -and making the kiwi $ redeemable but only in NZ has an effect on trade balances. Unlike gold, people cannot easily collect our energy and remove it to some other country.

    The Green new deal is an actual plan to spend what money we do have more effectively. Green policies are more likely to work than the current government’s disorganized response.

    Decriminalize drugs and get a big savings on prison construction.

    Build adequate and insulated housing and save energy and keep the builders employed

    Public transport investments instead of roads means 40% more jobs….

    Did you just respond with your preferred ideological insult without having actually read the plan? It seems so…

    Never mind.

    BJ

  65. “There is not much compassion in international circles for people who have been living beyond their means for many years and expecting others to save on their behalf.”

    just watching Close Up; a poor blighter got meningitis in his brain and it made him deaf and dumb but because it wasn’t an accident he can’t get much help>>>>>>>>>>>>>> on the other hand someone gets a couple of women up the duff and decides he’ll be the knight in shining armour and be the care giver while the taxpayer is the provider….. Cool eh? :wink:

  66. I thought you were a paid up member of the Greens, Turnip..?

    The only problem with the Green New Deal is it is about 20 times too small and doesn’t contain a compulsory superannuation scheme…

  67. No we need to gut the public sector

    Building homes does not change the current account deficit.
    We import more than we export.

    The people of NZ need to give up their computers,healthcare, cellphones,cars etc.

    A country that exports third world products can not expect a first world lifestyle.

    The Greens fail to mention that in their “Greens Spend more money we don’t have new deal.”

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