Newsletter No. 27 - November 2009

Links to other Newsletters can be found here.

CONTENTS

1. Reflections On The Past Week

2. The Financial Sector Harms The Real Economy

3. Money As A System Of Systems

4. "Massive, Radical Reforms" Are Needed

5. The Public Money Supply: National And International Monetary Reform

(2) Robert Poteat on why "the bank credit/debt money system is unavoidably inflationary" 

(3) Lowell Manning on the inflationary gap between wage/salary earnings and returns to investors

(4) How the international monetary system creates crises

6. Land Value Taxation

7. Other Important Topics

(2) When markets are poison.

(3) Opposing a "profoundly distorted picture of our world"

(4) Political and corporate lobbying in UK

1. REFLECTIONS ON THE PAST WEEK

Not a good start. A leading article on "Back to the Future" in The Times (London), Monday 2nd November states that "Capitalism is the most efficient way of creating wealth and also of spreading it. ... Above all, an efficient economy requires faith in the banking system".

The writer clearly hadn't realised that such statements say little more than "Hurrah for business as usual" or "We must have change", unless you define what you mean by abstractions like "capitalism" (and "socialism"), "efficiency" and "creating wealth" - what their practical implications are for the real world of today.

For example, how did that statement connect with the next day's government announcement of a new shake-up for the UK banking system? Did it suggest we should have faith that "an efficient economy" would be restored by feather-bedding the restructured banks with a further subsidy of £40 billion taxpayers' money?

Would our faith in the banking system then be further enhanced by the announcement three days later that, having already bought up £175 billion worth of assets - mostly government debt - to help the banks, the Bank of England had decided to expand "quantitative easing" by another £25 billion?

Does the The Times' statement have any relevance to Lord (Adair) Turner's recent suggestion, as head of the FSA (Financial Services Authority), that the British private financial sector has become "too swollen" for the good of the economy, and that some parts of it make no useful economic or social contribution at all? - see www.jamesrobertson.com/news-sept09.htm.

Gordon Brown enthusiastically congratulated the City of London in his Mansion House speech of 21st June 2006, for its financial and business services having achieved a larger role in the British economy than financial services in any other major country! - see www.jamesrobertson.com/news-jul06.htm. How do we reconcile Adair Turner's "too swollen" charge with that?

If Adair Turner or Gordon Brown or any other government financial authority, or any political party - or indeed any established NGO or academic body - seriously wanted to make a useful contribution to public understanding of our money system and to public policy for it, wouldn't they commission an independent analysis of the costs as well as the benefits for our society and economy from our private financial sector in the past ten years? Why has none of them done so?

Is it perhaps because they share Adair Turner's view that it is dangerous to let politicians and the public understand how the money system works - that, for example, "the present convention of non-transparent money creation is based on well founded fears that governments will abuse direct control of money printing presses" (see his article Europe's Best Defence Against Deflation, Financial Times, 4 November 2002. For more, see p.34 of my and John Bunzl's book Monetary Reform - Making it Happen).

Have the authorities in our supposedly democratic country been deliberately concealing from citizens and their representatives how the money system they manage for us now works? Yes, of course they have.

In the last few weeks, this lunatic saga has continued to unravel. It still has further to go and more to reveal. Developed by us oh-so-clever humans and used by no other species, the idiotic way we allow our money system to be managed would be a joke - if it didn't cause suffering to billions of people and other creatures around the world.

Around the world now, thousands of politicians, officials, experts, NGOs, commentators and journalists from many countries are preparing for the Copenhagen global climate conference in December. Already they accept that it won't produce a binding treaty, only prepare the ground for the possibility of one at a later date.

More important in the long run, none of them seem to understand the link between the global environmental threat and global finance. It is that the world's money system now imposes a perverse calculus of values on countries, places and people everywhere.

This both encourages the better-off minority to try to preserve and expand their privileged economic and social positions, and compels the poorer majority to try to survive and maintain themselves and their families, in ways that are bound to overwhelm the planet's resources, including its capacity to absorb carbon and other climate-changing emissions. Without the worldwide money system's radical reform, any eventual climate treaty is bound to fail.

The week ended on a rather better note. On Saturday 7 November the dear old Times, which steadfastly refuses to publish letters I send them on these matters, carried a centre-page "Opinion" article by Janice Turner, one of their regular writers: "Let's target our ire on the things that matter".

It was one thing, she said, to pursue the "gratifyingly easy scalps" of errant Members of Parliament who had got taxpayers to refund their expenses on things like duck houses and dog food. But what about the really serious damage that the bankers had inflicted on almost everyone but themselves?

"It was too complicated, too hard on the old attention span, to bring to account the slippery charlatans who stole our billions. Perhaps the lack of sustained rage against the City is down to a deliberate obfuscation of the facts. 'You little people' say the bankers, 'can't comprehend the algorithms of international finance. Just remember one thing: how critical it is we're paid egregious sums even when we've failed'."

Spot on. In other words, Bankers rule, OK?

2. THE FINANCIAL SECTOR HARMS THE REAL ECONOMY

In " How the Servant Became a Predator: Finance's Five Fatal Flaws" William K. Black's message is that "the financial sector is a tool to help those that make real tools, not an end in itself. But five fatal flaws in the financial sector's current structure have created a monster that drains the real economy, promotes fraud and corruption, threatens democracy, and causes recurrent, intensifying crises".

Black sees the first fatal flaw as follows. "Even when not in crisis, the financial sector harms the real economy. It is vastly too large. The finance sector is an intermediary - essentially a "middleman". Like all middlemen, it should be as small as possible, while still being capable of accomplishing its mission. Otherwise it is inherently parasitical.

Unfortunately, it is now vastly larger than necessary, dwarfing the real economy it is supposed to serve. Forty years ago, our real economy grew better with a financial sector that received one-twentieth as large a percentage of total profits (2%) than does the current financial sector (40%). The minimum measure of how much damage the bloated, grossly over-compensated finance sector causes to the real economy is this massive increase in the share of total national income wasted through the finance sector's parasitism."

Click here for the full text. Thanks to Steve Kurtz for the reference.

3. MONEY AS A SYSTEM OF SYSTEMS

To understand how money works, it helps to see it as a system of systems that interact with one another. How a money system operates and what money values - prices of some things compared with others - arise from it are largely determined by

The need for radical change in all three of the above is briefly explained in answers I gave to questions (www.sidint.net/after-the-crisis-the-need-for-a-new-monetary-system) about my contribution to Development, Vol. 52, Issue 3, September 2009.

4. "MASSIVE, RADICAL REFORMS" ARE NEEDED

Mason Gaffney is the author of many books, including (with Fred Harrison) The Corruption of Economics. His latest is After the Crash - http://eu.wiley.com/WileyCDA/WileyTitle/productCd-1444333070,descCd-description.html.

Here is an extract from " The four vampires of capital " by him in Land and Liberty, Summer 2009 - www.landandliberty.net/uploads/landl1224.pdf.

The changes I propose are massive and radical, I know; but we have been massively, radically wrong, and the times call for massive, radical reforms. People will resist, will object, will twist and turn and contort in dozens of ways, as Washington now does, to protect banks and landowners and the current power structure, resisting the unwelcome inevitable. They have eaten, drunk and been merry on low taxes, cheap credit, foreign loans and rising land values. Meet The Great Reckoning: it is time to foot the bill. We can do it and turn America healthy in one stroke by taxing land values and rents to retire public debts."

5. THE PUBLIC MONEY SUPPLY: NATIONAL AND INTERNATIONAL MONETARY REFORM

(1) Two petitions to the UK Prime Minister are now open for signature. I warmly recommend British citizens to sign both. They are at:

http://petitions.number10.gov.uk/Money-creation and

http://petitions.number10.gov.uk/Broadbandfunding.

They are an interesting pair. The first supports monetary reform on principle; the second supports a step towards the principle of monetary reform as a way of financing urgently needed investment in an important item of public infrastructure.

(2) Robert Poteat's paper for the 2009 conference of the American Monetary Institute explains why "The bank credit/debt money system is inherently and unavoidably inflationary." See http://monetary.org/moneyscenesix.htm.

(3) Lowell Manning, a civil engineer in New Zealand, is one of many monetary reformers who have come from more practical professional backgrounds than economics. He has developed an up-to-date version of Irving Fisher's equation which has served as an analytical basis for many monetary reform proposals since the 1930s.

I hope Manning's work will come to be accepted as important for economists, as the need for monetary reform belatedly penetrates their professional minds.

One practical conclusion is that:

"the effect of unearned interest on deposits is to transfer claims on the real wealth of the nation from those who produce the economic output to those in the investment sector who produce nothing. Houses and other assets become more expensive in terms of the inflated prices in the investment sector but must be bought using the less inflated money of the productive sector.

Unless inflation in the investment sector and the productive sector are equalised, there must be an ever-widening gap between debt-bound wage and salary earners on the one hand and the participants in the investment sector with net deposits in the banking system on the other."

A short version of Manning's findings is at www.flowman.nl/lowellshortpaper20090706.htm. For the full version ask him (his email is manning at kapiti.co.nz) to e-mail you a copy of 090527A final.doc.

(4) HOW THE INTERNATIONAL MONETARY SYSTEM CREATES CRISES

This Bretton Woods Project report identifies four main features of the current international monetary system.

First, floating exchange rates have been enormously volatile.

Second, the dollar's central role as the world's reserve currency allows the US to borrow cheaply and to continue borrowing indefinitely, with very damaging consequences for the rest of the world. Though American monetary and fiscal policy decisions can impact all other countries, the US can ignore this.

Third, there is little effective international oversight and control over the international monetary system.

Fourth, the rules, institutions and norms of the international monetary system are guided by the ideology and economic model known as the Washington consensus.

The report argues that: "The international monetary framework which emerged after the collapse of the Bretton Woods system in the 1970s has proved volatile, damaging and prone to crises. It is time for a fundamental redesign and the introduction of a global reserve currency, to help stabilise international exchange rates, smooth commodity prices, promote international economic cooperation, and prevent future financial crises."

It concludes that a fair, transparent process should negotiate the necessary reforms, involving all countries and open to civil society and parliaments, under the auspices of the United Nations. This has been demanded by thousands of civil society organisations, but the leaders of the G20 have not yet heeded it.

Click here for the full report.

6. LAND VALUE TAXATION (Also see Item 4 above)

ALTER (www.libdemsalter.org.uk) launched a new 100-page paperback on The Case for a New People's Budget at the Liberal Democrats' Conference in September. It marked the centenary of Lloyd George's People's Budget in 1909. It has a Foreword by Vince Cable.

It contains 10 essays as follows: "The People's Budget"; "Land Value Taxation and Transport"; "Business and Enterprise"; "Food Scarcity and Farming"; "Utility Companies"; "Housing"; "Poverty and the Welfare State"; "Banking & Finance"; "This is How We Do It"; and "Sustainable Taxation & Modern Liberalism".

The last two chapters - by Tony Vickers - deal with key practical questions for the present and the future. But all convey how much better off we would be if we replaced existing taxes with LVT.

I recommend it warmly. It costs £5.50 inc. postage and packing from

Catherine Hodgkinson, 51 Demesne Furze, Oxford Ox3 7XG

or contact Tony Vickers (his email address is tonyvickers at phonecoop.coop).

Click here for a report on the Irish government's decision to introduce Land Value Taxation, and here for the role played by the Irish NGO Feasta in making that happen.

Click here for news about the mutual support developing between LibDem ALTER (Action for Land Taxation and Economic Reform), the Labour Land Campaign and the Co-operative Party on LVT.

7. OTHER IMPORTANT TOPICS

(1) "Altruistic Economics: The gift culture and the end of extinction". In issue 18 of the always excellent Pacific Ecologist (www.pacificecologist.org/archive/18), Jonathan M Newton faces up to the fact that "our current alienated, resource-wasteful economic activity and antiquated banking and money systems are inadequate".

(2) When Markets Are Poison. "Studying the financial crisis and the climate crisis together can provide useful tools for understanding how to tackle both. Overconfident commodification of uncertainty (in the form of a trade in new and complex derivatives) helped precipitate a global economic crash. Overconfident commodification of climate benefits (in the form of a trade in carbon) threatens to hasten an even worse catastrophe" - www.thecornerhouse.org.uk/summary.shtml?x=565377.

(3) Media Lens (www.medialens.org) responds to the "profoundly distorted picture of our world" presented by the increasingly centralised, corporate nature of the media - providing a "propaganda system for corporate and other establishment interests". The "costs, in terms of human suffering and environmental degradation, are incalculable".

(4) Political and Corporate Corruption and Fraud. Click here to read about action proposed by the UK House of Commons to regulate political lobbying of the UK government.

James Robertson

11th November 2009