MD: We see a lot of articles that try to parse money and prices. There isn’t just one money. There isn’t just one kind of price. Let’s see if that’s what is going on here.
While there are times when businesses barter and trade services for goods or vice versa, most business is conducted on the exchange of money. Everyday, people and companies issue orders to pay and promises to pay. They sound alike, and are both considered negotiable instruments, but they differ.
MD: What makes an instrument “negotiable”? Is it a legal thing? Is it a lore thing? Is it a private agreement thing? Is it an association thing?
What Is a Promise to Pay?
Also called a promissory note, the most common example of a promise to pay is a utilities agreement. But loaning money to a friend or family can also be considered a promise to pay, since the stipulation in your loaning the money is that the person has promised to repay it. While oral promises to pay can technically be enforced by courts, it’s always better to issue a promissory note in writing to protect yourself. After all, your car loan, mortgage and every other loan or payment plan you’ve agreed to is in writing for good reason.
MD: What is it about a “utilities agreement” that gives it the distinction of “a promise to pay”. Is it because I use the good or service “before” I actually pay for it? If that is the case, we at MD know that would be considered money creation…just as if a credit card was used. And we distinguish this from a pre-payment (which is a debit card) or a retainer (which pays lawyers before they deliver services.)
Promissory notes can also be referred to as just “notes,” and typically, only two parties are involved. There’s the maker, who is the person borrowing the money or promising to pay money in exchange for a product, service or ongoing service. Two, there’s the payee, who is the person, company or institution to whom money is promised to be paid. For example, if you sign a promise to pay agreement with a Verizon sales kiosk, you are the maker of the agreement or note, and the kiosk company is the payee that will receive payments you’ve promised to make at designated intervals.
MD: So a “promissory note” has the notion of a “borrower” and a “lender”? Why do they call the borrower a “maker”? Could it be because a “promise is being made”? And they call the “lender” a “payee”? Is a lawyer’s retainer a “promissory note”? Are we to confuse what’s going on here as “money creation”? Of course not. You can’t take any paper related to this agreement and trade it for a candy bar. That’s the sub-minimal test.
Meeting the terms of agreement with most promissory notes should be clearly explained in the note. If you go to Verizon.com to pay online and you pay that month’s bill in full, you’ve met the terms of your promise to pay – for that month, anyhow.
MD: And the “terms of the money creating promise” clearly explains the promise and “who” is making it…and the agreed delivery terms. The “real” money process implicitly set’s the terms of the obligation…which are universal…no individual trader gets special terms…i.e. no individual trader gets special treatment regarding forgiveness or acceleration of the promise. But it’s important to remember, a “real” money process mitigates DEFAULTs immediately with INTEREST collections of like amount? Who pays the interest? Irresponsible traders (those new to the process or who have a record of DEFAULT). And those new to the process who deliver responsibility get their INTEREST payments returned to them, and they are applied to other new and/or irresponsible traders. The process, like any chemical process, requires a continuous flow and minute monitoring and adjustment. It’s a perpetual automatic negative feedback system…which is always stable.
What makes a promissory note different from an actual loan contract is that a loan contract is more regimented in details. For instance, your car loan payment is for $469 monthly. It doesn’t fluctuate. On the other hand, perhaps your Verizon contract includes a monthly installment of $229 for your new iPhone, but while the base plan is consistent, calling totals and add-ons for your bill can fluctuate monthly. So, your agreement is that you promise to pay the monthly charges as indicated by a bill issued on or after a specific date monthly.
MD: And what is it about a “promissory note” that requires a “more regimented set of details”? Here’s where the parsing begins. Note, the Verizon contract is really two separate trading elements…neither of which are money creating elements. You promise to buy the phone with regular monthly payments. You agree to pay for the service monthly for a specified term. But here again, neither of these are “money creation”. You can’t exchange the promise or any part of it for a candy bar…not ever. You may be able to trade it to someone else for money…but it is never money itself. Alternately, if the customer creates money in the “real” money process, he can use that to trade with the vendor. Once that’s done, the trade with the vendor is complete. But the trade with the “real money process” is just beginning.
What is an Order to Pay?
Also called a “draft,” this negotiable instrument is an order to pay money as opposed to a promise to pay. These can also be referred to as an “order paper” or “order instrument.” Examples of orders can be a check or a bill of exchange. Have you ever noticed that a personal check states “Pay to the order of” before the payee line? If you’re written in as the payee, once that check is presented to the bank, the bank has been ordered to pay you.
MD: First, the “pay to the order of” is not distinctive from “pay by order to”. In fact, the latter would be more appropriate as the example is of the “bank” being ordered “by the bank’s depositor” to make the payment. They’re called “demand deposits”. Curiously that common nomenclature is not referenced here.
Does an “order to pay” mean force may be applied…and that’s distinctive from a “promise to pay” because delivery on a promise can’t be forced? Here’s where a “real” money process has to reflect some experience. It can’t demand sale of a house if you fail to make a payment on time. It can demand sale of a house if you obviously have no intention of making up payments.
We can probably learn much from those gaining experience with Full Self Driving (FSD). They’ve been calling this Artificial Intelligence (AI). But no “intelligence” is ever built. Rather, “experience” is perpetually collected. If a “real” money process is using these techniques in monitoring delivery on promises, in time it will distinguish between a deadbeat, and a trader who has just stumbled. One attribute to be noted might be the trader’s previous stumbling incidents and history of ultimately delivering. Since money has no “time value”, time is “not” of the essence. And since “everyone is able to watch”, that brings another measurable attribute into the process.
Like FSD, a RMP (Real Money Process) will learn from experience…successes and failures. One thing is certain. The FSD will minimize collisions. The RMP will minimize (and immediately mitigate) DEFAULTs.
There are typically three parties involved in an order to pay. There’s the payee, the person to whom the funds are to be paid. Then there’s the drawer, that is, the person who fills out or at least signs the check. Finally, there’s the financial institution that will issue the funds to the drawee of the check, the person who endorses and deposits or cashes it.
MD: And none of these are money. While I can write a check, you don’t have to go to my bank to get money for it. You can “deposit” it in your bank and write a check against it there. Or you can get cash from your bank. This is because all banks form a collective. They have a “clearing house” that does all this record keeping. In the USA since 1913 the banks have been chartered by the FED. That system has been “gamed” from its inception. First, it gives the banks their 10x leverage privilege. Further, beyond just reconciling and clearing transactions, it has taken upon itself to control the economy…i.e. to have full employment and a 2% inflation target…while being totally unable to affect employment and delivering 4% inflation on average. It “is” the scam. A “Real money process” will compete the FED out of existence.
An order to pay, such as a check, must be endorsed, or signed, to receive funds. But once a check has been endorsed by the payee, it becomes a “bearer instrument” rather than an order instrument. This means, anyone who bears or holds the check is now legally able to receive the funds. Today, most checks no longer need endorsing if they are deposited through an ATM. Otherwise, they can be signed at the last moment when depositing or cashing through a bank employee. To stay safe, never endorse order instruments until it’s time to get paid.
MD: And this implies “controlled authentication”. And it is weak beyond belief. Very little scrutiny is made of the signature…and when it is, it is not by a professional. You can easily forge a signature. In the case of a dispute, the bank finds ways to say they weren’t at fault. But such forgeries are common in the current systems. Governments don’t even sign their checks. Rather, they use the signature as “advertisement” of someone holding government office. And governments are openly “counterfeiting”. They never pay that check. They just collect them and periodically “borrow” from the FED (who has nothing to loan) to cover the payments. And they use that borrowing to pay back previous borrowing. They just “roll over the debt”. And that’s DEFAULT. And none of the taxes that government collects goes to payment of those checks. Rather it “all” goes to paying the FED (i.e. the money-changers) INTEREST on so-called “loans” of money they never had in the first place. It’s a brilliant con…and it gets competed out of existence by a “real money process”
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MD: I just tripped over this podcast transcript while reviewing some of my archived material about money. It’s current (e.g. June 2022). Let’s see if there’s anything in here to agree with. Note: If you’re new to Money Delusions, read the right sidebar. It’s all you need to know about what money really is. It is a necessary perspective to observe what is going on.
Part One: https://www.youtube.com/embed/XDo7HykYN9k?feature=oembed
Part Two: https://www.youtube.com/embed/I-xWgLertkg?feature=oembed
Jonathan Brown Michael, welcome to the podcast.
Michael Hudson It’s good to be here. I’m looking forward to it.
Jonathan Brown Michael, I think you have one the most extraordinary upbringings and journeys into economics. And I just wanted to give our listeners just some sense of how you got from being the godson of Leon Trotsky all the way to what I consider to be probably the most important economist in the world today.
MD: Godson of Leon. Hmmm. Communists aren’t usually renowned for their knowledge of money. In their system there is no trade…so there is no need for money.
Michael Hudson 00:23 There’s no direct causality there that could have been anticipated. I never studied economics in college, because I went to school at the University of Chicago. We know that there were some students at the university who were at that business school. They were such strange people that we never even thought of going near them, because there was something otherworldly about them, something abstract.
MD: Interesting perspective on the U. of Chicago…home of the monetarist god, Milton Friedman. Hudson says they were “such strange people”.
My degree was in German language and history of culture, because the head of the History of Culture Department was Matthijs Jolles, a German professor and translator of von Clausewitz, On War. And in at the time, my intention was to become a musician. And I had to learn German in order to read the works of Heinrich Schenker. In music theory, my teachers were German. And for the History of Culture, most of the books that I was reading were, were all in German. And the German professors were also heads of the Comparative Literature Department and other departments. That meant that I could take all the courses cafeteria style at the university that I wanted.
MD: So he is so interested in music, he will learn a foreign language (German) to master the works of a composer (Schenker). Now, in the land of making trades, who out there is willing to make such a trade. And this is clearly a trade spanning time and space…lots of time…and lots of space. How does one carry out such a trade while still in college? (i.e. lowest money source; highest money sink; in most peoples’ history.)
I had to go to work when I graduated. I went to work for a while for direct mail advertising for the American Technical Society, a publisher a block away from the university, and then went to work for Free Press that was headed by Jerry Kaplan, a Trotskyist follower of Max Shachtman. And he wanted to send me to New York to help set up Free Press there.
MD: So what did he graduate in? If it was this music focus, or language focus, do you go into “direct mail advertising” (i.e. “junk mail”)? Some trades spanning time and space seem worse than oblique.
Soon after I came to New York, Trotsky’s widow died. And Max Shachtman was the executor of her estate. He thought I should go into publishing by myself. And I had already had the copyrights for George Lukacs, the Hungarian Marxist and I thought tried to get funding for a publishing company with Trotsky’s works and other works. I’ve been writing a history of music and art theory. And needless to say, I didn’t get any funding because nobody was at all interested in publishing the works of Trotsky. I even tried to get Dwight Eisenhower the write the introduction to his military papers, wouldn’t work.
MD: Is this name dropping? Dwight Eisenhower…that military genius (or uber bureaucrat) from Kansas? Time to google Hudson and see how old he is. I was in 2nd grade when IKE was elected…and just barely born when he stormed France’s beaches. Hudson’s got to be ancient. Turns out Hudson is only 5 years older than me. Scanning forward it looks like more “name dropping”. Let’s just go along to get along.
I was urged to meet Terence McCarthy, the father of a girlfriend of one of my schoolmates, Gavin MacFadyen. He was the first English-language translator of the first history of economic thought that was written: Karl Marx’s Theories of Surplus Value (Mehrwert), reviewing the value theory of classical economics. Terence said that he would help guide me in economic thinking if I’d get a PhD in economics and go to work on Wall Street to see how the world works. But I had to read all of the bibliography in Marx’s Theories of Surplus Value. So I had to begin buying the books, and ended up working as a sideline with one of the reprinters, Augustus Kelly, who was reprinting many of the classical economists. He was a socialist. There were other dealers in New York: Samuel Ambaras, Sydney Millman. I began buying all of the 19th-century classical economic books that I could, sinse that was the only way that I could get copies.
MD: Ok. Now he’s deep into economics brainwashing…and working to take it in from a fire hose. And of course, more name dropping. This is the “build credibility” phase. It’s usually tied closely to the “double talk” phase.
I took graduate classes in the evening while working at a bank for three years, the Savings Banks Trust Company. It was a commercial bank, but was acting as a central bank for the savings banks that in America finance mortgages.
MD: Now how’s that for a major complication. We have the criminal commercial bank fronting as a “central bank” for the “savings banks” to finance mortgages. We here at MD know that a mortgage is just money created by a trader (like you and me) to make a trade spanning time and space. It’s the biggest trade most of us make. So he’s taking economics at night for three years while learning the greatest con most of us encounter in life. This should be interesting. Keep in mind here, we know that no bank of any kind “creates” money. We know only traders do. So this operation is a “trader herding” operation. A three tiered scam.
All their savings are reinvested in mortgages. So for three years my job was to track the real estate market, the mortgage market, interest rates, the funding of mortgages, the growth of assets by the savings banks, all growing at compound interest. All the growth in savings in the New York savings banks in the early 1960s was simply the accrual of dividends. So you’d have a step function at dividend time every quarter, going up exponentially. There was hardly any new savings inflow. It’s as if you’ve just left a given amount of savings in 1945, and let the amount rise exponentially. All this increase in savings was recycled into the real estate market.
MD: I wonder if he would have gone to all that study if he knew what money is and where it comes from. First, we know it doesn’t come from savings. We know mortgages are not investments…they’re trading promises spanning time. There is no such thing as “funding” in this regard. There is no “growth of assets”…just a source on which to apply the money-changers 10x leverage privilege. And he incorrectly claims the scam is by the “real estate” market. These days, when people can no longer afford this scam, they are being conned into the large rental housing building market. What’s next? Regardless, Hudson now has both feet firmly in the swamp.
The New York banks wanted to extend their market so they couldn’t just keep bidding up New York housing prices. They won the right to lend out of state, especially the Florida. So my job was basically seeing that real estate prices were whatever a bank would lend. At that time, banks would not lend you a mortgage if the debt service exceeded 25% of your income. And you had to put up usually 30% of the purchase price as a down payment, but possibly 10%. So housing was affordable. You could buy a really nice house for you know, $20 or $30,000. Now, it costs $400,000 to buy just a one room apartment in a condominium.
MD: “They won the right to lend out of state.” Won it from who? The government the money-changers instituted for their protection? And to another state? Like Florida? A long way from Mecca (i.e. NYC)? I remember those terms. I first went to a bank to buy a house in 1970. They wanted 25% down and 10% interest. I discovered a savings and loan…5% down and 6% interest. Never tried to borrow from a bank again. I still didn’t know what money was then. I had been taught…but didn’t realize my education was a con. Live and learn…learn a con.
I bought a house for $1 down – it was $45,000 total. I took out a mortgage from Chase for half the price, and the other half was a purchase-money mortgage. So it was easy. Anybody could get a house in New York at that time. Housing was readily affordable.
After I finished my PhD courses, I changed jobs. My real interest at the time was international finance and the balance of payments. So I went to work at Chase Manhattan as their balance of payments economist. This was at a time when the balance of payments and even balance-sheet analysis was not taught in schools. It was very specialised. I realised that what I was taught, especially in monetary theory, had nothing at all to do with what I was learning in practice.
MD: Hmmm….didn’t take long to ditch the German music objective did it? How did he pay for all that? And “international finance” and “balance of payments”. In a “real” money process these concepts have no use…they have no meaning. He’s just moving up to the next higher tier of the con. And “balance-sheet analysis” was not taught in schools. Yes it was. I got it in 2nd grade. They called it “addition” and “subtraction”. But he is right, professional financial cheating is only taught by the guilds. Oh…and by the way…with a “real” money process there is no such thing as “monetary theory”.
In monetary theory, for instance, that was the era of Milton Friedman in the 60s and 70s. He thought that when you create more money, it increases consumer prices. Well, I thought that obviously was not how things worked. When banks create money, they don’t lend for people for spending. About 80% of bank loans in America, as in England, are mortgage loans. They lend against property already in place. They also lend for corporate mergers and acquisitions, and by the 1980s for corporate takeovers.
MD: I have begun dissecting Milton Friedman’s lectures on YouTube. What a con artist he is proving to be. And when you look at the audience ogling him you know this won’t end well.. But look boys and girls. It’s right there. “When banks create money”. We know only traders do that. And he says banks won’t “lend” money to traders…if they are going to spend it. (i.e. they won’t lend it for trade…at any price). This open admission of the con makes you want to puke, doesn’t it! And a “real” money process specifically eschews blessing of promises that are for “takeovers”. That’s not trade.
The effect of this lending is to increase asset prices, not consumer prices. You could say that money creation actually lowers consumer prices, because 80% is to increase housing prices. Banks seek to increase their loan market by lending more and more against every kind of real estate, whether it’s residential or commercial property. They keep increasing the proportion of debt to overall real estate price. So by 2008 you could buy property with no money down at all, and take 100% mortgage, sometimes even 102 or 103% so that you would have enough money to pay the closing fees. The government did not limit the amount of money that a bank could lend against income. The proportion of income devoted to mortgage service that was federally guaranteed increased to 43%. Well, that’s a lot more than 25%. That’s 18% of personal income more in 2008 than in the 1960s – simply to pay mortgage interest in order to get a house. So I realised that this was deflationary. The more money you have to spend on mortgage interest to buy a house as land and real estate is financialized, the less you have left to spend on goods and services. This was one of the big problems that was slowing the economy down.
MD: Money creation (i.e. traders making new promises spanning time and space) has no effect on prices at all. To the extent that prices change, it is because of supply and demand. When you buy a Hershey bar, its price doesn’t go up. And refraining from buying one doesn’t make it’s price go down. And the money you use to trade for the candy never changes in value under a “real” money process…so it has no effect on price at all. And regarding “real estate”, ideally “all” of it is partially held by as-yet-undelivered-promises. You create the money; buy the house; make monthly promised payments for 360 months; and that’s it. In the interim, the money you create takes part in virtually every simple barter exchange, until it is returned as promised…and destroyed. Everything else he describes is revealing what most people view as financial reality…he reveals it as con “optimization”. And what’s going on is “not deflationary”. Rather, it requires INFLATION for the scam to work. The only way the 10x leverage advantage can work is if there is INFLATION of the money itself. And government is more than happy to guarantee that by their perpetual “counterfeiting”. He correctly reveals that INTEREST collections “slow the economy down”…just like driving with four flat tires slows you down.
Well, it was obvious to me that rent was being paid out as interest. Rent is for paying interest. If I talked with various developers about buying buildings, they said, “Well, we try to buy our buildings without any money at all. The banks will lend us the money to buy a building, and they calculate how much is your rental income going to be? That rental income will carry how much of a bank loan at a given interest charge, and lend the money to buy it.” That is how real estate rent was financialized.
MD: Does this mean he doesn’t know how leverage works in real estate? Here’s how you do it. You put 5% down on say a $100,000 property…that’s $5,000. You rent the property out for about 1% …or $1,000 per month. You have to buy insurance and pay interest and taxes and have enough for minor repairs and changing out tenants. But the 1% pretty much covers that. You don’t make any profit unless you treat your tenants unfairly. So where’s the money to be made?
Let’s say interest is 8% and inflation is 7%. (Note: In a “real” money process, INTEREST and INFLATION are both properly zero.) You’ll also find you’re getting screwed on the insurance. The premium over 360 months comes to about 1/3 the replacement cost of the house (and that includes the land that doesn’t have to be replaced). That means a one in three chance every house built will be destroyed in 30 years. In my experience, not a single house has been destroyed within a 1/2 mile of me (1,000 homes) in over 50 years. And then there’s the taxes. Let’s just say they’re 5% (of the government appraised value) …and those government services are worth less than zero…but that’s another can of worms.
But we know this all works out to 1% per month. Now let’s look at the “real” money process. We (the money creating promissor) create $100,000 dollars and give it to the seller. We get title to the house. We then return 1/360th of that each month (i.e. $277.) We pay 5%/12 for taxes… $416. We pay 33%/360 for insurance…$93. We pay 0% interest…we are a responsible trader and never DEFAULT. That totals to $786…left for the bankers to steal as INTEREST.
Of course it’s the bankers who are stealing the taxes (that goes to the government so they can pay interest to the banks; and to the insurance companies…which are just the banks in different clothing). Now I said this can’t work without INFLATION and here’s why.
The traders won’t put up with the money-changers taking 100% of the deal…while having no “skin in the game”. That $5,000 you put down gives you “control” of the real property worth $100,000 initially. After one year, it’s worth $107,000 at 7% INFLATION. You’ve made $7,000 on your $5,000 or 40% on “your” money. Over the full 30 years you’ve gained $761,000 on your $5,000 investment. That’s 152 times…at 7% compounded annually. The bankers have made an infinite amount (they have no money in the deal). And your renter pays it all. Welcome to INFLATION based financial confiscation.
But with a real money process the property is much more affordable to the renter/buyer. It’s basically $100,000/360 or $277/month…1/4th what he’s now paying. What’s not to love about a “real” money process. I’ll tell you. Everything if you’re a financial scammer or the government you institute..
Democratization of real estate on credit means turns rental income into interest, not taxes This meant that the role that had been played in the 19th century by landlords is now played by banks. In the 19th century, the problem was absentee landlords, the heirs of the warlords who conquered England or other European countries in the Middle Ages. You had hereditary rent. Well, now our rent has been democratised. But it’s been democratised on credit, because obviously, the only way that a wage earner can afford to buy it is on credit. For an investor you can buy whole buildings on credit.
MD: He reveals the scam…in all it’s naked glory. I get a dozen calls every day from someone (fronting for a so-called investor) who wants to buy my real property for cash. That’s been going on about 3 years now. Why don’t they want the cash? Well, my guess is they know the jig is up…they know the reset is near. They know real property is more durable in a reset than cash (which goes to zero).
Finance has transformed real estate into a financial vehicle. So that that’s what rent is for paying interest means. There’s a symbiotic sector, Finance, Insurance and Real Estate – the FIRE sector. It’s the key to today’s financialised economy. Most real estate tax in America is at the local level, because after the income tax was introduced, commercial real estate was made tax exempt by the pretence that buildings depreciate in value, as if they don’t in fact rise in price. The pretence is that they wear out, even though landlords normally pay about 10% of the rental income for repairs and upgrades to keep the building from wearing out.
MD: Finance doesn’t “transform” anything. It is “always” just a privileged scam. And in addition to the Finance, Insurance, Real Estate, he enumerates (FIRE…first I’ve seen that one…what an appropriate acronym), he leaves off the most abusive of all…government. Why? Because that’s his protection.
I’m going to skim on ahead here and see if there’s anything new I haven’t discovered in nearly 80 years of disinformation. Read on at your own risk…or scan ahead for the next MD:
Today in New York, and I’m sure in London too, the older a building is, the better it’s built. Real-estate developers have crapified building codes so that the newer the building, the more shoddily it’s built. They call shoddy buildings “luxury” real estate, meaning is built with really not very thick walls. I think the junkiest building in New York is Trump Tower, which is sort of the model of shadiness which they call luxury. It’s very high-priced.
The academic economics curriculum finds unproductive credit too embarrassing to acknowledge While I saw the importance of finance and real estate, none of that was discussed in the university’s economics courses at all. The pretense is that money is created by banks lending to investors who build factories and employ labour to produce more. All credit is assumed to be productive, and taken on to finance productive investment in the form of tangible capital formation. Well, that that was the hope in the 19th century, and actually was the reality in Germany and in Central Europe, where you had banking becoming industrialised. But after World War I, you had a snap back to the Anglo-Dutch-American kind of banking, which was really just the Merchant banking. It was bank lending against assets already in place.
<h4>Classical economics as a reform program to free economies from economic rent and rentier income</h4>
I realised that the statistics that I worked on showed the opposite of what I was taught. I had to go through the motions of the PhD orals. and avoided conflict by writing my dissertation on the history of economic thought, because anything that I would have written about the modern economy would have driven the professors nutty. Needless to say, none of the academic professors I had ever actually worked in the real world. It was all very theoretical. So that basically how I came to realise that the 19th century fight for 100 years – we can call it the long 19th century, from the French Revolution, up to World War I, and from the French Physiocrats, to Adam Smith, Ricardo and Malthus, John Stuart Mill, Marx, Simon Patton and Thorstein Veblen – was the value and price theory of classical economics to quantify economic rent as unearned income.
The purpose of value and price theory was to define the excess of market price over actual cost value. The difference was economic rent. The essence of classical economics was a reform campaign – that of industrial capitalism. It was a radical campaign, because the basic cost-cutting dynamic of industrial capitalism was radical. It realised that in order to make Britain, France or Germany, or any country competitive with others, you had to get rid of the landlord class and its demands for economic rent. You also had to get rid of monopolies and their economic rent. You had to get rid of all payments of income that were not necessary for production to take place. The aim was to bring prices in line with the actual cost value of production, to free economies from this rake-off to unproductive investment, unproductive labour and economic rent – land rent, monopoly rent and financial interest charges. Those were the three basic categories of rent on which classical political economy focused.
To translate classical rent theory into practice, you needed a political reform, You had to get rid of the landlord class’s political power to block reform. It wasn’t enough simply to say that economic rent was not a necessary cost of production, not part of real value. The landlord class would simply say, “Well, what are you going to do about it?”
The proponents of industrial capitalism saw that the constitution of England, France and America required giving governments the power to pass laws to free economies from economic rent. in order to do that, they needed democratic reform of the political system. In England they needed to empower the House of Commons over the House of Lords. That effort led to a constitutional crisis in 1909 and 1910, when the House of Commons, Parliament, passed a land tax. That was rejected, as I’m sure you know, by the House of Lords. The crisis was resolved by saying the Lords could never again reject a Revenue Act passed by the House of Commons. That political reform was part and parcel with classi9cal economic theory defining rent as an unnecessary cost of production.
But where did this leave the interests of labor – the majority of the population? As a broad social reform, classical economics began to falter by 1848. You had revolutions in almost every European country. These revolutions were not fully democratic in the sense of they weren’t really for wage labour, which was the bulk of society. They were bourgeois revolutions, including land reform. They were all for getting rid of the landed aristocracy and the special privileges that the aristocracy held. But they were not very interested in helping consumers, and labour’s working conditions, shortening the workweek, shortening the workday and promoting safety. There was nothing really about public health, or public social infrastructure spending. So things began to falter by 1848.
But they still made progress through the balance of the 19th century. By the time World War I broke out in 1914, it looked like the world was moving towards socialism. Almost everybody in the 19th century, across the political spectrum, whatever you were advocating was called socialism.
Socialism and strong government as the program of post-rentier industrial capitalism At the broadest level, socialism meant collecting economic rent and getting rid of the landlords and the aristocracy, either by taxing away rent or nationalizing land and natural monopolies, in hope that that by itself would create a viable industrial economy. you had libertarian socialism, Marxist socialism, anarchist socialism, industrial socialism and Christian socialism. Almost every reformer wanted that as a label. The question is, what kind of socialism were are you going to have?
That was what the aftermath of World War I was fought about. The fight was largely shaped by the Russian Revolution, which unfortunately went tragically wrong under Stalin and gave socialism and communism a bad name. But it still had a good name in England after World War II. And also in America in the 1930s, as a result of Franklin Roosevelt’s New Deal that saved capitalism by investing in public infrastructure.
I can give you an example of where pro-capitalist theory was in the 1890s. In the United States. The industrial interests in America faced a problem once the Civil War ended in 1865. They wanted to create an industrial society – ideally, a fair society with rising living standards. How do you do that without training people to administer such an economy? You need to train people in a university. You have to teach them how economies worked. But the main universities in America were religious colleges, founded to train the clergy. Yale, Harvard, Princeton and most taught British free-trade theory, which trivialized economic theory.
So the business interests and the government saw the need to teach reality-based economics. They saw that there was little hope in trying to reform the existing universities. Their economics departments – called moral philosophy – were unreformable. So it was necessary to create new universities. All through America, each state was given a land grant to enable it to create a new university and teach reality economics. They also would teach economic history and how the world actually works. Most of all, they would teach protectionist trade theory and how to create a society and economy that is more efficient than other economies?
Well, the first business school in America was the Wharton School at the University of Pennsylvania. Its first economics professor was Simon Patton, a protectionist. And he explained that if you’re going to make industrial products at prices that outcompete those of England, you need public infrastructure spending. You need as much of the cost of living as possible to not to be paid by the employers to factor into the price of their products, but to be paid by the government.
Patten cited public roads and canals to lower the cost of doing business. He also noted that every time you build a road or railroad, you’re going to raise the land value along these routes – and lower land prices for areas replaced by the now-more-accessible producers. You can simply self-finance the cost of these by taxing the rent.
You also need public education, and that should be free so that you don’t have like today, to earn enough money to pay an enormous student debt – and receive a high salary to afford to pay that. If the government would provide free education, you wouldn’t have to pay workers enough to pay this student debt, so they wouldn’t need such high wages simply to break even. Today 18% of America’s national income is from medical insurance. If you have a public health system and socialized medicine, as England had after World War II and as Bernie Sanders advocates today, then you wouldn’t have to pay workers a high enough salary to afford this enormous medical expense. England realised this already in the 1870s and ‘80s, when Benjamin Disraeli campaigned as a conservative for health.
So the movement towards public infrastructure towards government spending was led by the industrialists. It was they themselves who wanted strong government. The common denominator of politics from Adam Smith through all of the 19th century was to free economies from the unnecessary economic rent, to free them from unearned income, from the free lunch. To do that, you have to have a government strong enough to take on the vested interests – first the landlord class in the House of Lords, and then the financial class behind it.
MD: Just wanted to let you know I’m still here. Just note, everything he cites changes dramatically in the presence of a “real” money process. Why don’t we have one? Well, it’s like “casualty” insurance…only different. With casualty insurance, the operative relation is PROFIT = PREMIUMS – CLAIMS = zero. The money is made on investment income (which “requires” that money have time value…which it doesn’t in a “real” money process). So there is a value proposition with insurance.
With money, on the other hand, the relation is: INFLATION = DEFAULT – INTEREST = zero. And there is no money to be made. There is no “value” proposition. However, the value to traders like you and me…and thus society in general (sans the money-changer scabs and the governments they institute). So far he’s gotten close…but no cigar.. I’ll try to bear with them a little longer…but we’re only 1/8th through this and it’s oh-so-painful.
Jonathan Brown 26:00 Well, just to clarify that, Michael, I think what you’re, what you’re saying is, I know in some of your writing you talk about the view of government or the public sector was it was a fourth means of production. So you got land, labour, capital and the public sector.
MD: Government is a 4th means of production? You’ve got to be joking. If you have resorted to a government solution to address any issue, you’re still looking for a solution. Government only, and always, makes issues worse…except for those who institute it…the money-changers.
MD: I think I’m going to have to leave it here. I’m going back to the site and leave a comment link to this annotation of their nonsense. Maybe I’ll hear from them. Life is too short for this.
Michael Hudson 26:16 That was the term that Simon Patten used. Government infrastructure is a fourth means of production. But what makes it different from profits and wages is that if you’re a wage earner, you want to make as high a wage as possible. If you’re a capitalist, you want to make as high a profit as possible. But the job of public investment is not to make an income, not to do what was done under Thatcher and Tony Blair, not to treat public utilities, education and health as profit making opportunities. Instead, Patten said, you should measure their productivity by how much they lower the cost of doing business and the cost of living for the economy at large.
Jonathan Brown 27:03 And what that allows a country to do, so if you’re good at it, is to get together and ask how to educate our people, lower the cost of transportation so we’ve got we’ve got a mobile workforce, all those things. We can then start to compete against other nations who are ahead of us, who may have more expensive means of production, and we can maintain that advantage. We’re not stuck in a lower level of the economy where we’re basically working for someone else. We’re able to develop ourselves as a nation. And I guess the benefit of us doing it collectively is that we can minimise the cost, then use a natural monopoly power in government hands to provide efficient services across the board. Is that right?
Michael Hudson 27:46 Yes, but they went further. Protectionists in America said the way to minimise costs – and it may seem an oxymoron to you – the way you minimise costs is to have high-wage labour. You raise the wages of labour, or more specifically, you want to raise the living standards, because highly paid labour, highly educated labour, well fed labour, well rested labour is more productive than pauper labour. So they said explicitly, America’s going to be a high wage economy. We’re not like Europe. Our higher wages are going to provide high enough living standards to provide high labour productivity. And our higher labour productivity, shorter working day, better working conditions, healthy working conditions, public health, well educated labor will undersell that of countries that don’t have an active public sector.
Jonathan Brown 28:45 and Henry Ford being the poster boy for that approach, of doubling his employees’ salaries and so on.
Michael Hudson 28:53 Yes.
Jonathan Brown 28:54 Amazing.
<h4>The fight against classical economics and its concept of rent as unearned income</h4> Michael Hudson 28:55 Needless to say, the fight for the kind of democracy that will free economies from economic rent was not easy. By the late 1880s, and especially the 1890s, you had the rentiers fighting back. In America the fight was led by John Bates Clark. There was a movement, which today is called neoliberalism, to deny the entire thrust of classical economics. Clarke said that there is no such thing is unearned income. That meant that economic rent does not exist. Whatever a businessman makes, he is said to earn. Whatever a landlord makes, he earns – so there was no unearned income.
This came to a head around 1890 the Journal of Ethics. Clark wrote the first essay, and it was refuted by Simon Patton. There was a fight against the concept of economic rent by academic economics, especially in New York City at Columbia University, where Clark ended up, This is really the dividing line: You recognise that much of the economy is unearned income and you want to get rid of it. To do that, you have to pass laws that will tax away the unearned income, or better yet, you put land and other natural resources and natural monopolies in the public domain where the public sector directly sets prices. That was what Teddy Roosevelt did with his trust busting.
Jonathan Brown 31:13 Michael, I just want to say reading your work is something of a revelation. I’ve got a degree in economics for what it’s worth. And I would say the only valuable thing that I found from a getting a degree in economics is that I know, resolutely when an economist is talking bullshit. How do you know that? It’s when his lips move.
Michael Hudson 31:32 If it’s an economist, they’re talking bullshit – let me make it easy, right!
MD: Then I call “bullshit”. Neither of these morons have come close to defining what money is and where it comes from…let alone knowing what it is.
Jonathan Brown 31:36 And then the thing is, that reading your work, for example, going back to Thorstein Veblen, his work, which only made it into the mainstream when I was getting a degree in the 90s, was conspicuous consumption. It had nothing to do with absentee landlords or, and the profound importance of that, and then I’m looking in J is for Junk Economics, and you talk about the free lunch, and how Milton Friedman said that there’s no such thing as a free lunch.
When you look at your work, you prove that actually there is, and that he’s having it! And you say, “Most business ventures seek such free lunches not entailing actual work or real production costs, and to deter public regulation or higher taxation of rent-seeking recipients of free lunches. They have embraced Milton Friedman’s claim that there’s no such thing as a free lunch”.
And you talk about: “Even more aggressively rent extractors accused governments of taxing their income to subsidise freeloaders, pinning the label of free lunches on public welfare recipients, job programs, beneficiaries of higher minimum wage, when the actual antidote to free lunches is to make governments strong enough to tax economic rent, and keep the potential rent extracting opportunities and natural monopolies in the public domain.”
Michael Hudson 32:51 Veblen was indeed was the last great classical economist. He coined the term neoclassical economics. I think that’s an unfortunate term. When I went to school in my 20s, I thought neoclassical meant ‘Oh, it’s a new version of classical economics’. It’s not that at all. What Veblen meant was there used to be the old classical economics of Adam Smith, John Stuart Mill and Marx, all about economic rent and exploitation. “Neo” means there’s a new body of completely different, post-classical economics aiming to make classical economics obsolete. That is the new mainstream economics of today, trying to make itself “classical.” So Veblen he should have used the terms post-classical or anti-classical economics.
Jonathan Brown 33:44 Or even pseudo classical?
Michael Hudson 33:49 It’s antithetical, because the root of classical value and price theory was to isolate and define economic rents statistically. To deny economic rent is to deny the whole point of classical value and price theory. That is where economics became untracked.
Unfortunately, it became untracked largely by Henry George, who rejected classical economics and very quickly followed J.B. Clark and accepted his mushy value and price theory. Removing all elements the cost of production from value theory, analysing prices simply in terms of consumer demand and what people want, and not analysing what determines land and other asset prices, loses focus.
George became very popular as a journalist. He wrote wonderful journalism to expose the railroads in California as landlords, and he wrote a wonderful book on the Irish land question. But when he tried to talk about the whole economy, he didn’t want any competition. He said, in effect, “Economics begins and ends with me. Forget everything, Adam Smith and classical economics.” He’s sort of an early Margaret Thatcher. There’s no such thing as society or the economy. Only “tax the landlords.”
Jonathan Brown 35:35 What are you doing? You’re destroying my view of Henry George! He’s an early Margaret Thatcher? How, how could that possibly be?
Michael Hudson 35:47 Well, in two ways. The first way is that in the 19th century, in order to tax the land rent, you had to take on the most powerful vested interests of all: the real estate interests and the financial interests. But Henry George was a libertarian. He was for small government. He broke with the socialists, because he warned that socialism had a potential for authoritarianism. Well, we know that he was right in that warning, because we saw what happened in Stalinist Russia. But obviously, what you want is a government that is strong and democratic, and with enough authority to tax and regulate the vested interests. (That term is Veblen’s, by the way.) That was the ideal in America, but it needed a strong enough government so that Teddy Roosevelt could come in and be able to bust the trusts.
The government was strong enough in 1913-14 to impose an American income tax that fell just on 1% of the population, almost entirely on economic rent, on land rent, mineral rent on monopoly rent of the big corporations. If you’re a libertarian, your government is too small to take on these vested interests. And you’ll never win. You’ll end up like the Social Democrats or like today’s Labour Party under Mr. Starmer, not able to be very efficient. So that was George’s first problem.
The second problem was when he said that all you have to do is tax the land and everything else will take care of itself. Well, as you know, he was nominated as a celebrity candidate by the socialist and labour groups in New York City in 1876 to run for mayor. They gave him their programme – safe housing, workers housing, safe working conditions, food laws that protect people from poison, like you don’t want to use chromium for cake frosting to make it yellow. Well, George threw out the whole labour programme and said that there’s only one thing that mattered: If you tax the land rent, the cakes will take care of themselves, worker safety conditions will take care of themselves. You don’t need socialism; just tax land rent.
Well, the word “panacea” came into popular use in the English language at that time, because George didn’t see the economy as a whole. That was a tragedy. He was great as a journalist describing rent and the machinations of the railroads. But once he tried to talk about the economy, without really describing how it worked as a system, saying there really isn’t any economic system, it’s just about land rent. That separated him from the other reformers.
By the 1890s you had many of reformers in America, who had been inspired by George’s journalism in the 70s and early 80s, including attacks on the oil monopoly and the Rockefellers. They asked what happened to George? Well, he became a sectarian. He formed his own party and said, we’re only going to talk about land rent. This diverted attention away from how the overall economy works. And if you don’t understand how the economy is all about providing a free lunch in one way or another, not only to landlords but to the financial sector primarily, then you’re really not going to address the interests of most of the population.
So his sectarian party shrank. Still, in the first decade of the 20th century you had followers of Henry George and socialists going around the country debating each other. They had great debates, they spelled out the whole problem. I wanted to reprint all these debates somewhere, what both the socialists and the Georgists said: “One thing we can agree on is that society is going to get go either your way or our way. We’re talking about how is the future of the political system and the economic relations and taxes that follow from this system. How are they going to evolve?”
The socialists focused on labour’s working conditions, because these were getting worse and worse. In America the fight for labour unionisation got quite violent, and corrupt. The abuse of consumers, the growth of monopolies, all these were growing problems. The socialists focused on these problems – and decided to leave the discussion of rent to followers of George. I think that was very unfortunate, because George had pried the discussion of economic rent away from the classical value theory and its political dimension, which was socialist.
I find little interest in today’s socialist movement or the socialist movement 50 years ago about land rent. They are more concerned about international issues, about war, about almost everything except land rent. And today I find the greatest interest in rent theory as a guide to a tax system in the context of an overall economic system to be in China. So that’s really where the debate over how to keep the price of housing down by keeping the financial sector from trying to capitalise the land rent into a bank loan.
That’s a big fight in China today. It should have been also in Russia. Fred Harrison, in the early 1990s, brought a group of people including me over to Russia. We made two trips to the Duma and did everything we could to explain that Russia could have a great advantage to rebuild its industry into a productive economy. The first thing that it should have done was to keep housing prices down. It could have given everybody their houses, free and clear, without any debt. Of course, some places would be more valuable than others, but Russia would have had the lowest-priced economy in the world. In America, the rent can take up to 43% of a home buyer’s income.
Well, there was pushback from the Russians. They had no rent in a socialist economy. Ted Gwartney, an American real estate appraiser, walked down the streets of St. Petersburg with the local mayor, I think on a fall or winter days. He pointed out that one side of the street was very sunny. The other street was in the shade. That’s how the sun is in the northern latitudes in the winter. Most people were walking on the sunny side of the street. That means that if you’re going to have a store, whether it’s a bakery, a food store or a restaurant, the store on the sunny side of the street is going to be able to attract more customers. Their site has more economic rent than the dark side of the street. Same thing with buildings near a subway. They will be worth more than sites far away from transportation.
The mayor said understood the point, and asked how to actually make a land value tax so to collect this rent? Ted explained that St. Petersburg’s layout was much like that of Boston, where a land map was easy to make. It showed that there was a peak centre of values near the subway, with rents tapering off further away. He suggested to apply Boston as a scale model to St. Petersburg. Just plug in a few prices, and you have a land-valuation map.
Russia could have been a low-cost economy. It could have kept the oil and gas, Yukos, GazProm, nickel and platinum resources all in the public domain to finance investment in re-industrialization, to become independent of the West. But as we all know, Ted and the people that Fred Harrison bought were completely overwhelmed by the billions of dollars that U.S. diplomats spent on promoting kleptocracy and shock therapy in Russia. Its officials and insiders worked for themselves, not Russia.
And it wasn’t only Russia that missed opportunities. I brought Ted Gwartney and his mathematical model-maker to Latvia, where I was Economic Research Director of the Riga Graduate School of Law. I was asked by the leading political party of Latvia, the Centre Party – basically the party of Russian speakers, with 1/3 of the population and votes – to draw up a model for how Latvia could restructure its post-Soviet economy and industry. Ted met with the tax authorities and housing authorities and explained how to use land rent as the tax base. They were amazed and said, “This is great. We can hire a separate appraiser for every single building. This will create a lot of employment”. No he said. He had been the appraiser for Greenwich, Connecticut, the state’s wealthiest city. He said, “We can do a whole city in about one week.” They couldn’t believe this in Latvia.
Around the time of his visit there was a meeting in Boston of the Eastern Economics Association. It was largely created by John Kenneth Galbraith to go off the economic mainstream. I think the Schalkenbach Foundation had a session on political critics of Henry George, so there were a lot of Georgists. Other people who came to the Eastern Economic Association meeting were socialists, including Alan Freeman who was the assistant to Ken Livingston, the Mayor of London.
When everybody was having lunch after the economic meetings, I brought Alan over to sit down with Ted Gwartney. Ted explained what he did, and Alan said, “Oh, I’ve never heard of this! I’ve got to come and meet you some more.’ So he came to New York and we went up to visit Ted in Connecticut. He explained how to make a land value map. Alan said, “You should win the Nobel Prize for this! This is amazing! There’s nothing like this in England.”
Ted explained that there are about 20,000 appraisers in America that do what he did. There are abundant statistics. Every city has a map of land and building appraisals: here’s the value of the building, here’s the value of the land. So smoothing out a land value map is pretty easy to do. Alan could hardly believe it.
Well, I went back to London shortly and met with Alan. It turned out that political pressures in England, especially from the Labour Party, led London to hire Weatheralls, a real estate company, do appraisals. So we never got to do our version of a real estate appraisal of London to calculate land rent.
But this is what all of the theories of the Physiocrats, Adam Smith, Ricardo, John Stuart Mill, Marx, Veblen, Alfred Marshall, all of them were focusing on. Yet this idea is so alien that from London to St. Petersburg, they don’t have any idea of how the simple concept can be done. The economics profession is in denial. It’s followed the idea that there’s no such thing as unearned income, everybody gets what they make.
The National Income and Product Accounts treat rent as a product, not a subtrahend A byproduct of this value-free doctrine is how countries calculate their national income and product accounts. And if you look at the GDP accounts for the United States (and I’ve published a number of articles on my website and in major economic journals), rent is counted as part of GDP.
This is easiest to see in real estate and finance. The Bureau of Labor Statistics sends its employees around to ask homeowners what the rental income of their home would be if they had to rent it. If you were a landlord and rented yourself how much rent would that be? This appears in the NIPA statistics as “homeowners imputed rent.” That’s 8% of GDP. But it is not really income, because it is not actually paid. Nobody gets it. But value-free designers of GDP want to describe all of the income that landlords make as contributing to GDP. They say that landlords provide a productive service, they provide housing to people who need it, and they provide commercial properties to businesses that need it. Well, that’s not exactly how John Stuart Mill put it. He said that rent is what landlords make ‘in their sleep’. So how can you rationalize how productive landlords are?
Another element of American GDP is financial services. I called up the Commerce Department where they make the NIPA statistics and asked what happens when credit card companies increase their interest charges. And where do penalty charges for late payments appear? Credit card companies in America make billions of dollars in interest a year and even more billions in fees, late fees and penalties. Most of the income that credit card companies make are actually on these fees and penalties. So where does that appear in that GDP? I was told, in “financial services.’ So the “service” of calculating how far the debtors must pay for falling behind in their payments. They typical charge 29%. That’s all counted as a contribution to GDP. But in reality it is a subtrahend, leaving less to spend on real “product.”
This raises the question of just what income and product actually mean. Well, this brings us back to what classical economics is all about. The “product” should be measured by what its actual necessary cost of production is. But there’s a lot of income over and above this necessary cost of production. Namely, economic rent, that’s unearned income. But the income and product accounts don’t say how much is “earned” and how much is “unearned” land rent, monopoly rent, natural resource rent, interest and financial charges.
A classical economic accounting format would show how much of the prices for what our society produces is actually necessary, and how much is a subtrahend. Classical economists treat the land rent that you pay, interest charges and monopoly prices as a rake-off. So not all of your income is income equals “product,” because only a portion of that income represents a real product.
In America, the head of Goldman Sachs a few years ago said Goldman Sachs partners – a financial management firm – make more money than almost anyone else in America, because they’re the most productive. If you make a lot of money, by definition, you make it by being productive. That’s the false identity.
Jonathan Brown 55:25 That’s really the John Bates Clark idea that if you make the money, you’ve earned it. And it’s not just because you control the gate. You’re the gatekeeper, to stop people and make them pay the toll. You’re the troll under the bridge, taking people’s money as they cross, which is essentially what financial economics is about.
Michael Hudson 55:48 Right. I have spoken with a number of political advisors, many of whom were followers of Henry George. They’ve described to me how political all of this definition of the economy is. A number of friends of mine have been trying to show how much of what the United Nations calculates as income and product is actually economic rent. Steve Keen, Dirk Bezemer and Jacob Assa are in this group. There are a number of others who do it. We publish in places like the Review of Keynesian Economics, Journal of Economic Issues and other not-mainstream journals. A lot of this was taught where I was a professor for decades, at the University of Missouri in Kansas City.
Our graduates had problems getting jobs, because in order to get an appointment at a university, you have to publish articles in prestige journals. The University of Chicago, the Milton Friedman boys, the Chicago Boys control the editorial boards of all these prestige magazines, just like they control the Nobel Economics Prize Committee. The prize basically is given to Chicago Boys every year for not explaining how the economy works.
A precondition for what you call an economist, especially a Nobel Prize winning economist, is not to understand how the economy works. Because if you understand that, you’re going to threaten the vested interests that are getting the free lunch. You have to say there’s no such thing as a free lunch, everybody earns whatever they can get. Robbers and criminals like that idea. “Yeah, we stole it fair and square!”
Crime pays, and rent seeking also pays.
You can get much more money quicker by extractive means – by rent extraction – than you can by investing in plant and equipment and developing products and marketing them and making a profit over time, and spending on research and development. That’s why in today’s United States, 92% of corporate revenue, called earnings, (although not all of it is earned – that’s a euphemism) is spent on stock buybacks and dividend payouts, not on new capital investment.
So the way that the economy works today is no longer industrial capitalism; it is finance capitalism. Instead of Industrial Engineering, making society produce more with all of the environmental protection cost included, you have financial engineering, making wealth by increasing stock-market prices. Wealth is not achieved by earning it. You don’t save up your earnings and get wealthy. I think half of Americans are unable to raise $400 In an emergency. They have no savings at all.
For most people it’s very hard to save up money, especially if they have student debt, credit-card debt, medical debt and mortgage debt. After paying this, there’s really no income left to be saved. So you have the 1% of society, the rentier portion that had to pay income tax back in 1914, getting huge amounts of income and the rest of the society getting less and less. The result is economic polarisation. The dynamics of society are financial and basically rely on rent seeking that has been financialized.
I’ll give you another example of the GDP. One of the problems that makes GDP statistics meaningless is depreciation, the idea that buildings depreciate. When Ronald Reagan came in, the real estate interests and their banks basically took over the government. Henry George and the Libertarians oppose central planning by elected democratic governments, and that leaves central planning to Wall Street’s financial interests. Every economy is planned, and if you don’t have a government strong enough to do the planning, then the planning is done by the financial sector and the real estate sector, and they were given free rein under Ronald Reagan.
Under Reagan’s 1981 tax “reform” you could pretend that if you buy a big commercial building, you can write off 1/7 of the entire costs every single year as tax deductible income. At the end of seven years, you change your ownership from one name to another name, and you start all over again. The same building can be re depreciated again and again and again.
Donald Trump wrote in his autobiography, he loves depreciation, because he said thanks to the pretence of depreciation, his buildings are all going up in value, but he gets to pretend they’re falling, and deduct all of that fictitious over-depreciation from his taxable income. It’s actually economic rent. But if you look at the national income statistics, you can’t find economic rent in them at all. I was able to piece it together by adding up what goes into economic rent: Real estate taxes are part of economic rent, and also interest payments, because interest is paid out of economic rent. But fictitious depreciation tax loopholes also should be there.
But nowhere in the national income statistics is a report of how much income real estate owners actually claim as depreciation. They haven’t done that because if they showed this, people would think, ‘Wait a minute, this is a giveaway. This is utterly unrealistic.” So they only put in a figure for how much they [think] buildings are actually depreciating over a period of decades. So you have a fictitious national income accounting format that makes it impossible to calculate what land rent is – and that was the major focus of classical economics.
How are you going to get a statistical system that actually reflects this? Well, one associate of mine, Jacob Assa, has written a few books on this criticising economic rent. He worked in the United Nations here in New York until quite recently. But as I said, our graduates can’t publish in the University of Chicago economic journals whose party line is that ‘there’s no such thing as economic rent’, just like there’s no such thing as society is beyond “the market.”
I wanted to publish statistics on this and in 1994 the Henry George School in New York asked me to calculate what rent was and the land value. I found out that the value of land, the market price of land in the United States was twice what the government reported.
The government pretends that real estate prices rise mainly because buildings keep growing in value, even though they’re supposed to depreciate. They pretend that buildings grow in value by taking the original cost of the building, and multiplying it by the Construction Price Index. Whatever is left is reported as land value. Well, in 1994 the Federal Reserve reported that the land value of all of the commercially owned real estate in the United States was negative $4 billion. This is crazy.
The statistics are drawn up by a methodology that the real estate interests lobbied for. When I calculated this, the Georgists in America got furious. They said that I was showing that land value and rents were much higher than they thought. They worried that this might lead people to want to tax real estate. Lowell Harriss of Schalkenbach explained that Georgists today represent mainly real estate developers, and that their major audience was local mayors, whose biggest campaign funders are the real estate interest.
These Georgists called themselves “two raters,” wanting to keep overall real estate taxes unchanged (“revenue-neutral”) but shift the tax from commercial landlords onto homeowners by taxing land, not buildings – e.g., electric utilities, office buildings and other capital-intensive structures.
By representing the developers, Georgists proposed to save society by having the developers build up those slums, build up those vacant lots. Like George, they said that there was no need to worry about ecology or any problem except cutting property taxes for large real estate owners. You don’t need to worry about workers conditions or anything else. Let’s just give an economic incentive (i.e., a tax cut) to help contractors build up those vacant lots.
I was told if I published a new explanation of my statistics showing that most rent was paid out as interest, I could never have any relations with Schalkenbach and the Henry George school again. So I published them in a Harper’s Magazine cover story and have lived happily ever after.
Jonathan Brown 1:06:13 And was that “The New Road to Serfdom”?
Michael Hudson 1:06:22 Yes. I chose that title because the purpose of industrial capitalism was to free economies from the legacy of feudalism. And the legacy of feudalism was the landlord-warrior class collecting hereditary rent and the predatory banks that were not making loans for industry. None of the industrialists got their money to invest in banks. The inventors of the steam engine couldn’t get loans except by mortgaging their houses. Banks don’t lend money to create capital, only for the right to foreclose on it.
Jonathan Brown 1:07:02 This is all included in your in your latest book that just came out, The Destiny of Civilization: Finance Capitalism, Industrial capitalism, or Socialism, which I gather was a series of lectures to a Chinese University. Is that correct?
Michael Hudson 1:07:16 Yes. There were 160,000 viewers for the first lecture, and there’s a huge interest in this in China, because they realise that higher housing prices make them poorer and more highly indebted, not richer. What is pushing up housing prices in China is the amount of credit that banks will lend against the property.
A land tax would keep housing prices down, because the rent could not be available, to be capitalized into a bank loan. As China gets more productive and more prosperous, people obviously are going to be able to afford housing, which is how most people define their status. If a site gets more valuable because of public investment in transportation, or schools or parks nearby, that’s going to make it more valuable. But if you tax this rental income, then you’re going to keep the housing price down.
I think Fred Harrison and Don Riley wrote a book Taken for a Ride where they show that the money that London spent on extending the Jubilee Line increased real estate prices by twice as much as the line cost. London could have simply collected the land’s increase in rental value that this public investment created and made it self-financing.
Instead it was a giveaway.
They ended up taxing labour and business, and the effect was to increase Britain’s cost of living and hence the cost of production, which is why Britain is de-industrialising. It’s been de-industrialising because despite the attempts through 1909 and 1911, to free itself from landlordism, the bankers have taken the place of the landlords. They are the class today that the landlords were in the 19th century. So we’re back on the revival of what really was feudalism – a rake-off by a hereditary privileged class.
<h4>America’s monetary imperialism coming to an end with de-dollarization</h4> Jonathan Brown 1:09:47
I’m wondering where we go next. I want to get into the conversations that you started with the 1972 first edition of Super Imperialism. I know we had a third edition fairly recently, with your prescience of the predictions in analyzing the situation for America, and how the balance of payments deficit was a result of U.S. expenditure by the military. Getting into the current manifestation of the de-dollarization challenge that seems to be accelerating through the Ukraine and Russia crisis, I wonder what background we need to give the listeners just to tell them about how that system works.
Michael Hudson 1:10:39 One of the things that most people don’t understand is money, largely because of the academic discussion confusing matters. Until 1971, countries running a balance of payments deficit would have to settle it either in gold or by selling off their industry to investors in the payments-surplus countries. Well, beginning with the war in Korea in 1950-1951, the U.S. balance of payments moved into deficit. The entire U.S. balance of payments deficit from the Korean War to the 1970s was a result of its foreign military spending.
By the time the Vietnam war was ending, the Americans had to sell its gold every month. Vietnam had been a French colony, so the banks there were French. As America spent more dollars in Southeast Asia, these dollars were sent from local French bank branches to their head offices in Paris. The Paris bank would turn over these dollars to the central bank for francs, and the central bank, under General de Gaulle, would cash in these dollars for gold.
Germany was doing the same thing, using its export proceeds that were paid in dollars to buy gold. So America’s gold stock was steadily going down, until finally it had to withdraw from the London Gold pool and stop making the dollar gold convertible. Back in 1950 when the Korean War began, the American Treasury had 75% of the world’s monetary gold. It had used this monetary power to control diplomacy in other countries. The basis of America’s political power was its gold stock.
Once they left the gold-exchange standard there was hand wringing. How was the United States going to dominate the world if it didn’t have gold anymore, if the military spending abroad had made it run out of gold? My Super Imperialism pointed out that henceforth when foreign central banks got more dollars, what were they going to use them for? Well, there’s only one thing that central banks at that time did: That was to buy government securities. So the central banks of France, Germany and other payment-surplus countries had little option except to buy U.S. Treasury bills and bonds. Some of these were special non-marketable bonds that they couldn’t sell, but they were stores of value.
So the money that America was spending abroad was simply recycled to the United States. It didn’t mean that America had to devalue the dollar through running a balance-of-payments deficit, like today’s Global South countries do, or do as England had to do with its’ stop-go policies, always raising interest rates to borrow when its deficits threatened to force the pound sterling to depreciate.
Jonathan Brown 1:13:57 Michael, this insight was that was that when you were working at Chase Manhattan, and you were advising the State Department on what to do with the fact that they were having these balance of payments problem, because of military spending?
Michael Hudson 1:14:07 My job at Chase was to analyse basically the balance of payments of Third World countries and then of the oil industry. I had to develop an accounting format to find how much does the oil industry actually makes in the rest of the world. I had to calculate natural-resource rent, and how large it was. I did that from 1964 till October 1967. Then I had to quit to finish my dissertation to get the PhD. And then I developed the system of balance-of-payments analysis that actually was the way it had been calculated before GDP analysis.
I went to work for Arthur Andersen and spent a year calculating the whole U.S. balance of payments. That’s where I found that it was all military in character, and I began to write in popular magazines like Ramparts, warning that America’s foreign wars were forcing it to run out of gold. That was the price that America was paying for its military spending abroad. I realised as soon as it went off gold in 1971 that America now had a cost-free means of military spending. Suppose you were to go to the grocery store and just pay in IOUs. You could just keep spending If you could convince the owner, the grocer to use the IOU to pay the farmers and the dairy people for their products. What if everybody else used these IOUs as money? You would continue to get your groceries for free.
That’s how the United States economy works under the dollar standard, at least until the present. This is what led China, Russia, Iran and other countries to say that they don’t want to keep giving America a free ride. These dollarized IOUs are being used to surround them of military bases, to overthrow them and to threaten to bomb them if we don’t do what American diplomats tell them to do.
That led already a few years ago to pressure to de-dollarize the world economy and make it multipolar, not simply an extension of the U.S. military, U.S. investors, mining and oil companies. The post-dollar aim was for other countries to keep their economic surplus among themselves to promote their own economic growth, instead of imposing IMF dictated austerity programmes to impose austerity so that they can pay foreign dollarized bondholders.
Just about everybody thought that it would take many years for China, Russia, Iran, India, Indonesia and other countries to get their act together and create an alternative. But this year the Biden administration itself destroyed America’s free ride for the dollar. First the United States grabbed Venezuela’s foreign exchange, then Biden grabbed all of the foreign exchange of Afghanistan, just confiscated it. And then a month ago he confiscated $300 billion of Russia’s foreign exchange reserves. He said, in effect, that we are the leading democracy in the world, and global democracy means that America’s military gets to appoint foreign presidents.
And so we don’t like the person you’ve voted in as president for Venezuela. We’re going to hire this little nitwit that we bought out, Juan Guaido, and appoint him president. To force you to accept this, we’re going to take away all of your gold reserves held in the Bank of England, and we’re going to give it to Mr. Guaido as our nominee for the bastion of democracy, to do what a democratic regime is supposed to do: hiring terrorist groups to kill all land reformers and labour leaders, to finance a neo-Nazi takeover like we did in Chile under Pinochet, and just like we’ve done in democratic Ukraine with our funding of neo-Nazis to fight against the Russians there.
This confiscation of foreign reserves and foreign money held in U.S. banks shocked the rest of the world. Nobody had believed that countries would actually grab other countries’ financial savings. If you go back to the wars in the 19th century, the Crimean War and others, countries would continue to pay their foreign debts.
All this was ended by President Biden rejecting the international rule of law. He said that “We have a ‘rules-based’ order, in which we can make up the rules. Number one, we are exempt from the rules. Only you have to follow them. Number two, the rules or whatever we say.” China, Russia and India would have taken years by themselves to denominate their trade in their own currencies. Biden’s money grab has impelled them to create a new economic order independently of the United States and Europe, whose euro and sterling are satellite currencies of the United States.
Jonathan Brown 1:19:54 So Michael, this is a crazy situation that we’ve got. Even If you have deposits in a bank, the deposits don’t really belong to you, but they used to be respected.
Michael Hudson 1:20:07 Well they belong to you, but they can be stolen.
Jonathan Brown 1:20:09 Yeah, but then they don’t belong to me, do they? They’re kind of mine, but not. Likewise, if I annoy the wrong person, I could have my car impounded, because I’ve just annoyed the local politician, which is essentially what’s happened to a Russian oligarch. Now, whether or not the oligarch deserved that $500 million yacht, obviously, they didn’t, but it was technically theirs. So what Americans are doing is showing that if you piss them off, they will take all your resources, which has happened in other countries, right? We’ve stolen it.
The British did that, right? We appropriated resources and stole resources from other nations. If you want the best example of that, you can just go into the very beautiful British Museum and see all the artefacts that we’ve appropriated, one of which was a Rosetta Stone, which I know you write about.
So we’ve got this situation now that the Americans have declared the most profound economic war on Russia, threatening China that we can do the same. China’s got trillions of U.S. dollars. And one of the things that I don’t quite understand, looking at your philosophy and Super Imperialism, was in demonstrating that the Americans can have a free lunch by getting people to buy U.S. Treasury bonds. How is it that the U.S. dollar has gone up against all currencies pretty much other than the rouble since declaring war in Ukraine?
Michael Hudson 1:21:43 Europe has committed economic suicide, United States offered its leaders a lot of money in their offshore accounts, and made sure that their kids got free education in the United States. But in return, they would have to represent the United States, not Germany, France or other countries. The Americans have been meddling in European politics for years. European politicians do not represent their own countries. They represent the American State Department and American diplomacy. And they were told to lock their countries into the U.S. economy. For instance, European businesses had a hope that Americans really hated. The Europeans hoped that after 1991, now that communism was over, they could invest in Russia to make money. They could sell exports to Russia and make mutual gains from each other. But the Americans wanted to make all the money off Russia for themselves, mainly by using the kleptocrats they backed to sell the natural resources that they grabbed to U.S. investors. The Harvard Boys wanted to make sure that rent-yielding natural resources were given the kleptocrats – who could only make their money in hard currency by selling shares abroad in the assets they grabbed, keeping their payments in England or the United States.
So they’ve asked Europe not to buy Russian gas, but to spend seven times as much buying American liquefied natural gas, and spend $5 billion to build the ports to accept this gas – while going without gas for about three or four years…let their pipes freeze… stop making fertiliser… Don’t feed your land, we’ll take it on the chin for America. Your standard of living is going to have to drop by 20%, but it’s all for American democracy. And the European heads said that’s fine.
America said that you Europeans are bothering them by trying to stop global warming. That’s a direct attack on a major arm of U.S. diplomacy, the oil industry. American companies control almost all the world’s oil trade. It’s the highest rent-yielding sector in the world. And it’s income-tax free. It’s politically powerful, and as long as America can control the oil trade, it can talk to Latin American countries or African countries and say if they elect a leader that U.S. officials don’t like, it can impose sanctions and stop exporting oil to them to freeze them out. They won’t get fertilizer, so the U.S. can starve you out. It can put a sanction on their food trade. Agriculture is Americans biggest trade surplus.
Jonathan Brown 1:25:14 That’s what they’re doing with the conflict in Ukraine to Russia, and also China as well. Are there other major sources of grain, wheat and rice?
Michael Hudson 1:25:26 Yes. But President Biden has blamed Putin for creating a world food shortage and threatening to cause a famine, because Ukraine can’t export its grain. Ukraine, at American direction, has put mines all over the Black Sea. So the Black Sea’s ports have mines around them. If a ship hits them, it’ll blow a hole in the hull and will sink. As a result, if you’re a shipping company and want to transport grain, you have to get insurance, because if you don’t have insurance, then you’re in danger of going bust if your ship goes under. But no insurance company will insure it until the Ukrainians remove the mines that they put. You need minesweepers for that. Needless to say, Russia doesn’t want American minesweepers in, because they may very well attack as there’s a war on.
So you have the United States blocking Ukrainian grain exports, which was a huge export. You’ve had the American dollar area, the NATO countries, refusing to import food from Russia, which is the world’s largest agricultural exporter. This is creating a crisis for Global South countries, for Latin America and Africa.
Meanwhile, global warming is causing droughts that are reducing the harvest. The Green Party in Germany has a pro-war policy that is making global warming rise faster. By supporting military warfare against Russia, and U.S. military adventurism in general, they are becoming major lobbyists for the air polluters. The largest air polluter is the American military. The Green Party in Germany advocates fighting Russia more, providing it with more arms, and thus supporting the military that is now the largest new contributor to global warming. In effect, this means that Europe is willing to say, ‘Okay, we are willing to have the sea levels rise another 10 feet, as long as we can help America dominate Russia’.
Europe even is letting America keep the Trump tariffs on its exports, in place, so it can’t export more for America. It looks like Europe will have to de-industrialize, maybe we’ll go back to the 19th century and become a country of farmers. That basically is the situation that its subservience is imposing.
Jonathan Brown 1:28:49 I’d like to come back to the just what China and Russia can do, given their reserves. They understand they’ve got… they’ve got lots of reserves of gold, and also large grain stores, China having the most as I understand it, but can you help me understand why all these nations around the world have U.S. dollar reserves in some form or other, most of it in bonds? Why is the dollar still increasing at this moment in time?
Michael Hudson 1:29:28 Because the Euro was going down. The Japanese Yen is going down. The Yen is the worst performing currency, because they’ve held their interest rates very low. Their aim is for banks to make money by borrowing low at low rates and lending to foreign countries at a higher rate. Europe is also keeping its interest rates low. The American Federal Reserve is raising the interest rate, and that is money from low interest rate countries. Capital from Europe and Japan is flowing to America.
Currency values are primarily set by relative interest rates and capital flows. They’re not set by the cost of production for imports and exports. They are not caused by trade, unless there’s a radical breakdown of trade. All these zigzags that you see are short-term capital movements. America tells other countries to keep their interest rates low, so that money will flow from their banks and financial to the United States to buy American securities that yield higher returns. As long as the Euro is a satellite currency to the dollar, it’s going to continue to go down. So the both the euro and the British Sterling are now moving towards $1 per pound and $1 per euro.
Jonathan Brown 1:28:49 That’s a short-term measure. The long-term measure is that countries have to start selling the bonds that they’ve got in U.S. currency. So long term, it has to come down. Is that right?
Michael Hudson 1:29:28 Yes. They’re going to hold each other’s currencies. Especially now that Russia is denominating its exports, in roubles instead of dollars. The American banks have lost the trade financing of the world oil trade, certainly Russian oil and agricultural trade. Instead of holding dollars, countries will hold rouble reserves to stabilise their currencies via the rouble, China is holding rouble reserves, and Russia is holding Chinese yuan reserves.
The balance will be held more in gold and some kind of assets without a liability attached to them. I think the logical direction in which this is moving is that the non-dollar countries will create their own version of the International Monetary Fund, their own World Bank, their own trade organization. So there will be one set of trade and financial and development organisations and military organisations in the U.S. and Europe, in NATO, that is, in the white countries, and another set of relations and the non-white countries that are actually developing while America and Europe shrink.
Jonathan Brown 1:33:06 So what’s your idea of how much gold China actually holds, because there’s the published numbers [which] are really extraordinarily small aren’t they for an economy that’s so big.
Michael Hudson 1:33:18 I don’t know. Governments can hold gold not only through their own treasury, but through some subordinate agency. I no longer go into the financial statistics like I used to, because it takes a whole year to do a balance sheet that is comprehensive. All I know is that they saw how America simply grabbed Russia’s dollar holdings, and they don’t want the same thing done to them. President Biden has said China is America’s number one long-term enemy, and he wants to destroy the Russian economy first and then attack China after prying them apart.
Obviously, China is reading the newspapers and wants to avoid that fate.
Jonathan Brown 1:34:16 The other thing that I find utterly remarkable, for example, is that Biden in his speech said that he wants to get rid of Putin. I think if it was a U.S. Defence Secretary or Secretary of State saying that he wants to arm Taiwan……. If I ran China and I said I want to arm Mexico, or if anyone in South America wants any weapons then my doors open to you, I would expect the Americans to be very upset with that because I’m breaching the Monroe Doctrine. Can you help me understand, having been in the corridors of power, whether Chase Manhattan or the contacts you’ve got, how can …. how can politicians be so delusional to think they can say stuff like that without having a negative consequence?
Michael Hudson 1:35:18 Well you know who’s really upset by that? The Taiwanese! They say, Oh, they want to make Taiwan into another Ukraine, to fight to the last Taiwanese, just like the Ukrainians have been used. They see two choices before them. If they do arm and get weapons that can hit China, then China is likely to bomb them. On the other hand, I’ve met Taiwanese officials for 40 years, and many have said that their long-term hope is to be reintegrated. They want to be investors in China, but they want to merger under terms where they can be sort of like Hong Kong, able to have a merger that will make them prosperous too.
So Taiwan’s choice is between following the Americans and becoming the Ukraine of the Pacific, or joining with China. Given the fact that China is growing and America is shrinking, what are they going to choose? Well, I would imagine that you will see a strong, peaceful integrationist movement with China. But China remembers that Chiang Kai Shek massacred the communists in 1927.
Jonathan Brown 1:36:47 So what are we looking at then, who is in charge, President Biden or other people?
Michael Hudson 1:36:56 President Biden is a front man. They’re all the front men for the faceless people in the State Department, the neocons who are controlling things. Biden has always been right-wing, just a corrupt party politician. He does what he’s paid to do. He’s unimaginative. He’s brought in some real Russia haters – people who have a visceral hatred of Russia because of their family background under the tsars or under Stalin. Blinken said that his family was Jewish and lost under the tsars, and maybe under Stalin. He wants to kill Russians because he’s so angry at what they did to his ancestors. That is the neocon mentality in a nutshell. It’s a crazy mentality.
The Federal Reserve and the Treasury officials say they were not consulted in the political moves that Biden and Blinken and the neocons are making. There is the kind of single-minded tunnel vision at work. They really are Russia haters and China haters. There is a lot of racism you’re seeing in New York, where it’s very dangerous for Asian women to take a subway. Almost every week, the lead news item is yet another Asian woman attacked or pushed in front of a subway. There’s a there’s a new race hatred in America. And they are treating Russians as the Ukrainians do, as if Slavic speaking people are a separate race.
Jonathan Brown 1:38:49 Extraordinary. So Super Imperialism came out, as I understand it, and was used by the State Department to figure out how to continue running their economics …
Michael Hudson 1:39:04 At first U.S. officials thought that going off gold was going to be a disaster. Herman Khan told me, “You’ve shown that we’ve run rings around the British Empire.” He hired me for the Hudson Institute, which is a national security institute, and brought me to the State Department for meetings and to Army War colleges and Air Force war colleges to talk about it. I guess I shouldn’t be surprised that the main people who wanted to learn how imperialism works were the imperialists themselves. I had thought that the anti-imperialists were going to be my main audience, but the imperialists really needed to know what was new.
Jonathan Brown 1:39:50 They took your book, Super Imperialism and they read it as a love letter, right.
Michael Hudson 1:39:56 Not a love letter. They saw it as a “how to do it” book. I was a technician.
Jonathan Brown 1:40:04 Right. And working for Herman Kahn, he’s a powerful guy that people don’t talk about so much anymore, but he was, he was extraordinarily influential at the time, right?
Michael Hudson 1:40:14 Yes, he had a great sense of humour. He was a great speaker. He was absolutely brilliant. He wrote a book on thermonuclear war, saying that even if there were to be a war, somebody would be left to survive. That made him one of the models for Dr. Strangelove in the movies. I would sit and hear Herman talk about military strategy, and was awed by how he thought it all through. He was a brilliant military tactician. He would bring me and sit down with generals, and they would explain things. I don’t have a good military sense, or any military training at all. He wrote that, personally, he wanted to be right under the first hydrogen bomb. He didn’t want to live in the post-nuclear world. But there would be some survivors somewhere. That made him notorious. He was so reviled for even having brought up discussion of the topic that needed to be discussed, that he wanted to have ideas that people liked. And that was the corporate environment study. That was what I was pretty much in charge of. I was the economist, he was the military. We had the same salary there.
We would go around the world disagreeing with each other. It would be like a show. He’d talk about the world being a cup half full. I talked about the cup being half-empty, as he put it. I talked about the debt overhead, and how debt was growing and would ultimately stifle the economy. He talked about how productivity would be sufficient to pay debt, although productivity doesn’t necessarily give you the money to pay the debt. Productivity does not grows exponentially, but tapers off. As debt grows, any rate of interest is a doubling time. And it doubles quicker than the economy can double.
Jonathan Brown 1:42:24 And this is really coming back to one of your initial questions from Terrence McCarthy, which was to focus on productivity, wasn’t it?
Michael Hudson 1:42:33 Yes. And the idea was focusing on productivity, you realise that it all comes down to labour ultimately. How do you make labour more productive? How do you make industry more productive? You get rid of what is unproductive – and the unproductive overhead is rent. So how much corporate spending is just plain overhead? How much is unnecessary for corporate industry to take place? That line of questioning brings you back into the classical economics. Marx is really the last great classical economist who pushed it all to its logical end. His contribution was to explain that just as the landlord exploits by taking rent, the industrial capitalist exploits labour by charging more for the products of labour than it costs to hire labour to produce.
However, unlike the rentier, unlike the landlord, the capitalist uses this economic surplus value to expand production, to build yet more factories, to employ yet more labour. This is an expanding society, whereas the rent paid to landlords is a kind of exploitation that is pure overhead and shrinks industrial capitalism. That’s why Marx said that the political aim of industrial capitalism was to free society from the landlords, predatory bankers and monopolists. That’s why the Communist Manifesto‘s program begins with collecting rent for the public sector. You can tax the land as a transition to socialising it. That was the Communist Manifesto’s classical economics.
Jonathan Brown 1:44:26 You have these views, and yet you were still a valued member of the team at the Hudson Institute.
Michael Hudson 1:44:33 Yes, because I was explaining how the world worked. Herman and I disagreed so much, we were genuine friends. I liked him, and we couldn’t believe that the other would actually believe something so different. But we said okay, if the arguments that we’re having is the “big argument,” it’s going to determine where the economy is going. Either he’s right or I’m right. This is like the debates between Henry George’s followers and the socialists in the early 1900s. It was going to be one world or another.
What is the key to analysing the economy? Is it to focus on rent and finance, or on technological potential? My point is that technological potential can be smothered by so much overhead paid to the rentier class via the FIRE sector – finance, insurance and real estate – that there’s no money left to invest, no income left for wage earners to spend on buying the goods and services that they produce.
Jonathan Brown 1:45:48 And yet the technology sector in my opinion is actually the new monopolist. Instead of having a competition, in that sense they’re the new landowners. So Google is a spectrum landowner. If I want to host these videos, then I’ve got to negotiate or accept the terms of the landowner YouTube. I’m posting them there, but I won’t be making any money on it. Because I’m one of the serfs on YouTube.
Michael Hudson 1:46:16 This is the problem that China is dealing with in its own way. What do you do when Jack Ma and other IT specialists end up as billionaires? Well, China did not have an anti-monopoly group. It let 100 flowers bloom and let billionaires develop, but would then have them transfer their money to the government in one way or another. They haven’t done this in the way that Western economies do, by an anti-monopoly tax, but by a political consensus way.
In countries like Russia, I’m trying to get them to formalise this into formally calculating the magnitude of economic trends. You want innovation to take place, you want people to make the fortune, but at a certain point they can’t somehow make so big a fortune that it ends up crashing the economy.
Jonathan Brown 1:47:37 But looking at your writing from the Byzantine times and the ancient Near East, is the importance of the leader of that particular economy or society to make sure that no one got so rich that they could overthrow the leader? Which is really what you’ve got with someone like Zuckerberg, the power that he was able to wield in the election, whether you agree with him or not, was extraordinary. And likewise, if you look at the fight that’s currently going on with Elon Musk and Twitter, is to recognise that actually we want, we want our people to own these resources that we pretend are private, but actually have tremendous social power.
Michael Hudson 1:48:24 Yes, they financialized politics in America, by the Supreme Court’s Citizens United ruling. Anyone can contribute as much as they want, if you’re a corporation. The rentier interests give to pro-rentier politicians to act as their puppets. The money goes for advertising airtime on television and the media to overwhelm all the people who normally would want to minimise the rentier class. So essentially, you’ve financialized politics in America much more than has occurred in Europe. But in Europe, it’s the right wingers who basically control the press, commercial television and media. So if the media are controlled by the right wing with their own agenda, they frame the economic issues from the vantage point of the rentier class instead of from the vantage point of how an economy actually develops and grows wealthier in a fair manner.
Jonathan Brown 1:49:48 I know we need to need to wrap up. Just thinking about the scenarios for Russia and China currently. Everybody who is part of the original white economies of Europe, realises that if they don’t side with America, they get overthrown. But also right now they have a short-term challenge that the Americans are going to let them starve because they’re stopping wheat exports coming through the European ports. But then you’ve also got Russia with resources, you’ve got China with grain resources.
So there is a potential that when people start to starve, and you look at the challenges in Sri Lanka, with politicians being murdered and people running out of food, there’s a chance for China to step in and say, we can send you grain exports. And by lucky coincidence, because of the all the lock downs that China’s got right now, a lot of the world’s boats and ships are currently waiting outside ports in China.
Michael Hudson 1:50:54 [Missing part here] Computer chips are part of the problem. And that’s probably going to make them friendlier with Taiwan. Taiwan has the computer chips.
Jonathan Brown 1:51:03 And by your assessment, because Taiwan do not want to be another Ukraine, American actions are likely to accelerate the reintegration.
Michael Hudson 1:51:12 There’s a bell shaped curve, I haven’t met with the Taiwanese in quite a few years so I don’t know, up to date what the dynamic is. But just by logic, you can see the international environment in which they’re operating. You wonder how they are going to calculate the plusses and minuses of the U.S. versus China? What economy do they want to attach themselves to so that they can get richer fastest?
Jonathan Brown 1:51:46 And also stay safe and not get involved in unnecessary wars. When you look at the tragedy in Ukraine, all these people dying when you’ve got such a strong opponent in Russia, how can you go to war with them for any period of time?
Michael Hudson 1:52:07 Well, that’s what the world is divided into. The U.S. and European society is built on war. It’s the only foreign policy they have, because they don’t have an economic power anymore. They’ve de-industrialised and the rest of the world that is trying to industrialise and trying to feed itself. China, Russia, India, the Global South are the anti-war part of the world. So the world is dividing into two parts: a rentier part supporting finance capitalism [that] is trying to impose it on other countries, to financialize China and Russia to make them put a Margaret Thatcher or Boris Yeltsin in charge of China. While they try to put their own candidates in charge, a la General Pinochet, the rest of the world is trying to defend itself against this terrorism.
So the Western world that calls itself democracy is the terrorist military world. The nations that it calls authoritarian are any authority strong enough to control and tax the financial interests – that is, any government strong enough to regulate finance and real estate. Such an economy is by definition authoritarian as opposed to a democracy, where Wall Street and the financial centres are the democratically elected central planners. So what’s at issue is who’s going to plan society: the financial sector, or the people as in China and other countries.
Jonathan Brown 1:53:41 I think that says it. From a Western lens it’s a different type of democracy.
Michael Hudson 1:53:48 Yes. But democracy really means an economy run to benefit the great bulk of the population, who happen to be wage earners? Or is it going to be for the 1%? Is the economy run for on behalf of the 99% and the 1%? Well, the 99% need a strong government to run it in their own interests and cope with the counter-revolutionary policies, the neo-feudal rentier policies of the 1%.
Jonathan Brown 1:54:22 Okay, so knowing China, then your take on its zero-COVID policy that the authorities are implementing in some parts of the country?
Michael Hudson 1:54:32 The more I read about long COVID here, the worse it seems. I’m 83 years old, so my wife and I have not gone to a restaurant since 2020. We haven’t even gone to our friends’ houses for dinner. We’re isolating ourselves. China has isolated itself at great cost, but it saved the population not only from having COVID itself, but from having long COVID. There are now a million Americans with long COVID. They also say that long COVID lowers your, your IQ by 10%.
It’s almost as dangerous is inheriting a trust fund when it comes to impairing your IQ. It’s debilitating.
My webmaster in Australia and his family have COVID. So I’m very sympathetic with what China’s doing, even though it means that I can’t go there, because I’d have to be isolated in a hotel room for two weeks just to give a few days’ meeting – and then be isolated again when I come back. So China is making a huge effort not to sicken its population with COVID. And now of course, since the Russians have began to publish all their findings of the US bio-warfare labs in Ukraine that were designed to spread a COVID like diseases by migrating birds and bats and manmade aircraft over Russia.
Now, they’ve reopened the question ‘was COVID a US bio-warfare from the very beginning’? And the Chinese are looking at it and saying ‘was it engineered’? If the Americans are trying to engineer COVID to affect mainly Slavic population and their DNA signatures, could they have been doing the same thing against Asians? So all of this is suddenly opened up. The World Health Organisation has refused to divulge any of the USA biowarfare efforts, and the U.S. has stonewalled all efforts to find out about the bio-warfare. This is isolating America and Europe.
If American Europe is left with its current foreign policy, biowarfare and atomic bombs, NATO will be shunned by the civilised world. As Rosa Luxemburg said a century ago, the choice is between socialism or barbarism. NATO, Europe and America represent the new barbarism. The alternative is socialism. That is how the world seemed to be developing in Europe and America until World War I untracked everything. The rest of the world now has a chance to get back on track. I don’t know what’s going to happen in the West.
Jonathan Brown 1:57:47 Michael, as always, you always get more into your stuff than I expected. Are there any things that you’d like to say to our listeners, before we finish up,
Michael Hudson 1:57:56 I’ve probably said too much. And I hope you can edit out anything that’s embarrassing.
Jonathan Brown 1:58:01 I may get thrown off YouTube for publishing some of your comments. So you may have to go back and review a few of them. But as always, Michael, thanks so much your time what we’ll do is we’ll send a link to everybody for the website and also for the new book, as well which I think and those series of lectures when I was researching for this conversation were the single best economic lectures I’ve ever listened to – truly extraordinary levels of insight and real economics rather than theoretical or textbook stuff. So as always from ShepherdWalwyn, thanks so much for your time and for your contribution.
Michael Hudson 1:58:41 Well, if you transcribe it all in will be worth it.
Jonathan Brown 1:58:45 That’s, that’s our promise 100%. So thanks very much.
Ann Nonny Mouse says: • WebsiteJune 18, 2022 at 9:55 pm GMT • 3.8 days ago↑Wow! Fabulous! It’s going to take me way more than 2:00:05 to read this in full, years of study here, but thanks!Money is magic, but wow! what a magician!Many thanks, Michael Hudson. ReplyAgree/Disagree/Etc.This Commenter
EH says: • WebsiteJune 19, 2022 at 12:58 am GMT • 3.7 days ago↑Good read. Even the civil RICO laws, if they were enforced, would take out all the major rentiers, it’s the very model of racketeering. Anybody can file civil RICO suits — I doubt anybody can win against the rentiers’ mental hold on judges, though. ReplyAgree/Disagree/Etc.This Commenter
Fidelios Automata says:June 19, 2022 at 1:32 am GMT • 3.7 days ago • 100 Words ↑Hudson seems to be a pretty smart guy but sadly he’s bought into the Covid propaganda. Admittedly, my wife and I are younger though still in the “high risk” group. We had Covid early on and since then have never isolated ourselves, nor did we give in to the vax. We don’t have “long covid” and we haven’t caught any other strains. Hudson should check out RFK Jr’s book on Fauci. Many of the deaths attributed to Covid came from the way the government and medical authorities handled it rather than the actual risks of the virus. • Replies: @peterAUS, @MefobillsReplyAgree/Disagree/Etc.This CommenterThis ThreadHide Thread
restless94110 says:June 20, 2022 at 7:21 pm GMT • 1.9 days ago↑While I learned a few minor things this time, I had to keep looking at the date these videos wee done since much of this is the exact same things–down to the words–the Hudson says.It’s depressing. ReplyAgree/Disagree/Etc.This Commenter
bert33 says:June 22, 2022 at 4:58 am GMT • 12.4 hours ago • 100 Words ↑If they’re serious about ever having affordable housing, then we need: Cheap campgrounds, showers, toilets, amenities cafeteria type situation, trailer parks/RV parks, mobile home parks, and apartment complexes. The housing market is crashing because too many speculators payed their high dollar money games with a place of domicile. Now in america we have people working full time, living in their cars. WTF?!?! ReplyAgree/Disagree/Etc.This Commenter
Mefobills says:June 22, 2022 at 3:00 pm GMT • 2.3 hours ago • 100 Words ↑@peterAUSA public figure who failed a character test. When Hudson was economic advisor for Kucinich, he received death threats. And of course, those threats were from vested interests.He didn’t wuss out and go and hide. That says volumes about his character.Have you received death threats and shrugged them off? That takes a giant set of balls, especially when vested (((interests))) don’t play around. ReplyAgree/Disagree/Etc.This CommenterThis ThreadHide Thread
Mefobills says:June 22, 2022 at 3:09 pm GMT • 2.2 hours ago • 100 Words ↑@VerymuchaliveAs if a Jewish Bolshevik would stand as a godparent. This is another of Hudson’s fabrications. Your making an unfounded allegation, so you can then cast aspersions.Try to figure out how Hudson is foursquare against Finance Capital and simultaneously a Trotskyite.Trotsky took money from Finance Capitalists, especially Schiff of Khun, Loeb and Co.You can’t be for something and against it at the same time, that is – unless you are moron, and Hudson is not a moron. Try to resolve your contradictions. ReplyAgree/Disagree/Etc.This CommenterThis ThreadHide Thread
Agent76 says:June 22, 2022 at 3:17 pm GMT • 2.0 hours ago • 200 Words ↑May 20, 2022 Introducing The Reset: The Great Reset Docuseries In episode one of The Great Reset Docuseries, we introduce The Great Reset. We provide the background of the World Economic Forum and its chairman, Klaus Schwab, along with the other global elites who assisted in the birth of the organization. We explore the organizations that compliment each other, working alongside the WEF to plan and enact a new form of global governance through The Great Reset.https://www.youtube.com/embed/JS6TYi9UmQI?feature=oembedMar 4, 2021 Banking below 30: Banks own many of Dallas’ high-crime apartments and they’re rewarded for itBanks are required to lend to low-income borrowers. But, instead of loans, regulators incentivize banks to invest in housing built in areas of crime and blight. https://www.youtube.com/embed/JcZmgJ2tBrI?feature=oembedNov 11, 2020 World Economic Forum: “You’ll own nothing, and you’ll be happy” (While Oligarchs Own Everything)All video and audio content belong to the respective owners and creators.https://www.youtube.com/embed/XzHDYrRuXMc?feature=oembed ReplyAgree/Disagree/Etc.This Commenter
Mefobills says:June 22, 2022 at 3:33 pm GMT • 1.8 hours ago • 500 Words ↑@Fidelios AutomataHudson seems to be a pretty smart guy but sadly he’s bought into the Covid propaganda. And yet, Hudson seems to be aligning himself with Ron Unz’s theory that Covid was militarized.Below is quote from Hudson’s personal experience, and he is not a medical expert, he is an economist. He has suspicions about the engineering of the virus, especially to be DNA specific. Getting into Hudson’s brain space, if one can do that, then the virus might well have been engineered, and hence could cause “long covid.” Also, when you are 83, your immune system is not as robust as when you are young.My webmaster in Australia and his family have COVID. So I’m very sympathetic with what China’s doing, even though it means that I can’t go there, because I’d have to be isolated in a hotel room for two weeks just to give a few days’ meeting – and then be isolated again when I come back. So China is making a huge effort not to sicken its population with COVID. And now of course, since the Russians have began to publish all their findings of the US bio-warfare labs in Ukraine that were designed to spread a COVID like diseases by migrating birds and bats and manmade aircraft over Russia. Now, they’ve reopened the question ‘was COVID a US bio-warfare from the very beginning’? And the Chinese are looking at it and saying ‘was it engineered’? If the Americans are trying to engineer COVID to affect mainly Slavic population and their DNA signatures, could they have been doing the same thing against Asians? ______________My personal view is that it is the gene therapy shots that causes long-covid. The mRNA molecule is man made with Pseudouridine and this creation was never really looked at for its negative effects. Also, mRNA gene therapy mystery juice goes on a field trip, going everywhere in the body, and then replicates where it shouldn’t. The spike protein itself is bad, like a prion. So, your body is turned into a spike protein factory.A healthy person has a lymphatic system that can deal with virus or bacterial invaders that enter into your nose, throat and lungs. Older people, not so much, which is why they succumb to things like the flu.Don’t be the enemy of perfection; Hudson is an economist -not a medical expert, and even now the Covid mystery still hasn’t unraveled fully.If you are an economist, then Hudson’s view is consistent with Ron Unz’s theory. Also, the bio labs in Ukraine WERE getting Slavic DNA to run experiments on.https://www.thelibertybeacon.com/the-ukrainian-biolabs-the-globalist-plan-to-exterminate-the-russian-people/In November 2017, something very unusual occurred. Russian President, Vladimir Putin, publicly stated that there were foreign subjects on Russian soil who were engaged in anomalous activities, like the collection of Russian DNA samples.
Putin released a statement where he clearly said that someone was keenly interested in the ethnic composition of the Russian population. ReplyAgree/Disagree/Etc.This CommenterThis ThreadHide Thread
Mefobills says:June 22, 2022 at 4:33 pm GMT • 47 minutes ago • 700 Words ↑@Kurt Knispel(By the way: “Land Tax” is one of the worst and most criminal thefts of all; add the minority Jewed gvt. and the IRS has no legitimacy whatsoever.) That’s a tough one to wrap your mind around. You are getting screwed now by rake-offs, by rents.The screwing is in prices, where people (on average) have to bid against each other to buy housing. This bidding process drives up prices, so that you are paying a large fraction of your income, just so your kids can go to a school that is not completely bombed out by minorities.Right? White people and North East Asians circle through neighborhoods in their cars, looking at the demographics. So, the house loan is the entry point for a “good neighborhood” which in turn relates to the nearby public school. Schools populated by minorities, especially blacks, don’t do well. But, OH! is that raaacist? I can say it, but Hudson cannot. Undoubtedly, racism is a functional part of economics, as people make choices.So, the idea is to lower rents, and the rake-offs that are stealing from your pocket. Adam Smith’s invisible hand is in your pocket, and squeezing your testicles. Paradoxically, rent taxes lower prices.Land, as one of the main contributors to production, has to be taxed to prevent rents. The proper way to do the taxing is complex. And the mortgage money creation process has to be controlled as well. So, it is both money creation and taxation that has to come under control. Hudson gave some examples:The more money you have to spend on mortgage interest to buy a house as land and real estate is financialized, the less you have left to spend on goods and services. This was one of the big problems that was slowing the economy down. So, if you are not buying and selling goods that you produce, with your fellows, then that is bad. You are not consuming those rib eyes from your rancher friend, and he is not enjoying the boats you created. The invisible hand is siphoning away your money, to pay the mortgage. The banker could give a shit how big your mortgage is, he cares mostly about the interest income. When you pay back your loan, the money you are paying back disappears when it pays down principle. So, housing prices are empty calories that force people into the streets, while paying the 1%.The banker is taking rents on you in the form of prices, and then your income vectors away from you to disappear into the banker’s ledger.Here is another “rent” charge, that society ultimately pays for:Under Reagan’s 1981 tax “reform” you could pretend that if you buy a big commercial building, you can write off 1/7 of the entire costs every single year as tax deductible income. At the end of seven years, you change your ownership from one name to another name, and you start all over again. The same building can be re depreciated again and again and again. Our Indian and Paki friends are big time into this scam. They use it to buy and sell convenience stores to each other. When one of the scammers is about at the end of his 7 year period of depreciation, he sells the building to his friend. Basically they swap their building with each other.The Jews in New York do the same thing with their buildings. They rub their hands in glee.The idea is to think in terms of rents and the taking of sordid gain. Taxes that land on rents are something like cutting out a tumor, so producers can produce, rather than feed energy to a cancer.But democracy really means an economy run to benefit the great bulk of the population, who happen to be wage earners? Or is it going to be for the 1%? Is the economy run for on behalf of the 99% and the 1%? Well, the 99% need a strong government to run it in their own interests and cope with the counter-revolutionary policies, the neo-feudal rentier policies of the 1%.Rents cause polarization. Debt mechanics caused Rome to fall into feudalism, as the land polarized into rentiers owning big estates (Latifundia). Gold was consecrated to the vaults, to then start the greatest depression, the dark ages. The 99% were dispossessed from owning land, and became serfs. ReplyAgree/Disagree/Etc.This CommenterThis ThreadHide Thread
MD: At MoneyDelusions, there’s a tool we use to test ideas. Ideas come up when someone thinks there’s a better way to do something. Thus, something is already being done. People resist change and they will put great energy into preserving the current process rather than trying a new process that promises improvements.
Well, what if the roles were reversed? What if the proposed process was in place and working? What if the existing process had to prevail as a “new” idea?
Let’s try it with this article. Let’s assume that the “real” money process was in effect. Would the subject of this essay, The Panic of 1837, even exist? Or if it did exist or arise, would it be as severe under the “real” money process described in the side bar? If the issues could arise, could the actual existing process deal with the issues better?
Let’s give it a try. The article we annotate here is from Wikipedia.
Whig cartoon showing the effects of unemployment on a family that has portraits of Democratic Presidents Andrew Jackson and Martin Van Buren on the wall.
The Panic of 1837 was a financial crisis in the United States that touched off a major depression, which lasted until the mid-1840s. Profits, prices, and wages went down, westward expansion was stalled, unemployment went up, and pessimism abounded.
MD: Notice the language “touched off”. We’re reading this article as if a “real” money process was in effect and efficiently operating. Could anything “touch off a major depression” with a “real ” money process in effect? Why would profits, prices, and wages go down? Why would westward expansion be stalled? Why would unemployment go up? Why would pessimism abound?
The panic had both domestic and foreign origins. Speculative lending practices in the West, a sharp decline in cotton prices, a collapsing land bubble, international specie flows, and restrictive lending policies in Britain were all factors.[1][2]
MD: Note, none of these claimed causes exist with a “real” money process. There are “no” lending “practices” when it comes to a “real” money process. When a trader sees clear to deliver on a promise that spans time and space, he “creates” money. He doesn’t “borrow” money. Someone doesn’t “lend” him money. There is no resistance to a responsible trader (one who delivers as promised) when he makes the promise. The problems “all” happen if he fails to deliver…and those problems have a very different characteristic if “borrowing” and “lending” are not involved. The key element here is “responsibility”.
MD: Here comes the recommended improvement…”a central bank” to regulate fiscal matters. Well, we already have a process that “regulates fiscal matters” (i.e. those related to money). (1) If the trader creating the money is not responsible, he incurs and INTEREST load. Or more correctly, a “responsible” trader never incurs an INTEREST load. If there’s a problem delivering on a promise, that problem doesn’t get smaller by imposing an INTEREST load. The argument against a central bank is obvious. A central bank can only make matters worse. In fact, it can be used…and is easily shown to be used… to cause a panic. Further (2), Andrew Jackson had experience with such solutions and rejected the charter for the Second Bank. They’re saying here that the panic would not have happened if this “new centeral bank” idea was allowed. Let’s watch them make the case.
This ailing economy of early 1837 led investors to panic – a bank run ensued – giving the crisis its name.
MD: They claim an “ailing economy”. What caused it to be ailing? Who are these “investors” who are led to panic. With a “real” money process, investors only play a role when irresponsible traders are concerned. Supposedly, such traders are higher risk and thus must pay INTEREST premiums to cover that risk. It works like “casualty insurance” where PREMIUMS = CLAIMS. With responsible traders, CLAIMS are zero…so PREMIUMS are zero.
A real money process imposes INTEREST load in direct response to DEFAULTs on trading promises. Responsible traders don’t DEFAULT, thus they bear no INTEREST load. All responsible traders a alike as far as the process is concerned. Irresponsible traders come with varying degrees of “propensity to DEFAULT”. This is also true with casualty insurance where those with greater risk of CLAIM pay greater PREMIUMS. And as with insurance claimants, filing a CLAIM is a choice. If you can resolve the issue without filing a CLAIM you can maintain a lower PREMIUM load.
And how about the “bank run”? Well, no bank exists. It only exists with the solution they propose. But its obvious here, it is their very solution that introduces this additional possible cause. And what is a bank run? It’s a case of “irresponsible banks DEFAULTING”. Their process has a 10x leverage advantage. They can “lend” 10x as much money as they have. Well, that gives them 10x the motivation to “screw” their customers…i.e. those who trusted them to keep their money safe. See how easy it is to show how defective the existing solution can be? The tables are turned. “They” must prove their case…and it obviously can’t even be argued, let alone proved.
MD: And here’s another claim that is easily refuted. Precious metals are “not” money. They are just stuff standing in as money. In a “real” money process, they play no role in trade. If you have surplus money and you think its safer to have gold, then buy (i.e. trade your money for) gold. That’s a choice.
Obviously the gold can be stolen as easily (or even more easily) than money. Remember, money may simply be an entry in a ledger. If that ledger is transparent for other traders to scrutinize (which the so-called financial audit does), then the money is difficult to steal.
This solution of “substituting specie for a promise” does nothing but give risk another avenue to come about. Worse, the value of the specie can change over time and space (e.g. a gold shipment can be robbed…or a new huge source can be found), and thus change in supply/demand determined value in trade. That can’t happen with money created in a “real” money process.
A significant economic collapse followed. Despite a brief recovery in 1838, the recession persisted for approximately seven years. Nearly half of all banks failed, businesses closed, prices declined, and there was mass unemployment.
MD: Look what happened! Half the ” banks” failed. With no banks to fail, there are no bank failures. You’re bank solution is openly flawed. Why? Because your solution presents a domino effect. One “borrower” DEFAULTs. If you’ve “loaned” out all your money, you can’t pay “demand” deposits. But with the “real” money process no such existing commitments are affected.
If a trader DEFAULTs on his promise, new “non-responsible” traders wishing to create money incur INTEREST load to immediately mitigate that DEFAULT. This is an automatic negative feedback mechanism. If the DEFAULT was the result of market softening (i.e. the demand prompting the promise was not as anticipated), then new traders are discouraged from making such promises too. Thus you don’t have “bubbles”. They get nipped in the bud. Further, if the demand is real, more traders move in to meet it and supply/demand imbalance is quickly corrected…thus prices remain competitive.
From 1837 to 1844 deflation in wages and prices was widespread.[4] The lack of deposit insurance deepened the Panic. By 1850 the economy was booming again, a result of increased specie flows from the California Gold Rush.
MD: INFLATION means there is a supply/demand imbalance. This is normal for any trade…except in a “real” money process, it is not normal for money. With money in perpetual free supply, INFLATION of money is perpetually zero. This is additionally achieved by mitigating DEFAULTs immediately with INTEREST collections of like amount.
And look how they say they came out of the panic! They found more gold! With a “real” money process, finding more gold just makes gold less dear…and thus trades of less other stuff…including “real” money created by traders.
So now I suggest you go through the rest of the article. (1) Make the case that the “cause” doesn’t even exist with a “real” money process involved. and (2) Make the case that the “banking” solution just exacerbates the problems…and in fact it is to the bankers benefit to instigate such disruptions. It is their way of manipulating the market. They call it the “business cycle”
The crisis followed a period of economic expansion from mid-1834 to mid-1836. The prices of land, cotton, and slaves rose sharply in those years. The boom’s origin had many sources, both domestic and international. Because of the peculiar factors of international trade, abundant amounts of silver were coming into the United States from Mexico and China.[citation needed] Land sales and tariffs on imports were also generating substantial federal revenues. Through lucrative cotton exports and the marketing of state-backed bonds in British money markets, the United States acquired significant capital investment from Britain. The bonds financed transportation projects in the United States. British loans, made available through Anglo-American banking houses like Baring Brothers, fueled much of America’s westward expansion, infrastructure improvements, industrial expansion, and economic development during the antebellum era.[5]
From 1834 to 1835, Europe experienced extreme prosperity, which resulted in confidence and an increased propensity for risky foreign investments. In 1836, directors of the Bank of England noticed that its monetary reserves had declined precipitously in recent years due to an increase in capital speculation and investment in American transportation. Conversely, improved transportation systems increased the supply of cotton, which lowered the market price. Cotton prices were security for loans, and America’s cotton kings defaulted. In 1836 and 1837 American wheat crops also suffered from Hessian fly and winter kill which caused the price of wheat in America to increase greatly, which caused American labor to starve.[6]
The hunger in America was not felt by England, whose wheat crops improved every year from 1831 to 1836, and European imports of American wheat had dropped to “almost nothing” by 1836.[7] The directors of the Bank of England, wanting to increase monetary reserves and to cushion American defaults, indicated that they would gradually raise interest rates from 3 to 5 percent. The conventional financial theory held that banks should raise interest rates and curb lending when they were faced with low monetary reserves. Raising interest rates, according to the laws of supply and demand, was supposed to attract specie since money generally flows where it will generate the greatest return if equal risk among possible investments is assumed. In the open economy of the 1830s, which was characterized by free trade and relatively weak trade barriers, the monetary policies of the hegemonic power (in this case Britain) were transmitted to the rest of the interconnected global economic system, including the United States. The result was that as the Bank of England raised interest rates, major banks in the United States were forced to do the same.[8]
When New York banks raised interest rates and scaled back on lending, the effects were damaging. Since the price of a bond bears an inverse relationship to the yield (or interest rate), the increase in prevailing interest rates would have forced down the price of American securities. Importantly, demand for cotton plummeted. The price of cotton fell by 25% in February and March 1837.[9] The American economy, especially in the southern states, was heavily dependent on stable cotton prices. Receipts from cotton sales provided funding for some schools, balanced the nation’s trade deficit, fortified the US dollar, and procured foreign exchange earnings in British pounds, then the world’s reserve currency. Since the United States was still a predominantly agricultural economy centered on the export of staple crops and an incipient manufacturing sector,[10] a collapse in cotton prices had massive reverberations.
In the United States, there were several contributing factors. In July 1832, President Andrew Jacksonvetoed the bill to recharter the Second Bank of the United States, the nation’s central bank and fiscal agent. As the bank wound up its operations in the next four years, state-chartered banks in the West and the South relaxed their lending standards by maintaining unsafe reserve ratios.[2] Two domestic policies exacerbated an already volatile situation. The Specie Circular of 1836 mandated that western lands could be purchased only with gold and silver coin. The circular was an executive order issued by Jackson and favored by Senator Thomas Hart Benton of Missouri and other hard-money advocates. Its intent was to curb speculation in public lands, but the circular set off a real estate and commodity price crash since most buyers were unable to come up with sufficient hard money or “specie” (gold or silver coins) to pay for the land. Secondly, the Deposit and Distribution Act of 1836 placed federal revenues in various local banks, derisively termed “pet banks”, across the country. Many of the banks were located in the West. The effect of both policies was to transfer specie away from the nation’s main commercial centers on the East Coast. With lower monetary reserves in their vaults, major banks and financial institutions on the East Coast had to scale back their loans, which was a major cause of the panic, besides the real estate crash.[11]
Americans attributed the cause of the panic principally to domestic political conflicts. Democrats typically blamed the bankers, and Whigs blamed Jackson for refusing to renew the charter of the Bank of the United States and on the withdrawal of government funds from the bank.[12]Martin Van Buren, who became president in March 1837, was largely blamed for the panic even though his inauguration had preceded the panic by only five weeks. Van Buren’s refusal to use government intervention to address the crisis, such as emergency relief and increasing spending on public infrastructure projects to reduce unemployment, was accused by his opponents of contributing further to the hardship and the duration of the depression that followed the panic. Jacksonian Democrats, on the other hand, blamed the Bank of the United States for both funding rampant speculation and introducing inflationary paper money. Some modern economists view Van Buren’s deregulatory economic policy as successful in the long term, and argue that it played an important role in revitalizing banks after the panic.[13]
Effects and aftermath
The modern balaam and his ass, an 1837 caricature placing the blame for the Panic of 1837 and the perilous state of the banking system on outgoing President Andrew Jackson, shown riding a donkey, while President Martin Van Buren comments approvingly.
Virtually the whole nation felt the effects of the panic. Connecticut, New Jersey, and Delaware reported the greatest stress in their mercantile districts. In 1837, Vermont’s business and credit systems took a hard blow. Vermont had a period of alleviation in 1838 but was hit hard again in 1839–1840. New Hampshire did not feel the effects of the panic as much as its neighbors did. It had no permanent debt in 1838 and had little economic stress the following years. New Hampshire’s greatest hardship was the circulation of fractional coins in the state.[citation needed]
Conditions in the South were much worse than in the East, and the Cotton Belt was dealt the worst blow. In Virginia, North Carolina, and South Carolina the panic caused an increase in the interest of diversifying crops. New Orleans felt a general depression in business, and its money market stayed in bad condition throughout 1843. Several planters in Mississippi had spent much of their money in advance, which led to the complete bankruptcy of many planters. By 1839, many plantations were thrown out of cultivation. Florida and Georgia did not feel the effects as early as Louisiana, Alabama, or Mississippi. In 1837, Georgia had sufficient coin to carry on everyday purchases. Until 1839, Floridians were able to boast about the punctuality of their payments. Georgia and Florida began to feel the negative effects of the panic in the 1840s.[citation needed]
At first, the West did not feel as much pressure as the East or the South. Ohio, Indiana, and Illinois were agricultural states, and the good crops of 1837 were a relief to the farmers. In 1839, agricultural prices fell, and the pressure reached the agriculturalists.[14]
Within two months the losses from bank failures in New York alone aggregated nearly $100 million. Out of 850 banks in the United States, 343 closed entirely, 62 failed partially, and the system of state banks received a shock from which it never fully recovered.[15] The publishing industry was particularly hurt by the ensuing depression.[16]
Many individual states defaulted on their bonds, which angered British creditors.[17]: 50–52 The United States briefly withdrew from international money markets. Only in the late 1840s did Americans re-enter those markets.[citation needed] The defaults, along with other consequences of the recession, carried major implications for the relationship between the state and economic development. In some ways, the panic undermined confidence in public support for internal improvements.[17]: 55–57 Although state investment in internal improvements remained common in the South until the Civil War, northerners increasingly looked to private rather than public investment to finance growth.[citation needed] The panic unleashed a wave of riots and other forms of domestic unrest. The ultimate result was an increase in the state’s police powers, including more professional police forces.[18][17]: 137–138
Recovery
Hard times token, late 1830s; privately minted, used in place of the one-cent coin during currency shortage; inscription reads “I Take the Responsibility”, showing Andrew Jackson holding a drawn sword and a coin bag emerging from a strongbox.
Most economists agree that there was a brief recovery from 1838 to 1839, which ended when the Bank of England and Dutch creditors raised interest rates.[19] The economic historian Peter Temin has argued that when corrected for deflation, the economy grew after 1838.[20] According to the Austrian economist Murray Rothbard, between 1839 and 1843, real consumption increased by 21 percent and real gross national product increased by 16 percent, but real investment fell by 23 percent and the money supply shrank by 34 percent.[21]
In 1842, the American economy was able to rebound somewhat and overcome the five-year depression, but according to most accounts, the economy did not recover until 1844.[22] The recovery from the depression intensified after the California gold rush started in 1848, greatly increasing the money supply. By 1850, the US economy was booming again.
Intangible factors like confidence and psychology played powerful roles and helped to explain the magnitude and the depth of the panic. Central banks then had only limited abilities to control prices and employment, making bank runs common. When a few banks collapsed, alarm quickly spread throughout the community and were heightened by partisan newspapers. Anxious investors rushed to other banks and demanded to have their deposits withdrawn. When faced with such pressure, even healthy banks had to make further curtailments by calling in loans and demanding payment from their borrowers. That fed the hysteria even further, which led to a downward spiral or snowball effect. In other words, anxiety, fear, and a pervasive lack of confidence initiated devastating, self-sustaining feedback loops. Many economists today understand that phenomenon as an information asymmetry. Essentially, bank depositors reacted to imperfect information since they did not know if their deposits were safe and so fearing further risk, they withdrew their deposits, even if it caused more damage. The same concept of downward spiral was true for many southern planters, who speculated in land, cotton, and slaves. Many planters took out loans from banks under the assumption that cotton prices would continue to rise. When cotton prices dropped, however, planters could not pay back their loans, which jeopardized the solvency of many banks. These factors were particularly crucial given the lack of deposit insurance in banks. When bank customers are not assured that their deposits are safe, they are more likely to make rash decisions that can imperil the rest of the economy. Economists have concluded that the suspension of convertibility, deposit insurance, and sufficient capital requirements in banks can limit the possibility of bank runs.[23][24][25]
Lepler, Jessica M. (23 September 2013). The Many Panics of 1837: People, Politics, and the Creation of a Transatlantic Financial Crisis. ISBN978-0-521-11653-4.
Bodenhorn, Howard (2003). State Banking in Early America. Oxford University Press. ISBN978-0-19-514776-6.
Campbell, Stephen (2017). “The Transatlantic Financial Crisis of 1837,” in William Beezley, ed., The Oxford Research Encyclopedia of Latin American History. doi:10.1093/acrefore/9780199366439.013.399
Kilbourne, Jr., Richard H. (2006). Slave Agriculture and Financial Markets in Antebellum America: The Bank of the United States in Mississippi, 1831–1852. Pickering and Chatto. pp. 57–105. ISBN978-1-85196-890-9.
Lepler, Jessica M. The Many Panics of 1837: People, Politics, and the Creation of a Transatlantic Financial Crisis (Cambridge University Press; 2013) 337 pages; compares London, New York, and New Orleans between March and May 1837.
McGrane, Reginald C (1924). The Panic of 1837: Some financial problems of the Jacksonian era.
MD: At Money Delusions we have come to know that neither the “Keynesian’s” nor the “Austrians” are even close to getting INFLATION right. How can you get INFLATION (or more generally economics) right when you don’t know what money is? Further, this, like government (i.e. the Republicans and Democrats) is like watching the Harlem Globe Trotters and the Washington Generals. It’s theater. But just for exercise, let’s annotate this article from that infamous Mises Monk, Bob Murphy, who has relaxing life away as a college professor (most recently at Texas Tech, my sons’ alma matre). With an NYU PhD we don’t ever expect much but a professional shill. Interestingly, not only does Murphy claim to know what money is…he’s proving he doesn’t know in his books.
The government’s latest report puts the twelve-month official consumer price inflation rate at 8.5 percent, the highest since December 1981:
MD: Of course we at MoneyDelusions know INFLATION cannot be measured. We also know with a “real” money process, it is guaranteed to be perpetually zero…we don’t need to measure it. But look at the time series below. Notice, it starts its abrupt ramp up at the end of 2021…when the SSA had to finally admit they had been lying about INFLATION for fully 20+ years. In January, 2022, annuitants got a 5% raise. That’s not the 7% average inflation that we provably had since 911…but it’s 5x the less than 1% they claimed we had. The numbers are pure fiction. So why try to tell a story about what they mean?
As economists debate the causes of, and cure for, this price inflation, it’s worth recounting which schools of thought saw it coming. Although individuals can be nuanced, generally speaking the Austrians have been warning that the Fed’s reckless policies threaten the dollar. In contrast, as I will document in this article, two of the leaders of the Keynesian and market monetarist schools didn’t see this coming at all.
MD: Notice Mises Monks like to refer to “price” inflation…as if there was any other kind. What we have had for the last three or four generations is government counterfeiting. They claim to be doing it at 2%…but on average have been doing it at 4% … since 1913.
My Worst Professional Mistake
Before diving into it, I need to address a problem: my hands-down worst professional mistake occurred during the early years of the Fed’s “QE” (quantitative easing) programs, when I made bets on (consumer price) inflation with two economist colleagues. I ended up losing those bets and thereby gave Paul Krugman the opportunity to lecture me on my intellectual dishonesty because I clung to my (ostensibly falsified) Austrian model even after my prediction blew up in my face. Indeed, if you check out my Wikipedia entry, you’ll see that apparently my life story is that I was born, got my PhD, and lost an inflation bet—in that order. (For those interested in the details, I summarize the episode with relevant links in this postmortem blog post. I also participated in a 2014 Reason symposium along with Peter Schiff and others, commenting on the lack of inflation.)
MD: Now come on Bob! Do you really think giving everyone 1 weeks rent as a stimulous is going to do anything different than buying them beers for a week?
Ever since the rounds of QE failed to yield surging consumer price inflation at the scale some of us warned of, the Keynesians and market monetarists understandably ran victory laps, saying that they were to be trusted over those permabear Cassandra Austrians. (To be sure, the market monetarists were far more civil about it than the prominent Keynesians.) So it is not with gloating or vindictiveness that I write the present article, but rather I do it to set the record straight and document for posterity that the leading Keynesians and market monetarists totally missed this bout of price inflation.
The Keynesians Camp: Paul Krugman and Klaus Schwab
Let’s do the fun one first: Paul Krugman has not fared well in light of our current inflationary experience. As late as June 2021, Krugman wrote an article in the New York Times titled “The Week Inflation Panic Died.” Here are some key excerpts, with my bold added, and keep in mind that when Krugman wrote this, the most recent Consumer Price Index (CPI) inflation rate was only 4.9 percent:
Remember when everyone was panicking about inflation, warning ominously about 1970s-type stagflation? OK, many people are still saying such things, some because that’s what they always say, some because that’s what they say when there’s a Democratic president….
MD: Even if they were able to measure INFLATION, the disruptions caused by a two year shut down would make their numbers useless.
But for those paying closer attention to the flow of new information, inflation panic is, you know, so last week.
Seriously, both recent data and recent statements from the Federal Reserve have, well, deflated the case for a sustained outbreak of inflation … [T]o panic over inflation, you had to believe either that the Fed’s model of how inflation works is all wrong or that the Fed would lack the political courage to cool off the economy if it were to become dangerously overheated.
Both beliefs have now lost most of whatever credibility they may have had….
The Fed has been arguing that recent price rises are similarly transitory … The Fed’s view has been that this episode, like the inflation blip of 2010–11, will soon be over.
And it’s now looking as if the Fed was right …
…. Monetary doomsayers have been wrong again and again since the early 1980s, when Milton Friedman kept predicting an inflation resurgence that never arrived. Why the eagerness to party like it’s 1979?
To be fair, government support for the economy is much stronger now than it was during the Obama years, so it makes more sense to worry about inflation this time around. But the vehemence of the inflation rhetoric has been wildly disproportionate to the actual risks—and those risks now seem even smaller than they did a few weeks ago.
MD: Really? Remember all the vaccinations? Who paid for those? Government you say? With money they counterfeited into existence? And who got the money? Drug companies and medical delivery plants like hospitals? As far as the economy was concerned, all that money went down a rat hole. But in reality, it went into government, and government dependants pockets.
Of course, Krugman’s confident dismissal of those Biden-hating doomsayers blew up in his face, as CPI inflation kept ratcheting higher and higher. In a December 2021 NYT column, Krugman threw in the towel and admitted he had been wrong, but in his own special way (again, with my bolding):
The current bout of inflation came on suddenly…. Even once the inflation numbers shot up, many economists—myself included—argued that the surge was likely to prove transitory. But at the very least it’s now clear that “transitory” inflation will last longer than most of us on that team expected….
… I believe that what we’re seeing mainly reflects the inherent dislocations from the pandemic, rather than, say, excessive government spending. I also believe that inflation will subside over the course of the next year and that we shouldn’t take any drastic action. But reasonable economists disagree, and they could be right….
The latest projections from board members and Fed presidents are for the interest rate the Fed controls to rise next year, but by less than one percentage point, and for the unemployment rate to keep falling.
MD: So how does the Fed control interest rates? Don’t they sell their counterfeit money at auction? And don’t they use that to pay back the counterfeit money they sold at earlier auctions? And don’t they guarantee their member banks 10x leverage regardless?
Perhaps surprisingly, my own position on policy substance isn’t all that different from either Furman’s or the Fed’s. I think inflation is mainly bottlenecks and other transitory factors and will come down, but I’m not certain, and I am definitely open to the possibility that the Fed should raise rates, possibly before the middle of next year….
Maybe the real takeaway here should be how little we know about where we are in this strange economic episode. Economists like me who didn’t expect much inflation were wrong, but economists who did predict inflation were arguably right for the wrong reasons, and nobody really knows what’s coming.
For those keeping score at home, remember that when I pointed out that Keynesians Christina Romer and Jared Bernstein had been notoriously wrong in their forecasts of unemployment following the Obama stimulus package, Krugman told us that “some predictions matter more than others.” So this time around, Krugman can’t argue that his botched inflation predictions are irrelevant. Instead, as we see above, he’s claiming that his opponents were right but for the wrong reasons. Even when Krugman is wrong, he’s still better than his enemies!
And for the sake of completeness, let’s reproduce this quotation from Klaus Schwab (who has doctoral degrees in both economics and engineering) and Thierry Malleret in COVID-19: The Great Reset. Writing in July 2020, Schwab and Malleret claimed:
At this current juncture, it is hard to imagine how inflation could pick up anytime soon…. The combination of potent, long-term, structural trends like ageing and technology … and an exceptionally high unemployment rate that will constrain wages for years puts strong downward pressure on inflation. In the post-pandemic era, strong consumer demand is unlikely. (p. 70)
MD: Earth to economists! The jig is up. We have a Wiemar, Zimbabwe, and Venezuela moment at our doorsteps. And there’s nothing they can do about it. Why do I get a dozen calls each day from so-called investors wanting to buy my real property for cash? Because they know the counterfeiting that produced the cash they think they have has yielded it worthless.
The Leader of the Market Monetarists, Scott Sumner
As I said earlier, the market monetarists are far more civil than Krugman, Brad DeLong, and some other leading Keynesians. (And as far as I know, they’re not bent on world domination either.) But to repeat myself: since 2008, the one trump card the market monetarists had in their rivalry with the Austrians was that many of us prematurely warned about consumer price inflation à la the 1970s, whereas the market monetarists relied on TIPS (Treasury inflation-protected securities) yields and other market indicators to reassure their readers that inflation wouldn’t be a problem.
In that context, then, it’s very interesting that Scott Sumner, founder and leader of the market monetarists, wrote a blog post entitled, “Fed Policy: The Golden Age Begins,” in January 2020. Here are the key excerpts, with my bold:
We are entering a golden age of central banking, where the Fed will become more effective and come closer to hitting its targets than at any other time in history. Over the next few decades, inflation will stay close to 2% and the unemployment rate will generally be relatively low and stable. And this certainly won’t be due to fiscal policy, which is currently the most recklessly pro-cyclical in American history.
… Fed policy is becoming more effective because it is edging gradually in a market monetarist direction….
If they continue moving in this direction, then NGDP [nominal gross domestic product] growth will continue to become more stable, the business cycle will continue to moderate, inflation will stay in the low single digits, and unemployment will stay relatively low and stable.
It won’t be perfect; the business cycle is not quite dead. There will be an occasional recession. But the business cycle is definitely on life support….
As an analogy, when I was young I would frequently read about airliners crashing in the US…. My daughter is a junior in college and doesn’t recall a single major airline crash in the US, excluding a couple of small commuter planes in the 2000s…. After each crash, problems were fixed and planes got a bit safer.
Recessions and airline crashes: They are getting less frequent, and for the exact same reason.
Before closing, let me deal with the obvious response from the market monetarist camp: They could defend Sumner’s claims by arguing that the Fed only strayed from the ideal path because of covid. Well, sure, but Sumner was still wrong for placing so much faith in central bankers and their “independence.”
Furthermore, as I explain in my chapter on market monetarism in this book, Sumner’s criterion of “NGDP growth” as a measure of tight or loose policy is almost a tautology. It is close to me arguing, “We will continue to see rising prices because of the Fed’s reckless policies, unless demand growth subsides, in which case we won’t.”
MD: When will the day come that Bob Murphy gets a clue?
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MD: A common provocative phrase. Money is an “in-process promise to complete a trade over time and space.” Well, substituting this provable definition for the “money” in the phrase, we essentially get “time is an in-process promise”. Obviously, it is not. Rather it is a fourth dimension defining “when” something is located “where.” Further we know that money is “always and only created by traders like you and me.” Well, you and I don’t create time. So how can time be money. The real principle is the “time value of money”. Does money today have a different value than money last year…or money a year from now. The simple answer: In a “real money process”, the value of money never changes…not over time…not over space. Thus, we can’t say it has time value.
It’s a phrase you’ve heard before. And probably a phrase you’ve accepted as truth. And it’s certainly true that there are plenty of ways that time and money relate to each other.
But a few months ago, I started to wonder: Is time really money? And if not, how does that change the way I think about my time and my money?
MD: Shouldn’t you begin by defining both “time” and “money”?
Today begins a series exploring those questions. I’ll tackle them from different angles and different aspects of entrepreneurship so that we can make more intentional decisions about how we spend our time and our money.
MD: How we “spend” our time and our money? That’s like “making more intentional decisions about how we trade.” There are only two ways: (1) Simple barter exchange in the here and now. (2) Exchange spanning time and space.”
First, a little context.
“Remember, time is money” is a line from Benjamin Franklin’s 1748 essay, “Advice to a Young Tradesman.” He encourages the reader to consider the money they might spend if they take a day off, as well as the money they’d lose for not working. I don’t know about you, but I feel like I’ve been running that calculation on repeat since I was sixteen years old! At least in the US, it seems we’re born with this idea already encoded into our brains.
MD: This is kind of a false choice. When you’re working, you’re in the process of making a trade. Not all work results in useful gain. Further, when you’re idle you’re in the process of doing something besides trading your “time and effort” for something. “Rest” is just such a thing…and if you don’t make that trade regularly you will die of exhaustion. Regardless, this has nothing to do with money.
Max Weber cites this aphorism repeatedly in his book, The Protestant Ethic and the Spirit of Capitalism. He sees it as a sort of semiotic turning point—a shift from the godly ethic of vocation to the secular ethic of capitalism. And remember, this phrase dates back to at least 1748. That’s 274 years of cultural indoctrination to this idea.
Now, if all of that sounds like I’m firmly against considering time as money (or money as time), I’m not. But I do think it’s an incredibly complicated truism that’s worth interrogating instead of merely accepting as immutable.
To kick off this deep dive into the question of whether time is actually money, I wanted to talk about money. And what money actually is, how we think about it, why the way we think about money matters. So I called up Paco de Leon, who just released a fantastic new book called, Finance For The People. She’s also the founder of The Hell Yeah Bookkeeping, which serves production companies and creative agencies. Paco knows more than a thing or two about money. But I wanted to start with the basics:
MD: Well, let’s see if Paco does indeed know a thing or two about money.
What is money?
At its most fundamental level, Paco told me, “Money is a shared delusion.” Money is valuable because we believe it’s valuable, not because it has inherent worth. If you’ve ever heard the term “fiat currency,” this is what it refers to: money that’s based on an agreement rather than an intrinsic value.
MD: Does a promise have value? Yes…of course it does. We value promises continually throughout our lives. And some promises we come to “not” value…because we know they won’t be kept. But knowing “all” promises creating money “will” be kept, either by the creator of the promise (and thus the money), or by the process that “guarantees” that the promise is delivered…and thus has value.
How is this guarantee accomplished? Well, it’s a lot like “casualty insurance”. You can send a ship of goods half way around the word. You can buy an insurance policy to guarantee “you” get paid for those goods and your ship returns. This is called a “PREMIUM”. And if your ship doesn’t return, you make “CLAIM” on the insurance provider. And in the insurance business, the operative relation is: PREMIUMS = CLAIMS. The money is made on the “investment income” from the PREMIUMS.
The operative relation for money is INFLATION = DEFAULT-INTEREST =zero. If the promise is not delivered, that is DEFAULT. Mitigating DEFAULTs with immediate INTEREST collections of like amount “guarantees” zero INFLATION. The crucial issue is “how” do you collect INTEREST and who do you collect it from?
That answer is you put the INTEREST load on irresponsible traders who have a non-zero propensity to DEFAULT. This is the same as the actuarial process of insurance: those who have the most CLAIMs pay the HIGHEST premiums.
About 10 or 11 years ago, I went to a lecture on money & meaning at my alma mater. Yes, I am that kind of nerd. That was the first time I was introduced to this idea—this fact, really. Money becomes valuable because you and I (and millions of other people) believe it is valuable. We believe it strongly enough to use money as a means of exchange and pay taxes and wages. The government incentivizes us to believe that—but ultimately, without the trust of US consumers, the dollar just wouldn’t be as valuable.
MD: So the lecture didn’t tell you that government is a dead-beat trader? If someone repeatedly lies to you, does that incentivize you to believe them? Of course not. You are admitting…you are deluded by government. A “real” money process gives money value buy guaranteeing the completion of a trading promise spanning time and space. It doesn’t require government. In fact, government behavior precludes it from creating money…i.e. a promise it is known never to deliver…but rather to just roll over with a new promise…to deliver on a failed promise with a new promise, also guaranteed to fail.
Further, this lecturer explained money exists to make exchanging goods—buying and selling—easier. Instead of every trade being a negotiation of how many eggs are worth a pound of wheat, we can assign a monetary value to each product and then independently decide whether we want to trade our money for the eggs or the wheat or a new phone.
MD: The common unit of measure is only part of the story. Our current money process gives a name to a certain amount of gold and/or silver. That name is the “dollar”. It assumes that the value of gold and silver never changes. That assumption is a delusion. If they had chose the name HUL (standing for Hours of Unskilled Labor), that would have been better. A HUL trades for the same size hold in the ground over all time.
We’re seeing this play out in real-time right now with cryptocurrency, my current research obsession. What do people believe bitcoin or ether is worth? And how does that value fluctuate based on the number of people who believe in its value? How is a quote-unquote currency impacted if few sellers accept it as payment from buyers? If you’re curious about how this “money is a shared delusion” thing plays out practically, learn about crypto and all the wild things happening in that market. (Hint: it’s not great.)
MD: Crypto (specifically Bitcoin) claims a solution to the “byzantine general’s problem”. Basically it tries to guarantee truth. It does this with a concept it calls “proof of work” and therefore proof of value. It’s another delusion. You don’t create value by digging a hole and then filling it in again. But you do expend work. A real money process makes no claims whatever about the value of the “promise” (i.e. money). It just guarantees that is ultimately delivered on…and destroyed. In the interim it trades as the most common object in simple barter exchange.
Back to the kind of money we have a stable agreement about. It can be hard to integrate the idea that money is a shared delusion because it’s so integral to the way we navigate the world. Our survival, in many ways, depends on how we earn and spend money. Paco was fascinated with that duality; money is both imaginary and key to our contemporary existence. She said, “Once we start to examine what [money] is at its core, we can start to ourselves, ‘If this thing is based on belief, well, how else is the way I interact with it based on beliefs?’”
MD: Do you describe “insurance” as a “shared delusion”…because it’s so integral to the way we make promises? Our survival depends on being of value. And that means trading our time for sustenance. Paco evidently failed in her examination of what [money] is at its core. You plant seeds with the belief that they will grow into a plant that you can eat. If you have a brown thumb like I have, you don’t believe it. But you can see skilled farmers making things grow. For me, I choose not to trade my time in planting. Rather, I trade it for something the farmer wants…and I trade that for the fruits of “his” planting. Don’t make this more complicated than it is.
What we believe about money impacts how we interact with it.
It’s the reason you and I can make drastically different money decisions, and they’re still the right decisions for us. Money isn’t an immutable, universal Truth—but a fluid, relative representation of value, which is always individual. What I value is not what you value. What you value is not what I value. What we each value will be decided by our circumstances, values, personal preferences, and priorities. And even within that relativity, there’s also the question of how value is related to available resources. For instance, I might understand and appreciate the value of investing in a house in Montana right now. It’s where we plan to move in about five years. But saying the market there is volatile would be an extreme understatement. Could I put together a down payment to buy property there? Sure. But I have to weigh the value of that money against the potential risk of buying now versus purchasing a few years from now.
Money isn’t an immutable, universal Truth—but a fluid, relative representation of value, which is always individual.
Paco gave me an even better example. Imagine you’re at a restaurant with a friend, and the Happy Hour special is $1 oysters. If you’re not an oyster fan, know that that price is a steal. You say to your friend, “I love oysters! Let’s get a dozen—that’s such a good price.” But your friend is dubious. “$1 oysters?” they say, “That’s… suspicious.” Maybe they are old. Perhaps the restaurant got them from an unscrupulous purveyor. Maybe they’re just not very good. You and your friend are working with the same financial information on the surface. It’s Happy Hour, and the oysters are $1 each. But you bring your beliefs about money and value to the table, and your friend brings theirs. The result is two drastically different approaches to the potential purchase.
MD: But none of that has to do with money. That has to do with trade. Trade has three stages: (1) Negotiation; (2) Promise to deliver; (3) Delivery as promised. In simple barter exchange, (2) and (3) happen simultaneously in the here and now. Money enables (2) and (3) to happen over time and space. And money has nothing to do with “belief”. That’s all taken care of in stage (1)…and it only applies to the two parties involved.
Our values, personal histories, upbringing, geographic location, culture, class… all these things and more influence the way we approach the proverbial $1 oyster. So do the beliefs that we have about ourselves. Paco told me that many of her original stories about money were informed by her belief that she wasn’t good enough. It might be easy to write it off as a “money mindset thing.” Yet, her anxiety about not being good enough was based on real experiences. She told me, “Being queer and a woman of color has not been a nice day at the beach. I’ve heard family members talking about so-and-so being gay. I remember hearing that story and being like: okay, noted, not okay to be gay.” She also picked up the “not good enough” message from thirteen years of Catholic school—a privilege in many ways, but also a daily immersion into a story about being fundamentally flawed.
MD: If Paco was this easily conflicted about money, what did she have to say about trade? Could she compare and contrast the two? I think you were wasting your time with Paco. In the land of the blind, the one eyed person is most value. In the land of the queer, the straight person has a value deficiency in at least one category of trade…that being an inter-personal relationship…which is the most equitable trade possible.
The worry about not being good enough coalesced into a story that she should take what she’s given and be grateful for it, grateful to be included, to belong. But eventually, she started to shift that story—and decided to go out on her own in order so she could take control of the value of her work on the open market. And… still, she was undercharging for bookkeeping services and consulting. “I was that $1 oyster,” she said. So the work continued. She pursued therapy and other ways of processing her beliefs and experiences to unpack why she was perennially coming up short on decisions about price.
MD: Again, this has nothing to do with money. She is addressing the (1) Negotiation state of trader.
This is what we mean when we talk about understanding your money mindset. It’s not about “charging what you’re worth” or investing in yourself. It’s really a process of unpacking unconscious stories, weighing them against cultural conditioning, and finding ways to resource yourself to shift your thinking. “Thinking bigger” is just a bandaid over a much bigger issue. If you try to cover your money wounds with “charge what you’re worth,” you won’t get very far without bleeding out. This is why so much money mindset advice feels like a panacea. Before we can write a more effective money story, we actually have to root out and process the old one.
Before we can write a more effective money story, we actually have to root out and process the old one.
“The quality of your thinking impacts the decisions you make,” Paco told me. That’s why she cares about really getting to the heart of how we think about money, rather than trying to plaster over it with affirmations and financial advice. When you say something like “charge what you’re worth” to cover over feelings of inadequacy, the inadequacy is going to leak through. Those unexamined feelings influence your decision-making. So you find a way to rationalize a decision prompted by your original, negative money story rather than the one you think you’re telling. Paco says:
“Just feel your damn feelings on the upfront! Recognize that you’re an emotional creature. Sometimes your feelings are going to get in the way. Feel them and manage them and regulate your nervous system.”
MD: Again…is irrelevant to money.
The Moral Quality of Money
When we start talking about how our beliefs impact our decisions with money, we inevitably land on assumptions about the moral quality of money. Money and what we do with it seem to signal whether we’re a good or bad person, a good citizen or a bad citizen.
MD: This is nonsense. If you have grapes and you want strawberries money gives you an option. You can “sell” your grapes for some number of HULs …hours of unskilled labor. You know a HUL value because you traded in them at some point in your life…usually a job during high school. You then take those HULs and find someone with strawberries. And you negotiate that trade. Using money you have two negotiation steps. (1) grapes for HULs; (2) HULs for strawberries. If you make a bad trade on you grapes, you still have a chance of correcting it on your trade for strawberries. Or you can gain on both trades or you can lose on both trades. It’s about your ability to trade. It’s not about money.
The messages around this can come from the oddest places—or, maybe, the most predictable least helpful places. For instance, in an interview on cable news, former Labor Secretary Elaine Chao said that low-wage workers had a patriotic duty to get back to work. Prosperity gospel preachers tell you that wealth is a sign of god’s favor. And the vast majority of the political machine in the US has been touting the welfare queen as the ultimate moral villain since Reagan.
MD: And again, be that as it may, it has nothing to do with money.
These messages aren’t the whole of the moral lessons we learn about money—they’re just the tip of the iceberg. They’re signposts of a pervasive, inescapable message about money; having money is good and, if you don’t have it, you better work your ass off for more of it so you can be good.
Paco said:
“We are overly focused on our own personal shortcomings, right? You did this wrong. You are bad. You are not disciplined. But what I really think what we need to focus on when we feel these negative feelings of shame and guilt is exploring and understanding where they came from. Who taught you that you should be ashamed of this? Where did you pick that up? Was it a move? Was it a song? Was it your grandparents?”
MD: I wonder what Paco would have to say about trading for art?
She said we pick up these expectations from family, friends, and society. When we violate that behavior, we feel bad. The answer? Paco says that financial pros need to help people heal the parts of them that are broken to help the people they serve to heal.
MD: And don’t forget the things we pick up from advertising and other forms of information and/or brainwashing.
Nowhere is moralizing more prevalent than in discussion about debt. But as Trump and other billionaires have proved repeatedly, debt only seems to be bad when you’re the wrong kind of person with that debt on your balance sheet. So I asked Paco: what’s the deal with debt?
MD: While you were at it did you ask her “what the deal with a promise”? Is a promise a debt? Of course it is.
As is her gift, Paco gave me a great analogy. Debt is like fire, she said. Fire has benefits—it lets us cook our food, for instance. But if that fire gets out of control? Well, then there’s a problem. Debt has significant benefits. Without the invention of the 30-year mortgage, many of us would not be able to own real estate. Without a loan or a business credit card, we might not be able to make investments in the growth of our companies. But debt can quickly get out of control. And that’s when it becomes a problem. “We shouldn’t look at things with this tunnel vision of ‘debt is bad,’” Paco said. Black and white thinking rarely (maybe never?) benefits us.
MD: The “30 year mortgage” illustrates the scam that is our existing money system. (1) It assumes someone is “lending” you the money when in actuality, “you” are “creating” it. (2) It assumes you must pay “interest” on the money you have still not returned. Both are false in a “real” money process. In a “real” money process, money is in perpetually free supply. It never changes its value. And it imposes no resistance to trading (e.g. interest load).
Is time money?
As I mentioned, I’m really interested in exploring the maxim, “time is money.” In what ways is that true? In what ways is it not true? And how might a fundamental, unexamined belief that time is money benefit or harm us and our work? So I asked Paco for her thoughts. She told me that there was a long time where she definitely ascribed to this philosophy. She’d make calculations about what she wanted to buy and whether the price was worth the amount of time it would take to earn that amount. She said it wasn’t a horrible way to think about money—but it’s certainly not the only way to think about the relationship between time and money.
MD: You took time to write this article. I took time to make these annotations. I received nothing in trade for my effort. That makes me a fool. What did you receive for writing the article?
For instance, when she started hiring, she realized that she could create leverage with other people’s time. As a business owner, she could use their work to earn more. She also thinks about how money can buy time, “Time is a non-renewable resource. Money is a renewable resource.” And, of course, she’s very interested in investing in a way that produces more money without more time spent on work.
MD: “Money is a non-renewable resource”: Try this? You can make money writing this article. You can obtain a hole by digging. If you need a hole, would you choose to spend your time writing this article for money…then trading that money for a guy to dig your hole? What if it takes twice as long to dig the hole yourself than to have the guy do it. Did you “reclaim” some non-renewable time? You know the old axiom: work smarter, not harder.
Paco and I agree that the danger in believing “time is money” is that it often reinforces conditioning around productivity and usefulness. We learn at an early age that the goal is to get as much done in a certain period of time as possible—the more ways we can hack our time to produce more, the more we’re rewarded. We’re also taught to evaluate our worth to society from the perspective of productivity. Taking time off, therefore, risks getting you labeled as lazy. And that brings us back to the core belief Paco (and I) have had to wrestle with: Am I enough? Am I doing enough?
MD: And again, that’s all irrelevant.
“Am I deserving of the space to just be a human appreciating the sunshine on my face? I want to normalize wanting to chill,” she told me.
“To me, money is freedom and it’s power. It allows me to live a life of dignity.”
MD: And if sea shells were money does that make picking up sea shells bring you more freedom and power? You know it doesn’t. You can’t just call something money and make it be so. It’s the process that brings the value.
As we started to wrap things up, Paco told me that she really wants people to be able to live a life of dignity. Yes, we need to concern ourselves with our own personal finances. But we should also be concerned about the public policies that would allow all people to live dignified lives. She said, “let’s just solve that problem first. And then luxury will follow.”
MD: If “all” people just took care of themselves “all” would be fine. That’s everyone’s first task…take care of yourself.
I’ve been rolling the idea of “dignity” around in my mind since I talked to Paco. Who is denied dignity? What are the mechanisms that enforce that denial? What does a dignified life look like, and how much does it cost?
Paco does such a great job of addressing the things we can control about money. And she also does a great job acknowledging that there is much that’s out of our control. This is certainly true when it comes to dignity, as well. We can do a lot for ourselves to ensure a dignified life. But for many of us, factors out of our control make it incredibly difficult. So, what policy changes could we advocate for so that all people could have access to a dignified life? What community care projects could help more people live with dignity?
MD: If you have money and you created it, you must eventually return it as you promised and it is destroyed. If you obtained your money in trade, it’s no different than grapes you obtained in trade…except for the process. With a “real” money process, you can put your money under a rock for 10 years…then take it out and trade it for the same size hole in the ground as you could 10 years ago. With grapes…well, they rotted 10 years ago. And with our counterfeit dollar, you can trade for a hole that is 2/3rds as big…assuming 4% inflation caused by government counterfeiting.
We all have room to work on our beliefs about money, and many of us have enough space to start changing the larger conversation, too.
MD: Actually, everything in your article is about “trade”…not “money”.
MD: This article is so typical of what we see coming out of ZeroHedge.com. These people actually believe what they write. As usual, we’ll dissect the article in place and expose the delusions. We’ve done it repeatedly before. The trouble is, they either will never get it…or the are an active part of the scam.
It’s no secret that China and Russia have been stashing away as much gold as possible for many years.
MD: And if they had a clue they wouldn’t be doing that. At the point where gold can have meaning in economics, the game is already over. There is only enough gold on the planet for each person to have less than 2 ounces…less than $4,000. If gold were actually the media of exchange, it would have to trade for a few orders of magnitude greater than that. And if it did, people would be digging up their own back yards looking for the stuff. It’s beyond stupid. Miners who actually know how to find and refine gold would become enormously wealthy, but could never create enough for the rest of us to use it in trade…i.e. as money.
China is the world’s largest producer and buyer of gold. Russia is number two. Most of that gold finds its way into the Russian and Chinese governments’ treasuries.
MD: Where it does absolutely nothing for the benefit of anyone.
Russia has over 2,300 tonnes—or nearly 74 million troy ounces—of gold, one of the largest stashes in the world. Nobody knows the exact amount of gold China has, but most observers believe it is even larger than Russia’s stash.
MD: Ok. Take that number. 74,000,000 ounces. Divide that by the 7 billion people on the planet. That comes to about 0.01 ounces per person on the planet. Times $4,000 per ounce you have $40. That’s 4 trips to McDonalds. Now what?
Russia and China’s gold gives them access to an apolitical neutral form of money with no counterparty risk.
MD: Counterparty risk? What does that have to do with anything. Money is an “in-process promise to complete a trade over time and space.” It is always, and only, created by traders like you and me. And it is always properly destroyed when we deliver as promised. In the mean time it circulates as the most common object of every simple barter exchange. It’s a record keeping problem…and a discipline problem if the trader fails to deliver as promised.
Remember, gold has been mankind’s most enduring form of money for over 2,500 years because of unique characteristics that make it suitable to store and exchange value.
MD: This stupid argument won’t even play in Peoria… let alone throughout the world.
Gold is durable, divisible, consistent, convenient, scarce, and most importantly, the “hardest” of all physical commodities.
MD: And here we have an open admission of ignorance about money. Durable isn’t an issue. An open record keeping system (e.g. ledger) is durable. Divisible? You can divide a number to any number of pieces you choose. If you buy a car by creating $70,000 in new money, that money can circulate as any denomination the marketplace requires. In the USA the smallest denomination is one cent…and most people won’t bend over to pick one up. Consistent? What does that mean? A promise is a promise. Delivery is delivery. What’s to be inconsistent? Convenient? What in the world is more convenient than a record keeping system? Create checks, currency, coins, … they’re just convenient place holders for what is recorded in the ledger. Scarce? This is the one that gets me most. The media of exchange should never be scarce. Quite the contrary, it should be in perpetual free supply. It should resist trade not at all. Hardest? As in harder than a Hershey bar? How ridiculous! And the one they left out…which is historically the biggest problem with any substitute for “real” money…it must be non-counterfeitable! And who is the biggest counterfeiter in “all” cases? Government!
In other words, gold is the one physical commodity that is the “hardest to produce” (relative to existing stockpiles) and, therefore, the most resistant to inflation. That’s what gives gold its superior monetary properties.
MD: Another open admission to stupidity. The money relation is: INFLATION = DEFAULT – INTEREST. Counterfeiting, the biggest cause of default not mitigated by interest collection, is the biggest source of inflation. It’s a very small fraction of traders who don’t deliver as promised. And when that happens, a “real money process” makes an immediate and equal interest collection of like amount. This guarantees that inflation will be perpetually zero.
Russia and China can use their gold to engage in international trade and perhaps back the currencies.
MD: Only as long as ignorance regarding real money prevails.
That’s why gold represents a genuine monetary alternative to the US dollar, and Russia and China have a lot of it.
MD: And of course there is no shortage of “stupid” people who think that matters. Real traders will “create” a “real money process” every time if not conflicted by the money-changers and the governments they institute. I’m now going to let him spew on as long he purveys the same ridiculous fiction. If he comes up with some new nonsense I’ll break back in.
Today it’s clear why China and Russia have had an insatiable demand for gold.
They’ve been waiting for the right moment to pull the rug from beneath the US dollar. And now is that moment…
This is a big problem for the US government, which reaps an unfathomable amount of power because the US dollar is the world’s premier reserve currency. It allows the US to print fake money out of thin air and export it to the rest of the world for real goods and services—a privileged racket no other country has.
Russia and China’s gold could form the foundation of a new monetary system outside of the control of the US. Such moves would be the final nail in the coffin of dollar dominance.
Five recent developments are a giant flashing red sign that something big could be imminent.
Warning Sign #1: Russia Sanctions Prove Dollar Reserves “Aren’t Really Money”
In the wake of Russia’s invasion of Ukraine, the US government has launched its most aggressive sanctions campaign ever.
Exceeding even Iran and North Korea, Russia is now the most sanctioned nation in the world.
As part of this, the US government seized the US dollar reserves of the Russian central bank—the accumulated savings of the nation.
MD: Oh I would so like to have Putin’s ear here. The best thing he could do is institute a “real money process” and use his gold to allay his doubters…he’d never have to touch any of it. In fact, I would like to see Elon Musk do it, rather than buy Twitter (that will bury him in criminal lawsuits should he succeed there).
It was a stunning illustration of the dollar’s political risk. The US government can seize another sovereign country’s dollar reserves at the flip of a switch.
MD: …until its counterfeiting is so obvious and egregious it deals itself out of the game all together.
The Wall Street Journal, in an article titled “If Russian Currency Reserves Aren’t Really Money, the World Is in for a Shock,” noted:
“Sanctions have shown that currency reserves accumulated by central banks can be taken away. With China taking note, this may reshape geopolitics, economic management and even the international role of the U.S. dollar.”
MD: Is anyone getting the dozen or so calls a day that I’m getting…from so-called investors who want to trade dollars for my real property? Why do that unless you know the dollars you hold are about to be worthless.
Russian President Putin said the US had defaulted on its obligations and that the dollar is no longer a reliable currency.
The incident has eroded trust in the US dollar as the global reserve currency and catalyzed significant countries to use alternatives in trade and their reserves.
China, India, Iran, and Turkey, among other countries, announced, or already are, doing business with Russia in their local currencies instead of the US dollar. These countries represent a market of over three billion people that no longer need to use the US dollar to trade with one another.
The US government has incentivized almost half of mankind to find alternatives to the dollar by attempting to isolate Russia.
MD: I vote for a competitive HUL (Hour of Unskilled Labor) based “real money process”. The HUL is valued today (i.e. trades for the same size hole in the ground) as it has for all time…recorded or otherwise.
Warning Sign #2: Rubles, Gold, and Bitcoin for Gas, Oil, and Other Commodities
Russia is the world’s largest exporter of natural gas, lumber, wheat, fertilizer, and palladium (a crucial component in cars).
It is the second-largest exporter of oil and aluminum and the third-largest exporter of nickel and coal.
Russia is a major producer and processor of uranium for nuclear power plants. Enriched uranium from Russia and its allies provides electricity to 20% of the homes in the US.
Aside from China, Russia produces more gold than any other country, accounting for more than 10% of global production.
These are just a handful of examples. There are many strategic commodities that Russia dominates.
In short, Russia is not just an oil and gas powerhouse but a commodity superpower.
After the US government seized Russia’s US dollar reserves, Moscow has little use for the US dollar. Moscow does not want to exchange its scarce and valuable commodities for politicized money that its rivals can take away on a whim. Would the US government ever tolerate a situation where the US Treasury held its reserves in rubles in Russia?
The head of the Russian Parliament recently called the US dollar a “candy wrapper” but not the candy itself. In other words, the dollar has the outward appearance of money but is not real money.
That’s why Russia is no longer accepting US dollars (or euros) in exchange for its energy. They are of no use to Russia. So instead, Moscow is demanding payment in rubles.
MD: Bingo. Game over for the Earth’s, and History’s, most egregious counterfeiter.
That’s an urgent problem for Europe, which cannot survive without Russian commodities. The Europeans have no alternative to Russian energy and have no choice but to comply.
European buyers must now first buy rubles with their euros and use them to pay for Russian gas, oil, and other exports.
This is a big reason why the ruble has recovered all of the value it lost in the initial days of the Ukraine invasion and then made further gains.
In addition to rubles, the top Russian energy official said Moscow would also accept gold or Bitcoin in return for its commodities.
“If they want to buy, let them pay either in hard currency—and this is gold for us… you can also trade Bitcoins.”
Here’s the bottom line. US dollars are no longer needed (or wanted) to buy Russian commodities.
Warning Sign #3: The Petrodollar System Flirts With Collapse
MD: I’m really skimming now. This guy is so far off the tracks there’s no hope of bringing him back. I think I’ll quit here.
Oil is by far the largest and most strategic commodity market.
For the last 50 years, virtually anyone who wanted to import oil needed US dollars to pay for it.
That’s because, in the early ’70s, the US made an agreement to protect Saudi Arabia in exchange for ensuring, among other things, all OPEC producers only accept US dollars for their oil.
Every country needs oil. And if foreign countries need US dollars to buy oil, they have a compelling reason to hold large dollar reserves.
This creates a huge artificial market for US dollars and forces foreigners to soak up many of the new currency units the Fed creates. Naturally, this gives a tremendous boost to the value of the dollar.
The system has helped create a deeper, more liquid market for the dollar and US Treasuries. It also allows the US government to keep interest rates artificially low, thereby financing enormous deficits it otherwise would be unable to.
In short, the petrodollar system has been the bedrock of the US financial system for the past 50 years.
But that’s all about to change… and soon.
After it invaded Ukraine, the US government kicked Russia out of the dollar system and seized hundreds of billions in dollar reserves of the Russian central bank.
Washington has threatened to do the same to China for years. These threats helped ensure that China cracked down on North Korea, didn’t invade Taiwan, and did other things the US wanted.
These threats against China may be a bluff, but if the US government carried them out—as it recently did against Russia—it would be like dropping a financial nuclear bomb on Beijing. Without access to dollars, China would struggle to import oil and engage in international trade. As a result, its economy would come to a grinding halt, an intolerable threat to the Chinese government.
China would rather not depend on an adversary like this. This is one of the main reasons it created an alternative to the petrodollar system.
After years of preparation, the Shanghai International Energy Exchange (INE) launched a crude oil futures contract denominated in Chinese yuan in 2017. Since then, any oil producer can sell its oil for something besides US dollars… in this case, the Chinese yuan.
There’s one big issue, though. Most oil producers don’t want to accumulate a large yuan reserve, and China knows this.
That’s why China has explicitly linked the crude futures contract with the ability to convert yuan into physical gold—without touching China’s official reserves—through gold exchanges in Shanghai (the world’s largest physical gold market) and Hong Kong.
PetroChina and Sinopec, two Chinese oil companies, provide liquidity to the yuan crude futures by being big buyers. So, if any oil producer wants to sell their oil in yuan (and gold indirectly), there will always be a bid.
After years of growth and working out the kinks, the INE yuan oil future contract is now ready for prime time.
And now that the US has banned Russia from the dollar system, there is an urgent need for a credible system capable of handling hundreds of billions worth of oil sales outside of the US dollar and financial system.
The Shanghai International Energy Exchange is that system.
Back to Saudi Arabia…
For nearly 50 years, the Saudis had always insisted anyone wanting their oil would need to pay with US dollars, upholding their end of the petrodollar system.
But that could all change soon…
Remember, China is already the world’s largest oil importer. Moreover, the amount of oil it imports continues to grow as it fuels an economy of over 1.4 billion people (more than 4x larger than the US).
China is Saudi Arabia’s top customer. Beijing buys over 25% of Saudi oil exports and wants to buy more.
The Chinese would rather not have to use the US dollar, the currency of their adversary, to buy an essential commodity.
In this context, The Wall Street Journal recently reported that the Chinese and the Saudis had entered into serious discussions to accept yuan as payment for Saudi oil exports instead of dollars.
The WSJ article claims the Saudis are angry at the US for not supporting it enough in its war against Yemen. They were further dismayed by the US withdrawal from Afghanistan and the nuclear negotiations with Iran.
In short, the Saudis don’t think the US is holding up its end of the deal. So they don’t feel like they need to hold up their part.
Even the WSJ admits such a move would be disastrous for the US dollar.
“The Saudi move could chip away at the supremacy of the US dollar in the international financial system, which Washington has relied on for decades to print Treasury bills it uses to finance its budget deficit.”
Here’s the bottom line.
Saudi Arabia—the linchpin of the petrodollar system—is flirting in the open with China about selling its oil in yuan. One way or another—and probably soon—the Chinese will find a way to compel the Saudis to accept the yuan.
The sheer size of the Chinese market makes it impossible for Saudi Arabia—and other oil exporters—to ignore China’s demands to pay in yuan indefinitely. Moreover, using the INE to exchange oil for gold further sweetens the deal for oil exporters.
Sometime soon, there will be a lot of extra dollars floating around suddenly looking for a home now that they are not needed to purchase oil.
It signals an imminent and enormous change for anyone holding US dollars. It would be incredibly foolish to ignore this giant red warning sign.
Warning Sign #4: Out of Control Money Printing and Record Price Increases
In March of 2020, the chair of the Federal Reserve, Jerome Powell, exercised unfathomable power…
At the time, it was the height of the stock market crash amid the COVID hysteria. People were panicking as they watched the market plummet, and they turned to the Fed to do something.
In a matter of days, the Fed created more dollars out of thin air than it had for the US’s nearly 250-year existence. It was an unprecedented amount of money printing that amounted to more than $4 trillion and nearly doubled the US money supply in less than a year.
One trillion dollars is almost an unfathomable amount of money. The human mind has trouble wrapping itself around such figures. Let me try to put it into perspective.
One million seconds ago was about 11 days ago.
One billion seconds ago was 1988.
One trillion seconds ago was 30,000 BC.
For further perspective, the daily economic output of all 331 million people in the US is about $58 billion.
At the push of a button, the Fed was creating more dollars out of thin air than the economic output of the entire country.
The Fed’s actions during the Covid hysteria—which are ongoing—amounted to the biggest monetary explosion that has ever occurred in the US.
When the Fed initiated this program, it assured the American people its actions wouldn’t cause severe price increases. But unfortunately, it didn’t take long to prove that absurd assertion false.
As soon as rising prices became apparent, the mainstream media and Fed claimed that the inflation was only “transitory” and that there was nothing to be worried about.
Of course, they were dead wrong, and they knew it—they were gaslighting.
The truth is that inflation is out of control, and nothing can stop it.
Even according to the government’s own crooked CPI statistics, which understates reality, inflation is rising. That means the actual situation is much worse.
Recently the CPI hit a 40-year high and shows little sign of slowing down.
I wouldn’t be surprised to see the CPI exceed its previous highs in the early 1980s as the situation gets out of control.
After all, the money printing going on right now is orders of magnitude greater than it was then.
Warning Sign #5: Fed Chair Admits Dollar Supremacy Is Dead
“It’s possible to have more than one reserve currency.”
These are the recent words of Jerome Powell, the Chairman of the Federal Reserve.
It’s a stunning admission from the one person who has the most control over the US dollar, the current world reserve currency.
It would be as ridiculous as Mike Tyson saying that it’s possible to have more than one heavyweight champion.
In other words, the jig is up.
Not even the Chairman of the Federal Reserve can go along with the farce of maintaining the dollar’s supremacy anymore… and neither should you.
Conclusion
It’s clear the US dollar’s days of unchallenged dominance are quickly ending—something even the Fed Chairman openly admits.
To recap, here are the five imminent, flashing red warning signs the end of dollar hegemony is near.
Warning Sign #1: Russia Sanctions Prove Dollar Reserves “Aren’t Really Money”
Warning Sign #2: Rubles, Gold, and Bitcoin for Gas, Oil, and Other Commodities
Warning Sign #3: The Petrodollar System Flirts With Collapse
Warning Sign #4: Out of Control Money Printing and Record Price Increases
Warning Sign #5: Fed Chair Admits Dollar Supremacy Is Dead
We are likely on the cusp of a historic shift… and what’s coming next could change everything.
* * *
The economic trajectory is troubling. Unfortunately, there’s little any individual can practically do to change the course of these trends in motion. The best you can and should do is to stay informed so that you can protect yourself in the best way possible, and even profit from the situation. That’s precisely why bestselling author Doug Casey and his colleagues just released an urgent new PDF report that explains what could come next and what you can do about it. Click here to download it now.511
MD: Having a total and universal misunderstanding of what money is, we get myriad articles telling how money is being manipulated…or should be manipulated. From the title we expect this is just such an instance. We’ll look…and annotate in place.
What lies beneath
As usual, just over two weeks into the new quarter, and well in advance of the developed economies, GDP-giant China told us exactly what happened there in Q1. When I say ‘exactly’, I mean to the usual degree of decimal-place detail, but the same lack of any useful breakdown: and despite lockdowns so hard that China’s Weibo is allegedly censoring the first line of the Chinese national anthem (“Stand up! Those who refuse to be slaves”) after it was used to vent frustrations.
MD: What a bazaar opening salvo!
Somehow, the expectation was for a 0.7% q/q GDP print, 4.2% y/y, up from 4.0% in Q42021: we got a far stronger print to show Covid, and Chinese data, don’t matter – GDP rose 1.3% q/q and 4.8% y/y.
Does one celebrate the resilience of the economy? MD: How can one separate the economy from the manipulation of its money?
Does one ask how that was possible when March data saw retail sales -3.5% y/y, below consensus of -3.0%, down from 1.7%… and yet higher than expected at 3.3% y/y year-to-date (YTD) vs. a 6.7% print in February that already did not match what *any* retailer is seeing? When fixed asset investment, albeit above consensus, slowed to 9.3% from 12.2% y/y even as property investment was weaker than seen at just 0.7% from 3.7% y/y? And industrial production rose to 5.0% from 4.3% y/y – which must have been via net exports… despite port closures!
MD: Does anyone ask why behavior of an economy should be sensitive to a calendar?
Does one ask why monetary policy was eased last week anyway, with the reserve requirement ratio cut 0.25% again? (That’s a move which will be as ineffectual for the real economy as all the previous cuts were: the only thing it perks up is enthusiasm from analysts who don’t understand how the real economy works.) MD: Does anyone ask why there should be such a thing as a “monetary policy”? Does anyone ask why anyone…or any small group…should have such a knob to manipulate?
Does one ask why China just announced details-free economic stimulus measures? (e.g., “Reform will be deepened to remove consumption constraints. Sound and steady development of consumption platforms will be advanced.” How so, when rumours are that we are soon to see bank deposit rates cuts to make room for lower lending rates, which follows the same financial-repression/demand-destruction path seen in the ‘new normal’ elsewhere?) Probably not. MD: When it is provable that everyone acts in their own self interest, why does not everyone’s self interest have equal weight? Why do we have banks screwing with lending rates when we know it is “traders”, not banks or the governments they institute, that create and destroy money?
Does one ask how local-government debt to build more infrastructure is ‘consumption’? (e.g., “consumption-related infrastructure development may be funded by local government special-purpose bonds, to leverage the catalytic role of investment in expanding consumption.”) MD: Why do we allow something claiming to be government…why do we allow it to control something like infrastructure development…but not manufacturing development? We shouldn’t even have government. What’s it good for?
Does one note an easily achievable stimulus floated is a de facto export subsidy? (e.g., “Export rebates will be better utilized as an inclusive and equitable policy tool that is consistent with international rules, and the business environment for foreign trade will be improved on multiple fronts.”) Yet if China thinks it can grow its way out of a structural crisis by flooding the world with more goods *again*, then it is in for a real shock. MD: Do traders need stimulus? What’s keeping traders from naturally making trades they can see clear to deliver on? Why do people allow a money-changer creation like government to even exist?
Making that point, Bloomberg warns: ‘Global Investors Flee China Fearing That Risks Eclipse Rewards’. All the more reason for a 1.3 % q/q print then(?) The article notes, “Russian sanctions raise concerns the same could happen to China… a growing list of risks is turning China into a potential quagmire for global investors. The central question is what could happen in a country willing to go to great lengths to achieve its leader’s goals.” This is hardly news to those who wanted to see it: but a South China Morning Post politics podcast this weekend in which one of their correspondents stated he had heard directly from an EU source that in recent discussions over Russian sanctions, US officials stated they are already gaming-out the same measures for China – and using language such as “when we sanction China”, not “if”. MD: Sanctions are a siege tactic. And siege is an act of war. Who is conducting this warring aggression…and why? Why does an entity capable of mounting such an attack even exist? Who needs it?
Imperialism and realism: Bancor and Rancor
Meanwhile, in Ukraine, hopes of peace talks appear forlorn: Mariupol appears close to falling, as the city of 400,000 stands in ruins; and despite talking of risks of a Russian tactical nuke, President Zelenskiy defiantly states his country won’t give up the Donbas and can keep fighting for 10 years, if needed. If supported by the West, perhaps it can – and the EU’s Von der Leyen is pushing for Europe to accelerate arms shipments to Kyiv, talking about an oil boycott, again, and sanctioning Russia’s largest bank, Sberbank. Markets were thinking 10 days and none of the above when this all started. MD: Why doesn’t this paragraph state it was Zelenskiy whose artillery caused the ruin of Mariupol?
On another front, as Finland and Sweden race towards NATO membership, Russia is moving forces towards the Baltic. Is this a bluff, as some felt it was over Ukraine? Or is Moscow going to engage in some form of limited confrontation with either or both Scandinavian states to ensure that if they enter NATO they do so already in a conflict with Russia? MD: Why do these countries want NATO membership? What’s in it for them? What do they lose by ostracizing NATO? What if Russia’s movements are totally defensive…or protective of the innocent…which of course they are?
Taking things to a more meta level, last week I argued ‘Bretton Woods 3’ (BW3) — a new global FX and financial architecture– is a fancy name for militarized mercantilism; that the West used to be good at it; that it will be again, even if it means lots of neoliberal norms have to go; and anyone who thinks a BW3 emerges painlessly hasn’t read any history. Usefully, one of the key proponents of ‘anti-American imperialism’ just made the point for me in depth. MD: If you argued for any kind of “global FX and financial architecture” you are stupid beyond belief. At the very least, you are clueless about what money is…where it comes from…and where it goes. Mercantilism is government imposed monopoly. Eliminating government is the solution.
(NB For these thinkers, American imperialism is the only imperialism: everything else is ‘realism’. That was underlined by humanist and coffee-table intellectual’s intellectual —and long-time believer that the auto-genocidal Khmer Rouge get a bad press— Noam Chomsky, who explained this weekend that Ukraine should surrender, because that’s ‘just the way the world is’.) MD: There should be a vaccine against morons like Chomsky.
In an interview, Russian politician Sergey Glazyev talks about “the imminent disintegration of the USD-based global economic system, which provided the foundation of the US global dominance… the new economic system [unites] various strata of their societies around the goal of increasing common well-being in a way that is substantially stronger than the Anglo-Saxon and European alternatives. This is the main reason why Washington will not be able to win the global hybrid war that it started. This is also the main reason why the current dollar-centric global financial system will be superseded by a new one, based on a consensus of the countries who join the new world economic order.” MD: The fact that such a thing as “the USD-based global economic system” even exists or should be tolerated is admission of zero understanding of money. They can change the money system all they want. Until they understand what money is…where it comes from…and where it goes, they’ll keep getting the same result. And of course they want that result. This leopard doesn’t change its spots.
So far, so gold-bug, crypto-nite, Chomskyite, Russian/Chinese nationalist, US billionaire hedge-fund manager, or general Down With This Sort of Thing. But we get details: MD: Such nonsense!
“In the first phase of the transition, these countries fall back on using their national currencies and clearing mechanisms, backed by bilateral currency swaps.At this point, price formation is still mostly driven by prices at various exchanges, denominated in dollars.” MD: Open admission of money manipulation. A “real money process” cannot be manipulated in any fashion whatever.
That’s what I have been flagging: things remain priced in USD and, for a few, at the margin, and inefficiently, USD are netted out via bilateral, geopolitical barter. However, “This phase is almost over.” That seems ambitious: it isn’t even a month old! Regardless, next comes “a shift to national currencies and gold,” and then: MD: A problem that does not…and cannot exist with a “real money process”.
“The second stage of the transition will involve new pricing mechanisms that do not reference the USD. Price formation in national currencies involves substantial overheads, however, it will still be more attractive than pricing in ‘un-anchored’ and treacherous currencies like USD, GBP, EUR, and JPY. The only remaining global currency candidate –CNY– won’t be taking their place due to its inconvertibility and the restricted external access to the Chinese capital markets. The use of gold as the price reference is constrained by the inconvenience of its use for payments.” MD: A “real money process” cares nothing about pricing mechanism. That’s up to supply/demand balance of objects being traded. All the “real money process” is concerned with is guaranteeing perpetual perfect supply/demand balance of the money itself.
So, as I pointed out, nothing really works; which, alongside final consumption being in the West, and lots of aircraft carriers, is a strong argument for the USD status quo, imperialist or not. But not to worry if you disagree, because after that: MD: When “it’s broke”, it a good time to “fix it”. You don’t fix something by changing it’s name. This will get fixed when a “real money process” is available for traders to choose. Once that is done, all these broken processes will wilt on the vine. No trader in his right mind would ever use one.
“The third and the final stage on the new economic order transition will involve a creation of a new digital payment currency founded through an international agreement based on principles of transparency, fairness, goodwill, and efficiency.” Which the international community is of course famous for. “A currency like this can be issued by a pool of currency reserves of BRICS countries, which all interested countries will be able to join.” MD: This is like religion…constantly trying to deal with knowledge that encroaches on its myths. They just create new myths…and change the wording of the old myths. It’s pretty disgusting.
Except India is questionable, and even Brazil might be shaky given where it sits geographically, near the source of all those aircraft carriers. And so we have Russia, China, and South Africa. That doesn’t even make a good acronym, let alone bloc.
“The weight of each currency in the basket could be proportional to the GDP of each country (based on purchasing power parity, for example), its share in international trade, as well as the population and territory size of participating countries.” So, it will be dominated by China; and so India is definitely out. “In addition, the basket could contain an index of prices of main exchange-traded commodities: gold and other precious metals, key industrial metals, hydrocarbons, grains, sugar, as well as water and other natural resources. To provide backing… relevant international resource reserves can be created in due course. This new currency would be used exclusively for cross-border payments and issued to the participating countries based on a pre-defined formula. Participating countries would instead use their national currencies for credit creation, in order to finance national investments and industry, as well as for sovereign wealth reserves. Capital account cross-border flows would remain governed by national currency regulations.” MD: If the currencies in the basket were using a “real money process”, their weight would not be relevant. The exchange rate would be constant…and one to one…at all times. This is a problem created by, and moved around by, money changers and the governments they institute. If you turn back the history of these governments you always find “one individual” who got control of a military and directed it to his own ends…and then took charge of the territory it acquired. This typically spans no more than 10 or 20 years in the first instance. And if he’s successful in creating a religion in that period, that religion passes to his heirs…until the people being dominated pull back the curtain and expose the scam. In the case of Britain, the people are so stupid it spans a period going back beyond useful records. That, folks, is perfect stupidity.
So, he is talking about a new ‘gold standard’ based on everything from precious metals to base metals, to water, to one of the key ingredients for cakes, to the GDP of China, questionable data and all. Somehow these back a new global reserve currency which somebody will manage, and provide emergency liquidity in, despite *ALMOST EVERYONE IN THE NEW BLOC RUNNING TRADE SURPLUSES* – and most so with the West, who are not going to join. As such, this is not so much a proposed Bancor, as Keynes floated at the original Bretton Woods before the US insisted on the global role of the USD; nor a monstrous Rancor to devour Wall Street; it’s just plain rancour (“bitterness or resentfulness, especially when long standing”). Indeed, here is the coup de grace: MD: Anyone talking about a standard that changes value with time, is talking nonsense. And gold is anything but constant in value. We can now create new gold at a fraction of earlier costs…except where a new discovery is found … and then you can just pick up nuggets off the ground creating fictitious wealth. Changes like that…or large quantities going down with a sinking ship…create great disruptions. And such disruptions are totally unnecessary…actually impossible…if a “real money process” is in effect.
“Transition to the new world economic order will likely be accompanied by systematic refusal to honor obligations in USD, EUR, GBP, and JPY. In this respect, it will be no different from the example set by the countries issuing these currencies who thought it appropriate to steal foreign exchange reserves of Iraq, Iran, Venezuela, Afghanistan, and Russia to the tune of trillions of USD…. Even if they were to default on their obligations in those currencies, this would have no bearing on their credit rating in the new financial system. Nationalization of extraction industry, likewise, would not cause a disruption.” MD: An open admission to traders that they are…and will continue to be…dictated to by the money-changers. How is it that the real producers in the world (i.e. the traders) can be so totally dominated by the absolute non-producing slugs of the world (i.e. the money changers)?
In other words, adopt the new world order and you get to default on all your FX debt and nationalise all your foreign-owned businesses! That is precisely what I also argued: bet on the new and bet on the default of the old. That is not going to be peaceful or painless – and it will be vigorously resisted. MD: This “new world order” thing is just the new “war monger”. The latest weapons of these war mongers is immigration and virus creation and spread…and they are essentially the same thing.
You want to ensure that even vampire-squid on Wall Street and global-not-local US billionaire hedge-fund managers agree to dump neoliberalism for Western mercantilism and a bifurcated Cold War world of tariffs, capital controls, and naval blockades? Keep talking about mass nationalisations and organised debt defaults in the Eurodollar markets.52,222109 MD: These articles just continue to be less and less interesting…more and more stupidity revealing. Such is life…and then you die.
MD: I tripped over the following YouTube propaganda and thought I should warn you about GoldMoney.com. Macleod gave a link to this article which I will now annotate.
MD: First, I’ll relate my story. Then I’ll annotate this article by Macleod. Neither Turk nor Macleod have a clue about what money is. It is obvious from this YouTube discussion and will likely be evident from this article as well. You can see other reactions to his nonsense by searching for “Macleod” or “GoldMoney” at the end of this article.
First, my story. Over 10 years ago I was buying gold because I was convinced the financial system was going down the toilet. GoldMoney.com had this value proposition: If I bought “gold grams” from them, they would store the gold in secure vaults around the world. They claimed to be governed by the Isle of Wight I think. At the time, gold and silver were going up quite aggressively against the dollar.
First, I dipped my toe in. I sent them about $1,000, let it sit in the account for a little while, then asked them to send me the $1,000 plus the appreciation back. They did it without a hitch. Next, I sent them quite a bit more money from my retirement fund. And I ran an experiment. I asked them to send me some gold. They did this…but there was a hitch. I had to pay “import duty” on the gold. The round trip “load” was 10% so I decided as long as gold was diving, I’d wait until it hit bottom to ask for my delivery. At least the import duty would be lower.
Anyone who has watched gold knows it has been a poorly performing asset. The cement blocks I’ve bought over that same period have done much better than my gold at GoldMoney.com. Every few months I would do my reconciliation of my account so I could update my own records.
All of a sudden I couldn’t get into my account. At the time I was busy with other things and procrastinated. But when I finally raised the issue with them they claimed their “regulator” needed additional information. I said “no problem”. Just close my account under our original terms and send me the gold.
They refused. But they said they would send me dollars to my bank account. I had to close my bank account some years earlier because my money proved not to be safe there. They said I had no recourse but to do as I was told. I went to the “WayBack.com” archive and gave them a link to our original agreement…which specifically said they weren’t regulated by any financial regulator…and that was part of their “value proposition”.
As of this writing the issue is still not resolved. They owe me a response in our dialog. I told them I was under no illusion that this matter would be resolved “legally” as the legal process is corrupt beyond hope.
Now…on to Macleod’s nonsense.
By Alasdair Macleod Goldmoney Insights April 07, 2022 We will look back at current events and realise that they marked the change from a dollar-based global economy underwritten by financial assets to commodity-backed currencies. We face a change from collateral being purely financial in nature to becoming commodity based. It is collateral that underwrites the whole financial system.
MD: Right now, as I noted, I’m looking back and seeing that Goldmoney is not to be trusted.
The ending of the financially based system is being hastened by geopolitical developments. The West is desperately trying to sanction Russia into economic submission, but is only succeeding in driving up energy, commodity, and food prices against itself. Central banks will have no option but to inflate their currencies to pay for it all. Russia is linking the ruble to commodity prices through a moving gold peg instead, and China has already demonstrated an understanding of the West’s inflationary game by having stockpiled commodities and essential grains for the last two years and allowed her currency to rise against the dollar.
MD: Note, with a “real” money process, geopolitics can play no role at all. Of course, Macleod is clueless about that.
China and Russia are not going down the path of the West’s inflating currencies. Instead, they are moving towards a sounder money strategy with the prospect of stable interest rates and prices while the West accelerates in the opposite direction.
MD: Notice he uses the term “stable” for interest rates and prices. We know that prices will do what they will do. It “is as it is” they say. But with a “real” money process, we know INTEREST is zero for responsible traders like you and me. And we know prices are not influenced by the money at all. Money is guaranteed to have perfect supply/demand balance throughout its life…and thus zero inflation and deflation.
The Credit Suisse analyst, Zoltan Pozsar, calls it Bretton Woods III. This article looks at how it is likely to play out, concluding that the dollar and Western currencies, not the rouble, will have the greatest difficulty dealing with the end of fifty years of economic financialisation.
MD: We know that any regulated money scheme will eventually blow up. If they can envision a Bretton Wood III, they can envision a XVIII…it’s like the Superbowl. And he needs to learn how to spell “ruble”. I wish he could help me with “dealing” with GoldMoney.com. Oh…and with a “real money process”, there is no such thing as financialisation…or backing for that matter.
Pure finance is being replaced with commodity finance
It hasn’t hit the main-stream media yet, which is still reporting yesterday’s battle. But in March, the US Administration passed a death sentence on its own hegemony in a last desperate throw of the dollar dice. Not only did it misread the Russian situation with respect to its economy, but America mistakenly believed in its own power by sanctioning Russia and Putin’s oligarchs.
MD: The USA has had its death sentence my whole life…nearly 80 years. When I started my career, about 1/4th of my income went to government…and about 1/4 of the citizens were dependent on government. By the end of my career 50 years later, both those ratios have increased at an exponential rate to over 3/4…and we know even they can’t go past 4/4ths.
It may have achieved a partial blockade on Russia’s export volumes, but compensation has come from higher unit prices, benefiting Russia, and costing the Western alliance.
The consequence is a final battle in the financial war which has been brewing for decades. You do not sanction the world’s most important source of energy exports and the marginal supplier of a wide range of commodities and raw materials, including grains and fertilisers, without damaging everyone but the intended target. Worse still, the intended target has in China an extremely powerful friend, with which Russia is a partner in the world’s largest economic bloc — the Shanghai Cooperation Organisation — commanding a developing market of over 40% of the world’s population. That is the future, not the past: the past is Western wokery, punitive taxation, economies dominated by the state and its bureaucracy, anti-capitalistic socialism, and magic money trees to help pay for it all.
MD: Maybe we should remember that only the USA congress can declare war. Sanctions are a siege tactic…and a siege is an act of war. Congress just declares war on inanimate things like “drugs”…they don’t want the competition. I wish they could declare war on “stupidity”…but of course that would be shooting themselves in the foot. For a long time I have realized that Britain and Israel were our worst enemies. But government is now eclipsing them.
Despite this enormous hole in the sanctions net, the West has given itself no political option but to attempt to tighten sanctions even more. But Russia’s response is devastating for the western financial system. In two simple announcements, tying the rouble to gold for domestic credit institutions and insisting that payments for energy will only be accepted in roubles, it is calling an end to the fiat dollar era that has ruled the world from the suspension of Bretton Woods in 1971 to today.
MD: And again remember the latency. In 1971 when the USA formally renegged on their guarantee of $35/ounce for gold (after confiscating all their citizens gold at $28/ounce)…in 1971, the real price of gold was over $70/ounce. France demanded a debt payment in gold and the jig was up. But it had obviously been up for some time at that point.
Just over five decades ago, the dollar took over the role for itself as the global reserve asset from gold. After the seventies, which was a decade of currency, interest rate, and financial asset volatility, we all settled down into a world of increasing financialisation. London’s big bang in the early 1980s paved the way for regulated derivatives and the 1990s saw the rise of hedge funds and dotcoms. That was followed by an explosion in over-the-counter unregulated derivatives into the hundreds of trillions and securitisations which hit the speed-bump of the Lehman failure. Since then, the expansion of global credit for purely financial activities has been remarkable creating a financial asset bubble to rival anything seen in the history of financial excesses. And together with statistical suppression of the effect on consumer prices the switch of economic resources from Main Street to Wall Street has hidden the inflationary evidence of credit expansion from the public’s gaze.
MD: We should remember, in 1964 we could buy a gallon of gas for a quarter dollar…which was 90% silver. In 1965 they quit minting silver into the coins…but the 1965 quarters still traded for a gallon of gas. This proved beyond all doubt that the silver had nothing to do with the trade. It implicitly demonstrated that money “represented” an in-process promise to complete a trade over time and space. And coins and currency were just tokens representing that promise. Why doesn’t Macleod make note of that?
All that is coming to an end with a new commoditisation — what respected flows analyst Zoltan Pozsar at Credit Suisse calls Bretton Woods III. In his enumeration the first was suspended by President Nixon in 1971, and the second ran from then until now when the dollar has ruled indisputably. That brings us to Bretton Woods III.
MD: And as I noted, even if you believe Macleods nonsense about commoditisation, don’t resort to Goldmoney.com for your commodity. They can’t be trusted.
Russia’s insistence that importers of its energy pay in roubles and not in dollars or euros is a significant development, a direct challenge to the dollar’s role. There are no options for Russia’s “unfriendlies”, Russia’s description for the alliance united against it. The EU, which is the largest importer of Russian natural gas, either bites the bullet or scrambles for insufficient alternatives. The option is to buy natural gas and oil at reasonable rouble prices or drive prices up in euros and still not get enough to keep their economies going and the citizens warm and mobile. Either way, it seems Russia wins, and one way the EU loses.
MD: What’s good for the goose is good for the gander. We played that card with the middle eastern nomads in the 1930s. They must accept only dollars for their oil. Write all you want Macleod. Theirs no end to their ability to rig any game.
As to Pozsar’s belief that we are on the verge of Bretton Woods III, one can see the logic of his argument. The highly inflated financial bubble marks the end of an era, fifty years in the making. Negative interest rates in the EU and Japan are not just an anomaly, but the last throw of the dice for the yen and the euro. The ECB and the Bank of Japan have bond portfolios which have wiped out their equity, and then some. All Western central banks which have indulged in QE have the same problem. Contrastingly, the Russian central bank and the Peoples Bank of China have not conducted any QE and have clean balance sheets. Rising interest rates in Western currencies are made more certain and their height even greater by Russia’s aggressive response to Western sanctions. It hastens the bankruptcy of the entire Western banking system and by bursting the highly inflated financial bubble will leave little more than hollowed-out economies.
MD: Wouldn’t it be neat if this Bretton Woods III thing actually fixed the problem once and for all by instituting a “real money process”? There would be no such thing as a central bank…anywhere on the planet. In fact, banks would probably cease to exist as well. And of course Goldmoney.com wouldn’t exist either.
Putin has taken as his model the 1973 Nixon/Kissinger agreement with the Saudis to only accept US dollars in payment for oil, and to use its dominant role in OPEC to force other members to follow suit. As the World’s largest energy exporter Russia now says she will only accept roubles, repeating for the rouble the petrodollar strategy. And even Saudi Arabia is now bending with the wind and accepting China’s renminbi for its oil, calling symbolic time on the Nixon/Kissinger petrodollar agreement.
The West, by which we mean America, the EU, Britain, Japan, South Korea, and a few others have set themselves up to be the fall guys. That statement barely describes the strategic stupidity — an Ignoble Award is closer to the truth. By phasing out fossil fuels before they could be replaced entirely with green energy sources, an enormous shortfall in energy supplies has arisen. With an almost religious zeal, Germany has been cutting out nuclear generation. And even as recently as last month it still ruled out extending the lifespan of its nuclear facilities. The entire G7 membership were not only unprepared for Russia turning the tables on its members, but so far, they have yet to come up with an adequate response.
MD: Earth to Macleod…oil doesn’t come from fossils. It abiotic. And further, planet Earth loves CO2. It basks in CO2. The global warming nonsense is just that…nonsense!
Russia has effectively commoditised its currency, particularly for energy, gold, and food. It is following China down a similar path. In doing so it has undermined the dollar’s hegemony, perhaps fatally. As the driving force behind currency values, commodities will be the collateral replacing financial assets. It is interesting to observe the strength in the Mexican peso against the dollar (up 9.7% since November 2021) and the Brazilian real (up 21% over a year) And even the South African rand has risen by 11% in the last five months. That these flaky currencies are rising tells us that resource backing for currencies has its attractions beyond the rouble and renminbi.
But having turned their backs on gold, the Americans and their Western epigones lack an adequate response. If anything, they are likely to continue the fight for dollar hegemony rather than accept reality. And the more America struggles to assert its authority, the greater the likelihood of a split in the Western partnership. Europe needs Russian energy desperately, and America does not. Europe cannot afford to support American policy unconditionally.
That, of course, is Russia’s bet.
MD: Imagine if Russia and China adopted a “real money process” and quit counterfeiting money. Then the whole world would have to follow suit. And governments couldn’t create money to wage wars. They couldn’t counterfeit money to buy citizen’s support. They would be less than 1/10th the size they are now.
Russia’s point of view
For the second time in eight years, Russia has seen its currency undermined by Western action over Ukraine. Having experienced it in 2014, this time the Russian central bank was better prepared. It had diversified out of dollars adding official gold reserves. The commercial banking system was overhauled, and the Governor of the RCB, Elvira Nabiullina, by following classical monetary policies instead of the Keynesianism of her Western contempories, has contained the fall-out from the war in Ukraine. As Figure 1 shows, the rouble halved against the dollar in a knee-jerk reaction before recovering to pre-war levels.
MD: Imagine the chart below if Russia (and the USA) had instituted a “real ” money process. That chart would be a straight horizontal line at 100. It wouldn’t wiggle at all. Now how could that be bad?
The link to commodities is gold, and the RCB announced that until end-June it stands ready to buy gold from Russian banks at 5,000 roubles per gramme. The stated purpose was to allow banks to lend against mine production, given that Russian-sourced gold is included in the sanctions. But the move has encouraged speculation that the rouble is going on a quasi- gold standard; never mind that a gold standard works the other way round with users of the currency able to exchange it for gold.
MD: With a real money process you have none of that nonsense.
Besides being with silver the international legal definition of money (the rest being currency and credit), gold is a good proxy for commodities, as shown in Figure 2 below.[i] Priced in goldgrams, crude oil today is 30% below where it was in the 1950, long before Nixon suspended the Bretton Woods Agreement. Meanwhile, measured in depreciating fiat currencies the price has soared and been extremely volatile along the way.
MD: Macleod doesn’t seem to realize that the changing supply/demand for gold and the changing supply/demand for oil…and for virtually all commodities will always dictate price. But with a real money process, a perpetually perfect balance of supply and demand for money is “guaranteed” and thus plays no role in pricing at all. It doesn’t need to be as complicated as these dolts are making it folks.
MD: It’s interesting that the curve above for goldgrams is a constant “zero”. That’s what your gold is worth to you if you bought it from Goldmoney.com…absolutely zero. They say “the regulators made us steal it from you”.
It is a similar story for other commodity prices, whereby maximum stability is to be found in prices measured in goldgrams. Taking up Pozsar’s point about currencies being increasingly linked to commodities in Bretton Woods III, it appears that Russia intends to use gold as proxy for commodities to stabilise the rouble. Instead of a fixed gold exchange rate, the RCB has wisely left itself the option to periodically revise the price it will pay for gold after 1 July.
MD: Is it just coincidence that “Pozsar” looks a lot like “Ponzi”? And earth to Pozsar, money is always and only linked to one thing…a responsible traders promise to complete a trade over time and space. The only reason we have all the nonsense that this article pontificates about is because moneychangers (and the governments they institute) counterfeit money at will. Stop that and bingo…problem solved.
Table 1 shows how the RCB’s current fixed rouble gold exchange rate translates into US dollars.
MD: Need to add cement blocks to the above chart. They did better than gold.
While non-Russian credit institutions do not have access to the facility, it appears that there is nothing to stop a Russian bank buying gold in another centre, such as Dubai, to sell to the Russian central bank for roubles. All that is needed is for the dollar/rouble rate to be favourable for the arbitrage and the ability to settle in a non-sanctioned currency, such as renminbi, or to have access to Eurodollars which it can exchange for Euroroubles (see below) from a bank outside the “unfriendlies” jurisdictions.
The dollar/rouble rate can now easily be controlled by the RCB, because how demand for roubles in short supply is handled becomes a matter of policy. Gazprom’s payment arm (Gazprombank) is currently excused the West’s sanctions and EU gas and oil payments will be channelled through it.
MD: With a real money process governing all nations money, exchange rates between the various currencies would be constant. In time they would all adopt the HUL (hour of unskilled labor) as the unit of measure. Since that never changes in value…i.e. always trades for the same size hole in the ground…exchange rates would be perpetually 1.0000 for all nation’s money. There would be no need for nations.
Broadly, there are four ways in which a Western consumer can acquire roubles:
By buying roubles on the foreign exchanges.
By depositing euros, dollars, or sterling with Gazprombank and have them do the conversion as agents.
By Gazprombank increasing its balance sheet to provide credit, but collateral which is not sanctioned would be required.
By foreign banks creating rouble credits which can be paid to Gazprombank against delivery of energy supplies.
MD: Be careful. That’s like Goldmoney.com saying a way to acquire gold is by sending money to them. But when you ask for your gold they say net not, nay, nope, nix, n’t;
The last of these four is certainly possible, because that is the basis of Eurodollars, which circulate outside New York’s monetary system and have become central to international liquidity. To understand the creation of Eurodollars, and therefore the possibility of a developing Eurorouble market we must delve into the world of credit creation.
MD: Macleod. Everyone here are MoneyDelusions knows that the Euro is pure nonsense…like all government managed (distorted and misguided) money…like putting lipstick on a pig.
There are two ways in which foreigners can hold dollar balances. The way commonly understood is through the correspondent banking system. Your bank, say in Europe, will run deposit accounts with their correspondent banks in New York (JPMorgan, Citi etc.). So, if you make a deposit in dollars, the credit to your account will reconcile with the change in your bank’s correspondent account in New York.
MD: But if the USA government claims you owe them money, they grab it right out of your bank. Your bank does nothing to defend you. And you “won’t” get your money back. You will die first. And of course the government is faceless…so there’s nobody for you to kill in return. They call it civilization.
Now let us assume that you approach your European bank for a dollar loan. If the loan is agreed, it appears as a dollar asset on your bank’s balance sheet, which through double-entry bookkeeping is matched by a dollar liability in favour of you, the borrower. It cannot be otherwise and is the basis of all bank credit creation. But note that in the creation of these balances the American banking system is not involved in any way, which is how and why Eurodollars circulate, being fungible with but separate in origin from dollars in the US.
MD: In a real money process, there is really no reason for loans. Only deadbeat traders (i.e. those who default on their promises need ever resort to loans.
By the same method, we could see the birth and rapid expansion of a Eurorouble market. All that’s required is for a bank to create a loan in roubles, matched under double-entry bookkeeping with a deposit which can be used for payments. It doesn’t matter which currency the bank runs its balance sheet in, only that it has balance sheet space, access to rouble liquidity and is a credible counterparty.
MD: The solution doesn’t lie in creating new government entities to do the counterfeiting. The solution is to take the money process out of the hands of “all” governments. Let it rest with the traders like you and I.
This suggests that Eurozone and Japanese banks can only have limited participation because they are already very highly leveraged. The banks best able to run Eurorouble balances are the Americans and Chinese because they have more conservative asset to equity ratios. Furthermore, the large Chinese banks are majority state-owned, and already have business and currency interests with Russia giving them a head start with respect to rouble liquidity.
MD: Remember when we did it to the Japanese in the late 30’s. We restricted their trade. And we enticed (forced) them to attack us (yes…our government was fully aware of Pearl Harbor and the war it would enable them to start.)
We have noticed that the large American banks are not shy of dealing with the Chinese despite the politics, so presumably would like the opportunity to participate in Euroroubles. But only this week, the US Government prohibited them from paying holders of Russia’s sovereign debt more than $600 million. So, we should assume the US banks cannot participate which leaves the field open to the Chinese mega-banks. And any attempt to increase sanctions on Russia, perhaps by adding Gazprombank to the sanctioned list, achieves nothing, definitely cuts out American banks from the action, and enhances the financial integration between Russia and China. The gulf between commodity-backed currencies and yesteryear’s financial fiat simply widens.
MD: And Goldmoney.com will claim some government is prohibiting them from delivering your gold to you. See how easy that works?
For now, further sanctions are a matter for speculation. But Gazprombank with the assistance of the Russian central bank will have a key role in providing the international market for roubles with wholesale liquidity, at least until the market acquires depth in liquidity. In return, Gazprombank can act as a recycler of dollars and euros gained through trade surpluses without them entering the official reserves. Dollars, euros yen and sterling are the unfriendlies’ currencies, so the only retentions are likely to be renminbi and gold.
In this manner we might expect roubles, gold and commodities to tend to rise in tandem. We can see the process by which, as Zoltan Pozsar put it, Bretton Woods III, a global currency regime based on commodities, can take over from Bretton Woods II, which has been characterised by the financialisation of currencies. And it’s not just Russia and her roubles. It’s a direction of travel shared by China.
MD: This is like your wife always claiming to have a yeast infection. Pretty soon you find a way around that.
The economic effects of a strong currency backed by commodities defy monetary and economic beliefs prevalent in the West. But the consequences that flow from a stronger currency are desirable: falling interest rates, wealth remaining in the private sector and an escape route from the inevitable failure of Western currencies and their capital markets. The arguments in favour of decoupling from the dollar-dominated monetary system have suddenly become compelling.
MD: When does the obvious cease to be a belief?
The consequences for the West
Most Western commentary is gung-ho for further sanctions against Russia. Relatively few independent commentators have pointed out that by sanctioning Russia and freezing her foreign exchange reserves, America is destroying her own hegemony. The benefits of gold reserves have also been pointedly made to those that have them. Furthermore, central banks leaving their gold reserves vaulted at Western central banks exposes them to sanctions, should a nation fall foul of America. Doubtless, the issue is being discussed around the world and some requests for repatriation of bullion are bound to follow.
There is also the problem of gold leases and swaps, vital for providing liquidity in bullion markets, but leads to false counting of reserves. This is because under the IMF’s accounting procedures, leased and swapped gold balances are recorded as if they were still under a central bank’s ownership and control, despite bullion being transferred to another party in unallocated accounts.[ii]
MD: Actually there is no end to the money-changers creativity in cheating you. Deal them out of the game. Institute a real money process. There’s really no use in reading this nonsense further. I’m tired…and throwing in the towel. Just one parting comment: Do business at Goldmoney. com at your own risk A word to the wise is sufficient.
No one knows the extent of swaps and leases, but it is likely to be significant, given the evidence of gold price interventions over the last fifty years. Countries which have been happy to earn fees and interest to cover storage costs and turn gold bullion storage into a profitable activity (measured in fiat) are at the margin now likely to not renew swap and lease agreements and demand reallocation of bullion into earmarked accounts, which would drain liquidity from bullion markets. A rising gold price will then be bound to ensue.
Ever since the suspension of Bretton Woods in 1971, the US Government has tried to suppress gold relative to the dollar, encouraging the growth of gold derivatives to absorb demand. That gold has moved from $35 to $1920 today demonstrates the futility of these policies. But emotionally at least, the US establishment is still virulently anti-gold.
As Figure 2 above clearly shows, the link between commodity prices and gold has endured through it all. It is this factor that completely escapes popular analysis with every commodity analyst assuming in their calculations a constant objective value for the dollar and other currencies, with price subjectivity confined to the commodity alone. The use of charts and other methods of forecasting commodity prices assume as an iron rule that price changes in transactions come only from fluctuations in commodity values.
The truth behind prices measured in unbacked currencies is demonstrated by the cost of oil priced in gold having declined about 30% since the 1960s. That is reasonable given new extraction technologies and is consistent with prices tending to ease over time under a gold standard. It is only in fiat currencies that prices have soared. Clearly, gold is considerably more objective for transaction purposes than fiat currencies, which are definitely not.
Therefore, if, as the chart in the tweet below suggests, the dollar price of oil doubles from here, it will only be because at the margin people prefer oil to dollars — not because they want oil beyond their immediate needs, but because they want dollars less.
China recognised these dynamics following the Fed’s monetary policies of March 2020, when it reduced its funds rate to the zero bound and instituted QE at $120bn every month. The signal concerning the dollar’s future debasement was clear, and China began to stockpile oil, commodities, and food — just to get rid of dollars. This contributed to the rise in dollar commodity prices, which commenced from that moment, despite falling demand due to covid and supply chain problems. The effect of dollar debasement is reflected in Figure 3, which is of a popular commodity tracking ETF.
A better understanding would be to regard the increase in the value of this commodity basket not as a near doubling since March 2020, but as a near halving of the dollar’s purchasing power with respect to it.
Furthermore, the Chinese have been prescient enough to accumulate stocks of grains. The result is that 20% of the world’s population has access to 70% of the word’s maize stocks, 60% of rice, 50% of wheat and 35% of soybeans. The other 80% of the world’s population will almost certainly face acute shortages this year as exports of grain and fertiliser from Ukraine/Russia effectively cease.
China’s actions show that she has to a degree already tied her currency to commodities, recognising the dollar would lose purchasing power. And this is partially reflected in the yuan’s exchange rate against the US dollar, which since May 2020 has gained over 11%.
Implications for the dollar, euro and yen
In this article the close relationship between gold, oil, and wider commodities has been shown. It appears that Russia has found a way of tying her currency not to the dollar, but to commodities through gold, and that China has effectively been doing the same thing for two years without the gold link. The logic is to escape the consequences of currency and credit expansion for the dollar and other Western currencies as their purchasing power is undermined. And the use of a gold peg is an interesting development in this context.
We should bear in mind that according to the US Treasury TIC system foreigners own $33.24 trillion of financial securities and short-term assets including bank deposits. That is in addition to a few trillion, perhaps, in Eurodollars not recorded in the TIC statistics. These funds are only there in such quantities because of the financialisation of Western currencies, a situation we now expect to end. A change in the world’s currency order towards Pozsar’s Bretton Woods III can be expected to a substantial impact on these funds.
To prevent foreign selling of the $6.97 trillion of short-term securities and cash, interest rates would have to be raised not just to tackle rising consumer prices (a Keynesian misunderstanding about the economic role of interest rates, disproved by Gibson’s paradox[iii]) but to protect the currency on the foreign exchanges, particularly relative to the rouble and the yuan. Unfortunately, sufficiently high interest rates to encourage short-term money and deposits to stay would destabilise the values of the foreign owned $26.27 trillion in long-term securities — bonds and equities.
As the manager of US dollar interest rates, the dilemma for the Fed is made more acute by sanctions against Russia exposing the weakness of the dollar’s position. The fall in its purchasing power is magnified by soaring dollar prices for commodities, and the rise in consumer prices will be greater and sooner as a result. It is becoming possible to argue convincingly that interest rates for one-year dollar deposits should soon be in double figures, rather than the three per cent or so argued by monetary policy hawks. Whatever the numbers turn out to be, the consequences are bound to be catastrophic for financial assets and for the future of financially oriented currencies where financial assets are the principal form of collateral.
It appears that Bretton Woods II is indeed over. That being the case, America will find it virtually impossible to retain the international capital flows which have allowed it to finance the twin deficits — the budget and trade gaps. And as securities’ values fall with rising interest rates, unless the US Government takes a very sharp knife to its spending at a time of stagnating or falling economic activity, the Fed will have to step up with enhanced QE.
The excuse that QE stimulates the economy will have been worn out and exposed for what it is: the debasement of the currency as a means of hidden taxation. And the foreign capital that manages to escape from a dollar crisis is likely to seek a home elsewhere. But the other two major currencies in the dollar’s camp, the euro and yen, start from an even worse position. These are shown in Figure 4. With their purchasing power visibly collapsing the ECB and the Bank of Japan still have negative interest rates, seemingly trapped under the zero bound. Policy makers find themselves torn between the Scylla of consumer price inflation and the Charybdis of declining economic activity. A further problem is that these central banks have become substantial investors in government and other bonds (the BOJ even has equity ETFs on board) and rising bond yields are playing havoc with their balance sheets, wiping out their equity requiring a systemic recapitalisation.
Not only are the ECB and BOJ technically bankrupt without massive capital injections, but their commercial banking networks are hugely overleveraged with their global systemically important banks — their G-SIBs — having assets relative to equity averaging over twenty times. And unlike the Brazilian real, the Mexican peso and even the South African rand, the yen and the euro are sliding against the dollar.
The response from the BOJ is one of desperately hanging on to current policies. It is rigging the market by capping the yield on the 10-year JGB at 0.25%, which is where it is now.
These currency developments are indicative of great upheavals and an approaching crisis. Financial bubbles are undoubtedly about to burst sinking fiat financial values and all that sail with them. Government bonds will be yesterday’s story because neither China nor Russia, whose currencies can be expected to survive the transition from financial to commodity orientation, run large budget deficits. That, indeed, will be part of their strength.
The financial war, so long predicted and described in my essays for Goldmoney, appears to be reaching its climax. At the end it has boiled down to who understands money and currencies best. Led by America, the West has ignored the legal definition of money, substituting fiat dollars for it instead. Monetary policy lost its anchor in realism, drifting on a sea of crackpot inflationary beliefs instead.
But Russia and China have not made the same mistake. China played along with the Keynesian game while it suited them. Consequently, while Russia may be struggling militarily, unless a miracle occurs the West seems bound to lose the financial war and we are, indeed, transiting into Pozsar’s Bretton Woods III.
[i] Chart kindly provided by James Turk from his recent book, Money and Liberty (pub. Wood Lane Books)
[ii] See Treatment of Reserves and Fund Accounts — Balance of Payments Division IMF Statistics Department.
[iii] Gibson’s paradox showed that the price correlation with interest rates was with the general price level, not with the rate of price changes. Because Keynes and others failed to explain it, modern economists ignore this relationship with respect to monetary policies. See https://www.goldmoney.com/research/goldmoney-insights/gibson-s-paradox
The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney, unless expressly stated. The article is for general information purposes only and does not constitute either Goldmoney or the author(s) providing you with legal, financial, tax, investment, or accounting advice. You should not act or rely on any information contained in the article without first seeking independent professional advice. Care has been taken to ensure that the information in the article is reliable; however, Goldmoney does not represent that it is accurate, complete, up-to-date and/or to be taken as an indication of future results and it should not be relied upon as such. Goldmoney will not be held responsible for any claim, loss, damage, or inconvenience caused as a result of any information or opinion contained in this article and any action taken as a result of the opinions and information contained in this article is at your own risk.
David Lawant this is my bio More posts by David Lawant.
MD: This blog named MoneyDelusion.com (note singular, not plural like this one) I tripped over. It was created in 2020. MoneyDelusions.com (note plural…was created three years earlier in 2017). This David Lawant is likely a Mises Monk. He’s posted three articles to his blog…one each day for three days…and then nothing. I wonder what he thinks he’s up to. Let’s see if he knows anything about money. If he does he’ll be the first Mises Monk I’ve found who does…and wouldn’t that be exciting!
A Medium of exchange (MoE) is an economic good that is used in exchange for other goods. Money is nothing more than a special case of media of exchange that happens to be universally accepted through a process that has already been well described elsewhere. Under this definition Bitcoin is not money because it’s not commonly accepted (yet), but it certainly is a MoE. For this text you can read these two concepts as synonyms, as everything here about money can be generalized to media of exchange without any loss in meaning.
MD: Right off the bat it looks like he doesn’t get it. A “medium” is the environment (control) within which “media” exists. It’s a minor point…unless his confusion goes deeper. Nope: Second sentence his thinks “money” is a special case of “media”. This is wrong. Money “is” the media. Different “cases” would be like ledger entries, demand deposits, coins, currency, etc. And what is this “universally accepted process described elsewhere”? Now he swerves into correctness…Bitcoin “is” not money…but it looks like it’s “acceptance” that is not mature enough…and thus will eventually be money. He’s wrong. It’s not created correctly. That’s what keeps it from ever being money. That’s what makes it just being stuff of simple barter exchange like gold and silver. And read that last sentence again. He is “money deluded”…that’s for sure.
Media of exchange are not a payment system, as Pierre Rochard correctly and insistently emphasizes. Although a payment system might be a nice-to-have feature to transfer a MoE form one hand to another, it is important to understand that these are completely orthogonal concepts. The channel through which a good is exchanged is not important for the economic analysis of a MoE. What matters is that the good is primarily used to be exchanged for other goods. Ludwig von Mises traced this confusion to a juridical view of money:
…the principal, although not exclusive, motive of the law for concerning itself with money is the problem of payment. When it seeks to answer the question ‘What is money?’ it is in order to determine how monetary liabilities can be discharged. For the jurist, money is a medium of payment. The economist, to whom the problem of money presents a different aspect, may not adopt this point of view if he does not wish at the very outset to prejudice his prospects of contributing to the advancement of economic theory.
MD: See…I told you he was a Mises Monk…and his brain is thoroughly contaminated. We here know that money is “an in-process promise to complete a trade over time and space.” It is always, and only, created by traders like you and me. It may never circulate as an object of simple barter exchange…but virtually always does. And when it does, it trades like any other object that two traders are willing to exchange. But its process is what makes it special. Real money has zero intrinsic value. But when properly protected from counterfeiting, it is the most efficient and most trusted of any object of simple barter exchange. This is because its value never changes over time and space. This is because there is no interest load associated with using it. And it is because the “process (e.g. medium) guarantees this to be so. It cannot operate any other way.
Some Bitcoiners question whether it makes sense to stress so much the MoE aspect of money if it is only a stage in the evolutionary process brilliantly depicted by Nick Szabo (collectible, store of value, medium of exchange, and unit of account). The point, as Szabo points out, is that something special happens when an economic good becomes a medium of exchange.
MD: Here you see a very common attribute of the Mises Monks…that is worship of other Mises Monks. They’re truly a mutual admiration society. It is a religion…and misguided like all religions. But the key thing to note here: An economic good does not “become” a medium of exchange (or even properly a “media” of exchange). Money is not an economic good…it is a “promise”. And “real” money is a promise that is guaranteed to be kept. It’s designed into the process. The sidebar explains it in very simple terms.
Categorization of Economic Goods
One of the most basic distinctions in economics is the one between consumption and production goods, usually called by Austrian economists as first-order and higher-order (second-order, third-order, etc…) goods. We can get away for now with the following simplified definition: first-order (consumption) goods satisfy direct human needs and higher-order (production) goods are used to produce lower-order goods.
MD: Money has no interest in what it is being traded for or how it will be used…or why it is being traded. Why should it? Why do they make this complicated? If I trade money for a hammer, do I care if it’s used to pound nails or to blacksmith wrought iron…or just to hang on the wall? If this article tells us why “he” cares we’ll correct him at that instant.
There’s nothing intrinsic about whether a good is first or higher order. For example: I can consume a certain amount of water to satisfy my thirst (i.e., water as a first-order good) or alternatively I can provide this same amount of water to cattle which I will ultimately consume as food (i.e., water as a second-order good and cattle as a first-order good).
First- and higher-order economic goods, albeit ultimately connected to a fundamental theory of value, are different enough to be treated separately in many instances. As Jesus Huerta de Soto puts it: “this classification and terminology were conceived by Carl Menger, whose theory on economic goods of different order is one of the most important logical consequences of his subjectivist conception of economics”.
Peter Paul Rubens’ representation of an altcoiner trying to spin up a monetary system (c. 1614–1616)
MD: More praise for fellow Mises Monks. Look how far we are into this article and he still has said nothing that has to do with money. He’s just tried to act like an intellectual. We know that as “double talk”. And watch out for creation of a new “..ist”…in this instance “subjectivist”. Does the world really need any more “ists”?
We have thus defined that media of exchange are goods that have no real “utility” aside from being exchanged for other goods, which in turn have real “utility” of their own. So how do we classify media of exchange? Are they first-order (consumption) or higher-order (production) economic goods? Is there anything especial about media of exchange that warrants a special analysis of them?
MD: When you realize that it’s the entire trading universe that is the “medium” of exchange, you don’t have to classify anything. In trading, those who prefer to trade for gold know its value. If they trade in silver, they know its value. What is different about “real” money is “its value never changes.” This can’t be said for any other object of simple barter exchange.
MD: The preferred unit for money is the HUL (Hour of Unskilled Labor). For all time in the past it has traded for the same size hole in the ground. And in a “real” money process, it will trade for the same size hole in the future. It is the traders who decide in their personal trades how many HULs is being traded.
MD: And this is a great simplification over the complicated process he alludes to. In his process you have to know the changing value of every good and service …in your mind. But when it comes to “real money” as one of the exchanged objects, you always know its value. When you were in high school (i.e. unskilled labor) you knew exactly what people were willing to pay for it. With the improperly managed dollar, people were willing to pay me $1.50 for a HUL. Today they are willing to pay $8.00. Why? Because the improper “dollar process” has allowed counterfeiting. They have allowed the supply/demand balance to change over time…and it is with supply continually outstripping demand through government counterfeiting (i.e. making promises they never keep)…counterfeiting “inflates” the supply. It’s just that simple.
Media of Exchange Are a Sui Generis Type of Economic Good
The number of economists who don’t have good answers to these questions is astounding. Most simply classify media of exchange as a higher-order good by exclusion. They don’t have direct “utility”, so they cannot be first-order economic goods.
MD: Here we see the pot calling the kettle black. I’m going to just let him spew on here. To put what he writes in context, he thinks gold is money. He thinks money “always” has intrinsic value. Gold thus gets its value by digging dirt and refining it. But dirt in your back yard isn’t going to give you any gold…no matter how much you refine it. And you can argue until you’re blue in the face that you put as much work into your backyard dirt as the gold professional put into his. He got gold…you didn’t. He got something to trade for his HULs…you didn’t. But when you know money is a promise, and you know “real” money comes from a process that “guarantees promises”, you don’t need to screw around with things like gold. I’ll let you read on yourself for a while. These guys make me tired..
Austrian economists think this approach is simplistic and inconsistent. They defend a three-fold categorization of economic goods: first-order (consumption) goods, higher-order (production) goods and media of exchange. This is a key proposition in Ludwig von Mises’ indispensable Theory of Money and Credit. He even criticizes his master Eugen von Böhm-Bawerk and defends the position of Karl Knies, economist of the rival German historical school, in this respect:
Production goods derive their value from that of their products. Not so money; for no increase in the welfare of the members of a society can result from the availability of an additional quantity of money. The laws which govern the value of money are different from those which govern the value of production goods and from those which govern the value of consumption goods.
The peculiarity of media of exchange, and by extent of money, as economic goods is clearly exposed by a simple conundrum. We know intuitively that every economic good can command a price because it has “utility”. If the “utility” of a MoE is to have purchasing power (i.e., a price), how to we get out of this circular reference to understand how money has value? Mises derived his famous regression theorem to solve this apparent circularity by introducing the time element, but this is outside the scope of this text. What matters for us is that media of exchange are unique because their “utility” and purchasing power coincide. As Murray Rothbard puts it:
Without a price, or an objective exchange-value, any other good would be snapped up as a welcome free gift; but money, without a price, would not be used at all, since its entire use consists in its command of other goods on the market. The sole use of money is to be exchanged for goods, and if it had no price and therefore no exchange-value, it could not be exchanged and would no longer be used.
MD: Here is a good time to comment on this thing they call “price”. It’s how much of the stuff you have and are willing to trade for how much of the stuff your trading partner has and is willing to trade. If the “stuff” is real money, you both know exactly what is being traded…one hour of unskilled labor…and it’s guaranteed. You can convert that to dollars, marks, franks, ounces of gold, or pork bellies. It’s up to you to decide on that conversion. But one thing you don’t have to do with “real” money. You don’t have to decide what a HUL is worth. You always know, because at one point in your life your were one…an hour of unskilled labor. So if you’re using “real” money, your trade just got less risky by a factor of two (i.e. one of the objects being traded is “guaranteed” not to change over time and space). Let’s let him blab on further for a while..
This special relationship between “utility” and price for media of exchange makes its analysis unique and leads to conclusions that might seem counter-intuitive compared to the analysis of typical commodities. As Mises points out: the real problem of the value of money only begins where it leaves off in the case of commodity-values. Rothbard agrees with Mises on this point:
In the case of consumers’ goods, we do not go behind their subjective utilities on people’s value scales to investigate why they were preferred; economics must stop once the ranking has been made. In the case of money, however, we are confronted with a different problem. For the utility of money (setting aside the nonmonetary use of the money commodity) depends solely on its prospective use as the general medium of exchange. Hence the subjective utility of money is dependent on the objective exchange-value of money, and we must pursue our analysis of the demand for money further than would otherwise be required.
MD: This is a lot like hearing someone quote bible verses isn’t it.
This is the first stepping stone to intellectually justify why immutability and censorship resistance are such important concepts for media of exchange. As we will see in future texts, it will lead to the Austrian view that, contrary to other types of economic goods, increasing the supply of a MoE will only benefit some at the expense of others. On the other hand, reductions in the supply of a MoE do not make society worse off. The purchasing power that is hoarded is transmitted to others in the exact same proportion.
MD: So what do you think it will take for these “intellectuals” to grasp the concept of perpetual supply/demand balance…guaranteed? They’re beating a dead red herring…to mix a metaphor.
B2C, B2B and… B2MoE?
The singularities of different types goods are not just an abstraction — the business and investing communities also understand this well. The contrasts any executive or investor sees between business-to-consumer (B2C) and business-to-business (B2B) companies are too obvious to state here. Financial professionals are also familiar with the division between retail and wholesale banking. It is very to easy to understand that these are fundamentally different businesses that have unique challenges.
One of the reasons why Bitcoin is so novel is that companies and investors have never dealt directly with media of exchange before, but only with services built on top of an established MoE. These services are just typical consumer or production goods, not media of exchange. Trying to fit the standard toolkit to such a unique type of economic good without first considering its idiosyncrasies might lead to expensive mistakes.
Bitcoiners, possibly due to their Austro-Hungarian DNA traces, understand these concepts fully. Still, it is important to be mindful of them and make them explicit, especially as more new people start to get involved with Bitcoin. Most arguments against Bitcoin can be traced down to a misunderstanding of how media of exchange actually work. Traditional economists are generally not better positioned to understand this either, as monetary economics has been reduced to reading FOMC tea leaves and computing econometric analyses.
The next time someone points a laughable obsession over the 21 million hard cap or satellite dishes, try to gauge his understanding of some basic monetary concepts like the ones discussed here. Then think again about what is actually laughable. The next time someone tries to shill another “blockchain” that optimizes for a number of features, or for any specific feature, at the expense of immutability and censorship resistance, try to understand whether this person has considered the fact that media of exchange work under different rules.
MD: Do you think he could be more clueless? I ask you, as a trader and given the choice of an inflating money, a deflating money, or a money guaranteed to have zero inflation or deflation, which would you choose? Now that you have chosen, would your trading partner make the same choice as you in this instance? For both trading partners to be on an equal footing as far as money is concerned, the money itself must “never” change value. Does the dollar have this attribute? The Zimbabwe or Weimer Germany money? How about gold? How about cement blocks? My cement blocks have held their value better than gold.
The positions of Bitcoin proponents are usually grounded on air-tight logic and sound economic theory that extends back for a long time. This is neither dogmatism nor tribalism. Contrary to what many believe, the Austrian School of Economics does not take individual freedom and property rights as an axiom, but it arrives at those ideals through rigorous deductive logic. It certainly is a longer route to appreciate the free market system, but it might be the only one that does not lead one astray over time.
PS: An upcoming text in this series will delve deeper into the concept of utility and will probably be a required companion to this text. For now, I’m working with the oversimplified concept of utility as the satisfaction of someone’s needs. For that reason, “utility” is used in quotes throughout this text.
In that sense, a more rigorous way to transmit the main message of this text is (to paraphrase Mises): “In the case of money, subjective use-value and subjective exchange-value coincide. Both are derived from objective exchange-value, for money has no utility other than that arising from the possibility of obtaining other economic goods in exchange for it”.
MD: As always, I couldn’t be more relieved to have reached the end of this article. And look at the help from his Mises Monk pals and scrutiny he got. Pretty scary isn’t it.
If The Fed Starts A Digital Currency, It Had Better Guarantee Privacy Tyler Durden’s Photo by Tyler Durden Tuesday, Apr 05, 2022 – 08:00 PM
MD: As always, Money Delusions will use the true definition of “real” money to annotate this article. The article appear in ZeroHedge.com as “If the Fed Starts A Digital Currency, It Had Better Guarantee Privacy”. And the title itself reveals confusion about what money is…and what its characteristics are. This begins by knowing what money is (i.e “an in-process promise to complete a trade over time and space”); how money is created (i.e. transparently in plain view by traders like you and me); how money is destroyed (i.e. also transparently by the trader delivering as promised); what happens if the trader “defaults” (i.e. “interest” of like amount is immediately collected); and how money trades in the interim (i.e. anonymously as any other object of simple-barter-exchange). Let’s get started:
Authored by By Andrew M. Bailey & William J. Luther via RealClearPolicy.com,
President Biden’s latest executive order calls for extensive research on digital assets and may usher in a U.S. central bank digital currency (CBDC), eventually allowing individuals to maintain accounts with the Federal Reserve. Other central banks are already on the job. The People’s Bank of China began piloting a digital renminbi in April 2021. India’s Reserve Bank intends to launch a digital rupee as early as this year.
MD: They immediately exhibit that they don’t know what money is. “Banks” have nothing to do with “real” money at all. It is the most obvious corruption of real money. And “digital” is just one of many forms of money.
Most commonly, money is just an entry in a ledger. In some cases it is in the form of coins and currency…both carefully designed to resist counterfeiting. In some cases it is in the form of a check (i.e. against a demand deposit). And we already have a fairly digital form of money in “debit cards”…a link to your ledger records that you carry in your purse. “Credit cards” are not an example of money. Rather, they are an example of “money creation”.
When you charge something on a credit card, “you” are creating money…a promise to complete a trade over time and space. When you use a “debit card” you are merely submitting proof that you hold some previously created money.
A CBDC may upgrade the physical cash the Federal Reserve already issues – but only if its designers appreciate the value of financial privacy.
Cash is a 7th century technology, with obvious drawbacks today. It pays no interest, is less secure than a bank deposit, and is difficult to insure against loss or theft. It is unwieldy for large transactions, and also requires those transacting to be at the same place at the same time — a big problem in an increasingly digital world.
MD: And before cash we had the tally stick…which claims to be the best implementation of money. And tally sticks were “real” money. They represented a promise to complete a trade over time and space. They worked better than gold. In fact, they could claim any kind of “backing” the trader’s agreed to (e.g. pork bellies). But nobody “traded” tally sticks. Thus, in that respect they weren’t money at all. They really were close to “crypto” in that respect…but much cheaper to create. You could create a tally stick with a twig and a knife. Today’s crypto requires insane amounts of electricity waste to create. They call it “proof of work”…which of course is nonsense.
Nonetheless, cash remains popular. Circulating U.S. currency exceeded $2.2 trillion in January 2022, more than doubling over the last decade. The inflation-adjusted value of circulating notes grew more than 5.5 percent per year over the period. And U.S. consumers used cash in 19 percent of transactions in 2020.
MD: Actually, the money changers are revealing the imminent collapse of cash. They hold lots of cash (counterfeited by government) and are doing everything they can to exchange it for real “property”. I get a dozen calls a day from “so-called investors” who want to “buy” my property. It’s a game of musical chairs. They don’t want to holding it when the “reset” comes as they know it will be instantly worthless. And also note, with “real” money, inflation is perpetually zero. No adjusted valuation is ever necessary.
Why is cash so popular, despite its drawbacks? Cash is easy to use. There are no bank or merchant terminal fees associated with cash. And, most importantly, it offers more financial privacy than the available alternatives.
MD: In actuality, cash is “not” easy to use. You almost never see it being used…even in restaurants and bars. I use it in bars just to keep score. I take a certain amount of cash, which when I’ve used it up I know I’m about to have had too much to drink. I spend lots of time explaining to other patrons why I can’t let them buy me a beer.
When you use cash, no one other than the recipient needs to know. Unlike a check or debit card transaction, there’s no bank recording how you spend your money. You can donate to a political or religious cause, buy controversial books or magazines, or secure medicine or medical treatment without much concern that governments, corporations, or snoopy neighbors will ever find out.
MD: With a “real” money implementation, there is no need for banks to be involved. All that is necessary is a “block chain” like implementation that resists the “three general problem” and counterfeiting. And when properly implemented, the “block chain” implementation is cost free. It has no use for “proof of work”. It “knows” it’s keeping track of performance on promises.
Privacy means you get to decide whether to disclose the intimate details of your life. Some will happily share. That is their choice. But others will prefer to keep those details private.
MD: But keep in mind, while “real” money used in trade is “always anonymous”, it’s creation is always “open and transparent”. Awareness of this distinction is crucial.
In a digital world, personal information can spread far and wide. And it can be used to exclude or exploit people on the margins. The choice about what information to share is important. For some, flourishing depends on carefully choosing how much others know about their politics, religion, relationships, or medical conditions.
Financial privacy matters just as much as privacy in other areas. What we do reveals much more about who we are than what we say. And what we do often requires spending money. In many cases, meaningful privacy requires financial privacy.
MD: Again, keep in mind that money is only concerned with the problem of “counterfeiting”. It cares not at all who is using it and for what. But people using it must know and expect it is genuine…i.e. not counterfeited. And of course we all know the principal counterfeiters of money are governments. For a “real” money process to exist, it’s operation must be transparent and impervious to any attempts to control or to counterfeit it. It is simply about record keeping.
Privacy also operationalizes the presumption of innocence and promotes due process. You are not obliged to testify against yourself. If law enforcement believes you have done something unlawful, they must convince a judge to issue a warrant before rifling through your things. Likewise, financial privacy prevents authorities from monitoring your transactions without authorization.
MD: Law doesn’t apply to a “real” money process. But open communication and mitigation is crucial. Again, it’s about making counterfeiting impossible. And when detected it must reveal who did the counterfeiting; see that the counterfeiting doesn’t happen again; and treat the counterfeiting for what it is… a “default”. And thus it immediately mitigates it with “interest” collection of like amount. This must be totally transparent…so the marketplace can ostracize the perps. Who pays the interest? Other irresponsible traders.
The recent executive order, to the administration’s credit, notes that a CBDC should “maintain privacy; and shield against arbitrary or unlawful surveillance, which can contribute to human rights abuses.” But a reasonable person might worry that the government is paying lip service to privacy concerns.
MD: A principle “axiom” must be observed at all times. If you are considering a government solution to any problem, you are still looking for a solution. Government is “never” the solution to any problem. It is just a magnifier of the problem.
A recent paper from the Fed, offered as “the first step in a public discussion” about CBDCs, suggests the central bank has no interest in guaranteeing privacy at the design stage. Instead, it maintains that a “CBDC would need to strike an appropriate balance […] between safeguarding the privacy rights of consumers and affording the transparency necessary to deter criminal activity.” The Fed then solicits comments on how a CBDC might “provide privacy to consumers without providing complete anonymity,” which it seems to equate with “facilitating illicit financial activity.” A U.S. CBDC, in other words, will likely offer much less privacy than cash.
MD: No central entity (especially a central bank) is ever involved in a “real” money process. Rather, it is the “process” that is the entity. As such, the process is universally used and totally transparent to all traders at all times.
We do not deny that financial privacy benefits criminals and tax cheats. Such claims tend to be exaggerated, though. In reality, it is a small price to pay for civil liberty. That due process applies to everyone — criminals included — is no reason to scrap the Fourth or Fifth Amendments.
MD: Taxes implies government…so it is a non-starter. If government participation was ever a valid option, it would be the “only” viable option. You would pay taxes (and only taxes) for everything. Your gasoline, your groceries, your clothing…all would be free. You would just pay tax and it would be covered out of that. Some people call this communism. Some call it insurance. It’s all nonsense.
Policymakers may be tempted to compromise on financial privacy when implementing a CBDC. Instead, they should attempt to replicate the privacy afforded by cash. Like non-alcoholic beer, the Fed’s “digital form of paper money” would superficially resemble the real McCoy while lacking its defining feature.
MD: Policy is the the marker here. No process is every properly governed by policy. The closest we should ever come to adopting policy is the “golden rule”. Policy is different from process. Money is a “process”. It cares nothing about policies like full employment and setting inflation at 2% (while continuously failing by a factor of 2).
by Tyler DurdenSaturday, May 21, 2022 – 01:30 PM
David Lawant this is my bio 
