Tuesday, November 29, 2011

What about the "New Economics Party?"

I've seen a video courtesy of  Robin Westenra's blog:
-and seen their website
Still I can't get my head round their website, seems like a dogs dinner of vaguely populist ideas mostly adopted because of their acceptability to the disposessed without actually requiring them to get off their arses and become responsible for their own sustenance, i.e. we just adjust certain facets of the structure of the economy and all good things follow.
 The trouble is that any movement that is aiming to achieve prominence by collecting votes is doomed to populist policy. This party is clearly aimed at urban populations that don't own land, don't have access to land, dont want to work on the land but see land as a priviledge of the wealthy that can be taxed to provide an income stream to be given free of any commitment to do real productive work to those who have become unhealthily attached to their urban service sector "thinking rather than doing" lifestyle jobs that are in reality only possible because of the anachronism of a century of subsidy by cheap oil.
 These guys really need to understand the concept of distributism, which is a well thought-out concept of land use that is the only way that everyone is going to get fed in the post oil age. Unfortunately working the land is an abhorrent thought to the vast majority of those in Auckland or Wellington and that is where political power (and civil disorder danger) lies. For these populations, I'm afraid only the misery of an empty belly at some future time will be sufficient to cure them of their attachment to town life. See here my blog post on supply chain collapse for likely outcomes.
For a seriously plausible alternative economic strategy see Positive Money NZ.
Deirdre Kent of the New Economics Party replied:

There is nothing populist about our policies. We leave that to the Green Party to go for the middle ground and not campaign on the urgent issues of our time which are positively alarming. No one is going to argue that recommending a 4-6% decrease every year in our oil imports would appeal to anyone except those who know the reality and know we must face it.

If you think it is a "dog's dinner" by which you mean it doesn't fit any previous models (actually I meant it was a basketful of snippets from here-and-there) you are right. No other party wanting the whole world to have access to food, housing, water, health, education and social justice is currently recommending such a radical reversal of tax policy.

We say we need to tax unearned income not earned income. After all it was the banks in the early 20th century who demanded of our government that they impose income tax, we didn't have it in NZ up till then. GST is regressive and why should any government tax enterprise?

On the other hand, as Greens have pointed out for two decades, prices give the wrong signals because companies and individuals use water, land, oil, artificial fertilisers, pesticides and herbicides etc and society pays the price of clearning up the mess, (rivers, toxic sites and so on). The way to internalise costs is to charge an annual rent for the privilege of using that part of the commons you "own". Many industries today can only operate because their costs are externalised – an "I keep the income, someone else pays the costs" mind-set.

As Charles Eisenstein says in his book Sacred Economics "The price of a tank of fuel doesn't include the cost of the pollution it generates, nor the cost of the wars fought to secure it, nor the cost of oil spills."

Ours is a party that recognises that more people need to return to the land and to work the land. Just outside our major cities we watch as lifestylers commute all week and play on horses and ride-ons all weekend but don't use their valuable land for growing food. And meanwhile they watch their property value rise as community infrastructure round them is built by others while they gain unearned income. Here where I live I know a guy who bought his land on a river near a town which was growing. He bought it for $400,000 and it is now worth over a million while he has worked in Wellington and let the property decline and decline. And our council wants people to grow food on our good land! But without tax signals and rating on unimproved value they are relatively helpless. Ridiculous and unfair.

Our policies of imposing resource taxes rather than income tax and GST are designed to reward those who work to improve their properties. If they are not working the land they should sell it to someone who does.

Actually when an Australian NGO called Earthsharing Australia did some research on land values they found that the biggest concentration of land value was in the centre of the cities. A land value tax is the way to stop speculators sitting on valuable sites and waiting for them to appreciate. As the 2009 Tax Review stated a land tax will bring in income from overseas owners where before they didn't pay tax.

And our policy is that those who contribute back to the commons should be monetarily compensated. This includes farmers who remove land from production to provide ecological services like carbon sequestration, water and soil conservation or provide habitat for plants insects and fish.

With land value taxes and the removal of the incentive to speculate on land and resources the cycle of boom-bust is evened out. The price of land remains more even and doesn't rise exhorbitantly.

The Greens in their campaign seem to have one resource tax – the tax on the commercial use of water. This is a good start. Capital gains tax will never do it for land though.

 Kevthefarmer Replied:
I have to say, re-reading the website there is nothing in the NEP that I can disagree with apart from the Land Value Tax, which I find perverse and offensive in every way, and which provoked my snarky blogpost.
"But income is a poor predictor of someone’s ability to pay. Their wealth is a much better predictor, and much of their wealth is often tied up in property."
 Cursory examination shows this to be untrue. All farmers (and most people will be a farmer in the not-to-distant future) -are capital-wealthy and cash-poor.  You (or someone) use the phrase "tied up", which indicates lack of liquidity- which is exactly the case with land holding, whereas income is a liquid asset and is easily available for taxation purposes. This whole passage is an oxymoron. The perversity is that a person using the land for a productive purpose rather than speculation runs the risk of being driven off their land by the Valuation Officer. This happened to some fairly smallscale (few hundred acres) farmers in Golden Bay (Laurences turf so he should know) because the V.O.realised they had "million dollar views" of the mountains and sea!  Land Value Tax is popular with government book-keepers because you can"t export or hide the land. therefore it is easy to charge. That is its only "advantage".
Death duties and capital gains tax do work well for a wealth tax, given certain exemptions such as first dwelling house and land farmed in-hand. Community Land Trusts and the State could be exempted
Do you realise that land based industry only accounts for 5% of GDP in NZ, whereas service sector is 70% and manufacturing is 25%. how do you propose to extract a significant proportion of the more-or-less 40% of GDP that the state requires for its purposes from a sector that only accounts for 5% of GDP?

There is more- Let me join the discussion at your website!

Regards, Kev.

Predatory Banks Target NZ Farmers Again.

Well I just started to write a snarky bit of Agribiz-knocking invective but I thought I'd stop myself and take a bit of a different tack and bash the banks, which is really boring because that's what I do all the time. This article in Stuff.co.nz -Business Day entitled "Banks need to be choosier lenders"  gets the point completely backwards. The fact is that farmers need to be choosier borrowers, in fact, like the rest of us they need to not borrow but to pay down their debt as fast as possible- there will be no debt write-offs for those holding physical assets such as land -not even the however many of them that are sitting in parliament on the National government benches. Good point actually -can you be a sitting MP and a bankrupt at the same time? Perhaps we won't have to endure the full three years of this government after all.
The author of this article so wants to not take sides, be everyones friend. Why not tell us about the bullshit "audits" the banks offered farmers, totally slanted to encourage the taking of loans- I know about these things- I have a farming insider down in South Canterbury tells me, though anyone with a pulse ought to know intuitively that's what these sharks do for a living.
"The insinuation was that anyone over 50 is too old to be farming". More like too old to be intimidated / bamboozled into signing on the line eh?

Monday, November 21, 2011

Let's not pussyfoot around with the banks

21 November 2011

Let's not pussyfoot around with the banks

Andy Wimbush Tony Greenham of the New Economics Foundation
Head of Finance and Business
A closer examination of money creation shows the need for major banking reform.
Originally posted at London Loves Business.
There is a simple fact about the UK banking system that is both profound and mundane. It is also little known, and yet the source of much hyperbole. What is this simple fact?
Commercial banks create new money.
This statement often seems to have a strange effect on people, either sending them down to St Paul’s with a Guy Fawkes mask and a tent, or backing away from you in horror as if you had just blasphemed in front of the Pope.
I really don’t know why, because it is merely a description of how fractional reserve banking allows banks to expand “broad money”, or bank deposits, when they create new credit. This is really the whole point of fractional reserve banking. Indeed, the ability to create new money in this way to finance investment and growth in consumption was arguably a major factor behind the successful industrialisation of nations, the UK being first and foremost among them.
So if you are not happy with the statement “banks create money” I hope you will read our new book Where does money come from? which has been endorsed by Professors Charles Goodhart and David Miles, former and current members of the Bank of England Monetary Policy Committee respectively.
The real questions should be: “Is this a problem? And if so, is there any sensible alternative?”
I think it has become a problem. The proportion of the money supply created in this way has shifted considerably over the past decades to reach 97 per cent, while the Bank of England’s control over this process is in reality minimal, or at least ineffective.
The result is asset-price inflation and a highly unstable financial system. The system reinforces booms, leading inevitably to credit bubbles, and reinforces the subsequent bust, leading to a credit crunch in particular for SMEs.
Another nasty consequence is that the creation of new money is privatised, but its exchangeability is guaranteed by the state – that’s you, the taxpayer of course – leading to the calamitous moral hazard spoken of by Mervyn King, and the inevitability of publicly funded bail-outs of private losses.
So what can be done to improve matters?
One approach is to go the whole hog and properly privatise money – broadly speaking the approach of the Austrian school of economic thought represented by Hayek.
There would be no state backing of bank deposits or banks, who would compete on their creditworthiness and reputation to ensure that their bank deposits were accepted by other banks.
Theoretically this should get taxpayers off the hook and, one would hope, restore market discipline to bankers. However, it is not clear that it would stop the boom and bust cycle.
Everyone seems creditworthy in a boom.
And as the credit crunch demonstrated, everyone looks like an unacceptable risk in a banking crisis. In this event, would it be credible to imagine that the central bank could sit by and watch large swathes of banks close their doors imposing potentially huge losses on their customers?
Another approach is to properly nationalise the control of Sterling. Give the central bank not just control over interest rates, but closer control over the quantity of new credit created by banks and its sector allocation – a sort of Project Merlin with teeth. This should improve the Bank of England’s control over inflation and stability. Credit control, or sometimes less formal guidance, is a feature of many country’s monetary systems including the UK up to the 1960s.
A more radical variation is to remove credit creation powers from banks entirely. Banks would then offer two sorts of account.
First, a payment and safety deposit account (think paypal, but backed by the Bank of England).
Second, an investment account where funds are actually transferred to borrowers (think Zopa or stockbroker). This is sometimes referred to as “full-reserve banking”’.
Key to this would be an acceptance by customers that if the bank’s lending was poor, that they could actually lose money on their investment account. Radical perhaps, but surely the alignment of risk with reward is at the heart of a free market system, so why should we expect risk free returns on our savings if they are being lent to businesses or individuals who might never repay?
Finally, we could have a multi-currency world where Sterling is used alongside local currencies issued and controlled by local banking institutions. Local currencies increase the local money multiplier effect that can support jobs and business is less wealthy areas. National and international currencies would remain the payment medium of choice for national and international transactions.
Pie in the sky? Not really, because each of these four suggestions have more or less operated successfully around the world in the past, including in the UK. As we watch the continuing debacle of chronic financial crises unfold, isn’t it time to ask some more fundamental questions about our money system?

Tuesday, November 15, 2011

The World is Drowning in Debt, and Europe Laces on Concrete Boots

 Thanks to Robin Westenra at Seemorerocks for forwarding this one. 

Tuesday, 15 November 2011

The World is Drowning in Debt, and Europe Laces on Concrete Boots

by Charles Hugh Smith
14 November, 2011

Three metaphors describe Europe: drowning in debt, circular firing squad and trying to fool the money gods with an inept game of 3-card monte.

The world's major economies are drowning in debt--Europe, the U.S., Japan, China. We all know the U.S. has tried to save its drowning economy by bailing out the parasite which is dragging it to Davy Jones Locker--the banking/financial sector-- and by borrowing and squandering $6 trillion in new Federal debt and buying toxic debt with $2 trillion whisked into existance on the Federal Reserve's balance sheet.

It has failed, of course, and the economy is once again slipping beneath the waves while Ben Bernanke and the politico lackeys join in a Keynesian-monetary cargo-cult chant: Humba-humba, bunga-bunga. Their hubris doesn't allow them to confess their magic has failed, and rather than let their power be wrenched away, they will let the flailing U.S. economy drown.

Europe has managed to top this hubris-drenched cargo-cult policy--no mean feat. First, it has indebted itself to a breathtaking degree, on every level: sovereign, corporate and private:

Germany, the mighty engine which is supposed to pull the $16 trillion drowning European economy out of the water, is as indebted as the flailing U.S.

Second, the euro's handlers have already sunk staggering sums into hopelessly insolvent debtor nations, for example, Greece, which has 355 billion euros of outstanding sovereign debt and an economy with a GDP around 200 billion euros (though it's contracting so rapidly nobody can even guess the actual size). According to BusinessWeek, the E.U. (European Union), the ECB (European Central Bank) and the IMF (International Monetary Fund) own about $127 billion of this debt.

Since the ECB is not allowed to "print money," the amount of cash available to buy depreciating bonds is limited. The handlers now own over 35% of the official debt (recall that doesn't include corporate or private debt), which they grandly refuse to accept is now worth less than the purchase price. (The market price of Greek bonds has cratered by 42% just since July. Isn't hubris a wonderful foundation for policy?)

In other words, they have not just put on concrete boots, they've laced them up and tied a big knot. We cannot possibly drown, they proclaim; we are too big, too heavy, too powerful. We refuse to accept that all these trillions of euros in debt are now worth a pittance of their face value.

When you're drowning in debt, the only solution is to write off the debt and drain the pool. The problem is, of course, that all this impaired debt is somebody else's asset, and that somebody is either rich and powerful or politically powerful, for example, a union pension fund.

Third, the euro's handlers have set up a circular firing squad. Since the entire banking sector is insolvent, the handlers are demanding that banks raise capital. Since only the ECB is insane enough to put good money after bad, the banks cannot raise capital on the private market, so their only way to raise cash is to sell assets--such as rapidly depreciating sovereign-debt bonds.
This pushes the price of those bonds even lower, as supply (sellers) completely overwhelm demand from buyers (the unflinching ECB and its proxies).

This decline in bond prices further lowers the value of the banks' assets, which means they need to raise more capital, which means they have to sell even more bonds.

Voila, a circular firing squad, where the "bulletproof" ECB is left as the only buyer who will hold depreciating bonds longer than a few hours, and all the participants gain by selling bonds before they fall any further. This is the classic positive feedback loop, where selling lowers the value of remaining assets and that drives further selling.

As many have noted, soaking up all the Greek debt--a mere sliver of the eurozone's impaired debt-- would essentially wipe out the entire EFSF "stability" rescue fund.

The "solution" to the cargo-cult crowd is "obvious"--print, baby, print, and use that new paper to buy 3 trillion in mostly-worthless bonds. But that is just another circular firing squad, as Nobel prize winning economist Thomas Sargent noted: "There's a fundamental truth that everyone has to understand: what the government spends, the public will pay for sooner or later, whether in taxes or inflation or having their debt defaulted on." (Source: BusinessWeek 11/20/11)

The 3 trillion euros comes of somebody's pocket, one way or the other; there is no free lunch.

Even worse, debt is the only engine of "growth" left in the developed world. This chart shows how America's "growth" since 1980 has been fueled by debt that expanded by 136% ($30 trillion) beyond actual economic growth. The same is also true of Europe, where Italy, for example, borrowed 1 trillion euros over the past decade or so in return for essentially zero growth.

This reveals the key dynamic of the past decade: the diminishing productivity of debt. What happens when an economy is so burdened by the friction of inefficiency and indebtedness that borrowing a trillion euros just keeps the economy barely above water? The next trillion won't even keep "growth" at zero, and the economy sinks beneath the waves.

The world has reached the point of debt saturation. Creating more debt no longer generates "free lunch" growth, even in China, though the central bank in China is still playing as if shifting debt off-balance sheet into a "shadow" system will fool the money gods. It won't.

Everybody in Europe is playing the same sort of games, hoping to fool the money gods and keep the "free lunch" economy "growing." While everybody focuses on the circular firing squad in Italy, untold billions of euros of impaired private mortgage debt in housing-bubble-popped Spain still sits on the books of Spanish banks at full value, lest a sneeze of reality send Spain's entire banking sector to Davy Jones Locker.

Though no official publicly admits it, nobody really knows how much debt there is in Greece, or who even holds it. Here's the fig leaf confession: "Scarce data makes estimates difficult." Yes, I'm sure it does. So the true size of Europe's debt is unknown because everyone with a stake in the charade is trying desperately to keep the true scope hidden. (Ditto in China.)

The debt will get renounced, and debt as the "engine of growth" will also be renounced.

Europe is an inept 3-card monte player attempting to swindle the money gods. The gods aren't fooled by such shallow shuffling games, in fact they are greatly annoyed that humans even dare to attempt such flimsy tricks. Their wrath is building, and human hubris will only make the reckoning worse.

Friday, November 11, 2011

Attempting to Turn a Shed-Full of Used Toilet Paper into a Perpetual Meal-Ticket.

Oh to be UK Prime Minister George Osborne. Today we heard the happy news that thirty of the City’s leading lights had been kind enough to get in touch – how helpful, that in this time of global economic turmoil, a friendly troupe of business leaders knows exactly what’s to be done.
"An early removal of the temporary 50 per cent tax rate would attract wealth generators to the UK and support the entrepreneurs we need to help us grow the economy and provide jobs.”

Any statement that includes the notion "return to growth" is specious nonsense. The era of growth-model economics is over, due to resource constraints. Many hundreds of academic and lay articles have been written about "reaching limits to growth". It beggars belief that at least a significant proportion of the "city investor" types don't know this, therefore one must conclude that this constant hum of "return to growth" is merely "soft soap" to lull the public into complacency while the evil-doers carry on scheming.

The "scheme" if I may digress, is to convert the toilet-paper "assets" into real wealth -physical assets. The so-called "complex financial instruments" that represent the output of twenty years of deregulated banking have no more real worth than toy money. They used to have a "value" as the institutions traded them among themselves in their fantasy game in order to inflate the book-value of their businesses upon which their salaries were based, but now they are worthless. A child knows you can't take toy money to the shops and buy lollies, but for the bankers, the governments of the world are playing "toy-town bank" swopping their used toilet-paper for real spendable money and in turn running up unsustainable sovereign debt and the "promise to pay" of taxpayers for generations to come -no wonder nations credit ratings keep sliding! A happy result of this, for the bankers, is that the resulting sovereign debt creates the conditions for sell-offs of capital assets -Crown land, public utilities, water rights, proprietorship of which enables the new owner to collect rents. This is the planned perpetual meal-ticket for yesterdays "city investor" -being a neo-feudal overlord in a new dark age. splendour for the one per cent, squalour for the common herd.

Our choice? force the institutions to acknowledge the inherent worthlessness of their toxic assets -put the used toilet-paper into the appropriate hygenic disposal place. I am reminded of a very funny situation many years ago when a friend was carrying his two year-old daughter in his arms. She was grumpy with a cold and her nose was streaming with green snot. Her father had her blow her nose into a tissue, after which she screamed at him "Give me back my bogie"! The city financier types will just have to get over it like my friends daughter got over the loss of her bogie.
The present banking system can only function in a state of more-or-less permanent growth, That phase of human economic development is now over. We must institute a banking system not based on creation of money as interest-bearing debt, and properly regulated against speculative scheming, as detailed at the  Positive Money Website so that banking can serve the economy, not the other way round. The G20 nations foolishly resolved in 2008 to back the banking sector to the bitter end with no significant concessions toward banking reform. It is now time to take heed of the "Occupy Wall Street" movement and its many spin-offs and reverse that folly to stop being complicit in our own enslavement.