The Eurozone is Headed for a Crash

It’s 2008 All Over Again

by Mike Whitney

CounterPunch (August 29 2011)

Bank funding costs are rising, liquidity is being choked off, and interbank lending has started to stall. A full-blown crisis can still be averted, but leaders will have to knuckle down and resolve the political issues fast. Otherwise the seventeen-member monetary union will fracture and the euro will be kaput. Here’s a clip from the Wall Street Journal:

Commercial banks boosted their reliance on the European Central Bank, borrowing 2.82 billion Euros ($4.07 billion) from an emergency lending facility on Tuesday … While the amount of borrowing is tiny … the increase from 555 million Euros a day earlier, nonetheless suggest that some lenders are struggling to borrow from traditional funding sources. {1}

Sure, it’s a pittance compared to the trillions floating around in the EU banking system, but the pattern is the same as it was in 2007 when the troubles began at French bank PNB Paribas. Back then, the problems seemed small, too, but things got out of hand quick. Over the next year, trillions in mortgage-backed securities (MBS) were downgraded, forcing bigger and bigger losses on bondholders, many of which were the nation’s largest banks. The bloodletting persisted until September 2008, when Lehman Brothers imploded and the financial system went into cardiac arrest. The Fed rushed to Wall Street’s rescue with $12 trillion in loans and other guarantees in hand just to keep the patient from croaking on the Emergency Room floor. Now it looks like history is repeating itself.

As the collateral the banks hold (mainly foreign sovereign bonds) continues to lose value, the banks will come under greater pressure, making funding more costly and harder to get. In fact, the mad-scramble for short-term funding has already begun. Banks are hoarding capital just as they did after the Crash of 2008, depositing larger and larger amounts in overnight accounts with the ECB in order to avoid lending to the other banks. All of this is taking a toll on consumer and household lending which will inevitably push eurozone GDP further into the red. The negative feedback loop into the real economy will send unemployment higher and further crimp business investment. This is from Businessweek:

Despite the ECB’s best efforts, some of Europe’s banks may be inching toward insolvency. The cost of insuring the bonds of 25 European banks and insurers set a record high on August 24 of 257 basis points, higher than the 149 basis-point spike when Lehman Brothers collapsed in the fall of 2008, according to the Markit iTraxx Financial Index of credit default swaps.

The banks aren’t required to mark down most of their holdings of government debt to market prices. If they did, some would be forced to default or seek a bailout. {2}

Are you kidding me? The banks are sitting on a mountain of garbage paper and EU regulators haven’t even forced them to write down the losses. Is it any wonder why public confidence is at all-time lows?

US money funds have been gradually reducing their exposure to EU banks due to worries about their collateral, much of which is bonds from Portugal, Italy, Ireland, and Greece (PIIGS). Eventually, these bonds will be crushed by downgrades and the banks will have to pony-up for the losses. That’ll be the swan song for some of Europe’s big name banks that are gravely undercapitalized. Of course, there could be a multi-trillion dollar bailout like there was in the US, but it’s hard to imagine how the ECB could slip that by Germany. After all, Germany has already rejected eurobonds; so why would they support the more offensive idea of bank bailouts? It just doesn’t add up.

And, in case there’s any doubt about German Chancellor Angela Merkel’s contempt for eurobonds; here’s what she said on Tuesday:

At this time – we’re in a dramatic crisis – euro bonds are precisely the wrong answer … They lead us into a debt union, not a stability union. Each country has to take its own steps to reduce its debt.

Then she added this corker: “We are in no rush whatsoever to solve the crisis in Europe. We will not be swayed by market crashes or panics”. That doesn’t sound like someone who appreciates the urgency of the moment. It sounds like someone who wants to teach the market “who’s boss”.

But Merkel’s bravado doesn’t change the fact that the EU bank funding system is on the fritz; liquidity is drying up, stress gauges are blinking red, and the banks are too scared to lend to each other. It just demonstrates the obtuseness of grandstanding politicians.

And, keep in mind that – while QE2 helped many of the European banks stockpile “rainy day” reserves in the US – those piles are beginning to dwindle as investors wise-up and head for the exits. They’ve seen this movie before, and it doesn’t end well.

Here’s an excerpt from a report by Nomura indicating how fast liquidity is draining from the system:

The USD cash buffer has been falling according to FED data from 889 billions USD on July 20 to 758 billions USD on August 3 … In fact, according to the same report, there was a notable decline of 131 billions USD in two weeks, clearly a trend to watch … {3}

So, no, we’re not at the panic-phase yet, but we’re getting closer by the day. And as the run on the money markets continues, more banks will have to go cup in hand to the ECB seeking loans to stay afloat. At the same time, ECB chief Jean-Claude Trichet will have to step up his sovereign debt purchasing program to prop up plunging bond prices to help teetering Greece and Company stay upright. Otherwise, someone’s going to go belly-up and take down a good portion of the EU financial system along with them.

And that Doomsday Scenario seems to be on the mind of central bankers at the ECB, too. According to CNBC:

The Sunday Times in the UK reported that policy makers in Brussels are drawing up radical plans to offer central guarantees over certain types of debt issued by banks. The move is reported to be a direct response to the sharp fall in US funding for Europe’s banks. If true, this is clearly something the boss of the ECB can’t be discussing in public … {4}

Indeed, how can one publicly discuss their intention to disregard the democratic process altogether, overstep their mandate, and underwrite hundreds of billions in garbage bonds held by thieving bankers? That’s hardly the kind of policy that would elicit a riotous display of support from the people.

So, it’s a mess, and it’s going to get a whole lot messier because EU banks need to roll over more than $4.5 trillion in the next two years and the funding flywheel is already gummed up. So, if there’s not a political solution to the trans-EU fiscal issues in the next few months, the eurozone is toast. When the credit markets start to groan, bad things can happen fast.

As of Sunday night, the interest rate on one-year Greek government debt is up to 59.8 percent.


{1} “Europe Banks Lean More on Emergency Funding”, Wall Street Journal

{2} “How Long Can the ECB Prop Up Europe’s Sick Banks?”, Businessweek

{3} “Credit Terminal Velocity”, Macronomics, Pragmatic Capitalism

{4} “Trichet Gives Master Class in Saying Nothing”, CNBC

Mike Whitney lives in Washington state. He can be reached at

The Shamans Among Us: A World in Perpetual Conflict

The Deleterious Consequences of Economic Models

Economic models are mere policy proposals; they are not the consequences of any economic system based on “natural law or even good theory”, they are not scientific; they are merely ad hoc. Furthermore, deleterious consequences often result from these models. Economists also routinely simplify things to a point that makes them even impossible to describe coherently. But there’s much more. Rodrik has posted two pieces that imply that rather than bringing about a world in which everyone lives happily ever after, economic models result in a world in which everyone lives in perpetual conflict.

by Professor John Kozy

Global Research (August 19 2011)

There is an Afterword in Dani Rodrik’s book The Globalization Paradox (2011) which he has posted on-line titled, “A parable for the world economy” {1}. For reasons obvious to anyone who reads it, he felt it necessary to supplement it with another piece titled, “The economics of a parable, explained” {2} which really doesn’t explain very much. Yet both pieces together reveal much that Mr Rodrik seems to be unaware of. So here’s what I found in it.

Rodrik’s Parable (which is more accurately an allegory)

Once upon a time in some undefined place, whose description sounds very much like an island, there were a number of villages, at least two, widely separated by both distance and a dense forest. One of those was a little fishing village at the edge of a lake whose poor inhabitants lived off the fish they caught and the clothing they sewed (out of what, Rodrik doesn’t say) and had no contact with the other villages, since they “were miles away and could be reached only after days of travel”.

But then the stock of fish in the lake plummeted. The villagers went to the village shaman (read economist) and asked for help. He told them to set up a fishermen’s cooperative which would decide how much fish each man could catch in a month until he fish stock is replenished.

“The villagers weren’t happy to be told how to run their business, [when did these impoverished villagers merely trying to eke out a living become ‘businesses’?]” but they understood the need for the restraint and in no time, the lake was overflowing with fish.

Problem solved? Well no.

Even though the villagers’ access to fish was now restored, the shaman had another (unsolicited) idea. (What else would one expect from a shaman?)

The shaman said. “Since you seem to be interested in my help, would you like me to give you another idea?” “Isn’t it crazy that you all have to spend so much of your time sewing your own clothes when you could buy much better and cheaper ones from the villages on the other side of the forest?” Has this shaman read Ricardo? And how could the shaman have known about the better clothing available in the other village? After all, the villagers, “had no contact with the other inland villages”.

Oh, well, I guess shamans just know such stuff.

The villagers asked, “what can we sell in return?’ So now these poor villagers who originally were just trying to eke out a living are also buying and selling?

“I hear the people inland [aren’t lakes inland?] love dried fish”, said the shaman. But from whom did the shaman hear this? Does he talk to God, perhaps? Maybe just hears voices in his head.

So the villagers dried some of their fish and started to trade with the villages on the other side of the forest. The fishermen got rich on the high prices they received while the price of garments in the village dropped sharply. My oh my! How Rodrik’s simple little fishing village has changed. Now it has wampum and a market, a pricing system, rich fisherman, and, sadly, impoverished garment makers. What a wondrous place the shaman had wrought. But it wasn’t!

“Not all villagers were happy. Those who did not own a boat and whose livelihood depended on the garments they sewed were caught in a squeeze. They had to compete with the cheaper and higher-quality garments brought in from the other villages and had a harder time getting their hands on cheap fish. They asked the shaman what they should do.”

In the beginning of this “once upon a time allegory” the village had one problem to solve. Thanks to the village shaman, the village’s problems have increased faster than the fish.

But, of course, the shaman has solutions. More and more and more solutions. Now he suggests an increase in taxes. Taxes? Where did they come from. “The shaman said, ‘You know how every family has to make a contribution during our monthly feast?’ ‘Yes’, they replied. ‘Well since the fishermen are now so much richer, they should make a bigger contribution and you should make less’.” The fishermen weren’t thrilled, but it seemed like a sensible thing to do to avoid discord in the village and soon the rest of the village was happy too. So once again, the shaman had brought happiness to the poor, fishing village. Aren’t economists, oops, shamans, wonderful?

Well, no! The shaman had still another idea. “Imagine how much richer our village could be if our traders [traders?] did not have to spend days traveling through the dense forest. Imagine how much more trade we could have if there was a regular road through the forest.” “But how?” asked the villagers. “Simple”, said the shaman. “Organize work brigades to cut through the forest and lay down a road”.

So first the village consisted of garment makers and fisherman. Now it also has businessmen, road builders and traders. What about fish dryers, packagers, backpack or cart makers, and only Rodrik knows who else?

Before long, the village was connected to the other villages by a paved [paved?] road that cut down on travel time and cost. Trade expanded and the fishermen [or traders] got even richer.

But, as time passed things turned sour. “The road gave villagers from beyond the forest easy access to the lake and allowed them to take up fishing, which they did in droves. Since neither the council nor the fisherman’s cooperative could enforce the fishing restrictions on outsiders, the fish stock began to deplete rapidly again. The new competition also cut into the earnings of the local fishermen. They began to complain about the feast tax being too onerous. The road had made it easy to come and go – and evaded their obligations altogether. This made the rest of the villagers furious.” Ah, yes, that damn little wonderful road! It was time for another trip to the shaman.

All agreed that the situation was unsustainable; the road had made them all poorer. The fishermen wanted a change in the rules that would reduce their contributions to the monthly feasts. Others wanted an end to the fish trade with outsiders. Some even asked to blockade the road. But the shaman, not realizing that had he never proposed building the road, none of this would ever have come to pass, had still another suggestion: Place “a toll booth at the entrance to the access road, and everyone who comes in and out should pay a fee”.

“But this will make it more costly for us to trade”, the fishermen objected. “Yes indeed”, the shaman replied. “But it will also reduce over-fishing and make up for the loss in contributions at the feasts”. “And it won’t cut off trade altogether”. “The villagers agreed that this was a reasonable solution. They walked out of the meeting satisfied. Harmony was restored to the village. And everyone lived happily ever after”. Sure they did! The solution created so many problems that Rodrik had to write another piece in which he describes what could be an infinite number of additional problems. Read it {2}.

But even Rodrik either doesn’t recognize or chooses to ignore some major problems: He ignores the fact that the shaman’s suggestions are mere policy proposals; they are not the consequences of any economic system based on “natural law or even good theory”, they are not scientific; they are merely ad hoc. Furthermore, none of these deleterious consequences would had occurred had the shaman not said, “Since you seem to be interested in my help, would you like me to give you another idea?” From that point on, everything that needed fixing was a worse problem caused by the shaman.

Shamans routinely simplify things from which they then draw conclusions but the simplifications are too simple to even be described coherently, as this parable/allegory is. The “little fishing village” has all of the ingredients of an advanced industrial economy although it is never described that way. The ingredients are found, piecemeal and unexplained, as the allegory progresses. How many economic models are similarly constructed?

But there’s more, much more, but I’ll mention just one. Once the villages had established a trading system, the various village shamans would surely have begun thinking of their own village’s interests in the other villages, and their shamans would have begun to make suggestions about how to “protect” those interests. And when one village decided its interests required more of what the other village was willing to provide, some shaman would have suggested raising an army and merely taking what his village wanted. An army would have been raised by telling the young that they were going to be engaged in serving their village by protecting it and that it was noble to die for their village. They would all be honored as village heroes. But in truth, all they would be is canon fodder for the sake of plunder, and the shamans’ suggestions, rather than bringing about a world in which everyone lived happily ever after, result in a world in which everyone lives in perpetual conflict. Thank you Mr Shaman Rodrik and your fellow shamans. You have made all of this perfectly clear. World trade leads to world war.

Henny Youngman often told this joke: I went to my doctor and told him, it hurts when I do this. My doctor said, well, don’t do that.

Shamans of the world, your doctoral degrees are in witchcraft. Stop telling people to do things that hurt.





John Kozy is a retired professor of philosophy and logic who writes on social, political, and economic issues. After serving in the US Army during the Korean War, he spent twenty years as a university professor and another twenty years working as a writer. He has published a textbook in formal logic commercially, in academic journals and a small number of commercial magazines, and has written a number of guest editorials for newspapers. His on-line pieces can be found on and he can be emailed from that site’s homepage.

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An Elegy for the Age of Space

by John Michael Greer

The Archdruid Report (August 24 2011)

The orbiters are silent now, waiting for the last awkward journey that will take them to the museums that will warehouse the grandest of our civilization’s failed dreams. There will be no countdown, no pillar of flame to punch them through the atmosphere and send them whipping around the planet at orbital speeds. All of that is over.

In Houston, the same silence creeps through rooms where technicians once huddled over computer screens as voices from space crackled over loudspeakers. The screens are black now, the mission control rooms empty, and most of the staff have already gotten their pink slips. On the Florida coast, where rusting gantries creak in the wind and bats flutter in cavernous buildings raised for the sake of a very different kind of flight, another set of lauch pads sinks slowly into their new career as postindustrial ruins.

There are still rockets lifting off elsewhere, to be sure, adding to the globe’s collection of satellites and orbiting space junk. The International Space Station still wheels through the sky, visited at intervals by elderly Soyuz capsules, counting down the days and the missions until its scheduled deorbiting in 2016. In America, a few big corporations have manned space projects on the drawing boards, angling for whatever federal funding survives the next few rounds of our national bankruptcy proceedings, and a few billionaires here and elsewhere are building hobby spacecraft in roughly the same spirit that inspired their Gilded Age equivalents to maintain luxury yachts and thoroughbred stables.

Still, something has shifted. A tide that was expected to flow for generations and centuries to come has peaked and begun to ebb. There will still be rockets surging up from their launch pads for years or decades to come, and some few of them will have human beings on board, but the momentum is gone. It’s time to start coming to terms with the winding down of the age of space.

Ironically, one of the best pieces of evidence for that was the shrill reception given to an article in The Economist announcing The End of the Space Age {1}. The irony was particularly delicious in that The Economist is a British periodical, and Britain has already been through its own retreat from space. During the first half of the twentieth century, the British Interplanetary Society was among the most prestigious groups calling for manned space missions, but dreams of a British presence in space collapsed around the same time as Britain’s empire and industrial economy did. It’s hard to miss the schadenfreude in The Economist’s editorial stance, but it was even harder to overlook the bluster and denial splashed across the blogosphere in its wake.

A little perspective might be useful here. When the space shuttle first came off the drawing boards, the much-repeated theory was that it would be the first of a new breed of spacecraft that would make a flight from Cape Canaveral to orbit as commonplace as a flight from New York to Chicago. The next generation would swap out the shuttle’s disposable fuel tank and solid-fuel boosters for a fully reusable first stage that would take a shuttle-equivalent most of the way into orbit, then come back to Earth under its own power and get refueled for the next launch. Further down the road, but already in the concept phase, were spaceplanes that could take off from an ordinary runway and use standard jet engines to get to 50,000 feet or so, where rocket engines would cut in for the leap to orbit. Single-use rockets? In the minds of the space-savvy, they were already as outdated as Model T Fords.

Yet here we are in 2011, the space shuttle program is over, the replacements weren’t built, and for the five years of scheduled life the International Space Station has left, its crews will be getting there via the 1960s-era technology of Soyuz space capsules atop single-use rockets. As for the rest of the steps toward space everyone in the 1960s assumed we would have taken by now – the permanent space stations, the base on the Moon, the manned missions to Mars, and the rest of it – only the most hardcore space fans talk about them any more, and let’s not even discuss their chances of getting significant funding this side of the twelfth of never.

Mind you, I’m not cheering. Though I realized some years ago that humanity isn’t going to the stars – not now, not in the lifetime of our species – the end of the shuttle program with no replacement in sight still hit me like a body blow. It’s not just a generational thing, though it’s partly that; another large part of it was growing up where and when I did. By that I don’t just mean in the United States in the middle decades of the last century, but specifically in the triumphant years between John Glenn’s first orbital flight and Neil Armstrong’s final step onto lunar soil, in a suburb south of Seattle where every third family or so had a father who worked in the aerospace industry. Yes, I remember exactly where I was sitting and what was happening the moment that Walter Cronkite told the world that Apollo Eleven had just landed on the Moon.

You didn’t grow up as a geeky, intellectual kid in that sort of setting without falling in love with space. Of course it didn’t hurt that the media was filled to the bursting point with space travel – turn on the tube any evening during my childhood, and if you didn’t get Lost In Space or Star Trek you’d probably catch The Invaders or My Favorite Martian – and children’s books were no different; among my favorites early on was Ronnie Rocket and Suzie Saucer, and I went from there to The Wonderful Flight to the Mushroom Planet, The Spaceship Under the Apple Tree – well, you get the picture. (I won’t even get into science fiction here; that’s a subject that deserves an entire post to itself.) Toys? The GI Joe accessory I treasured most in those days was a plastic Mercury space capsule with space suit to match; I also played with Major Matt Mason, Man In Space, and plenty of less efficiently marketed toys as well.

The future that most people imagined in those days had plenty of options primed to catch a young boy’s imagination, to be sure. Sealab – does anybody remember Sealab these days? – was the Navy’s attempt to compete with the romance of space, complete with breathless National Geographic articles about “a new world of limitless resources beneath the sea”. (Ahem.) For a while, I followed Sealab as passionately as I did the space program, and yes, my GI Joe also had a wetsuit and scuba gear. That was common enough, and so were my less scientific fixations of the time, the monster lore and paranormal phenomena and the like; when you’re stuck growing up in suburbia in a disintegrating family and the only source of hope you can come up with is the prospect that the world isn’t as tepidly one-dimensional as everyone around you insists it has to be, you take encouragement where you find it.

You might think that a kid who was an expert on werewolf trivia at age ten would have gone in for the wildest of space fantasies, but I didn’t. Star Trek always seemed hokey to me. (I figured out early on that Star Trek was a transparent pastiche of mid-1960s US foreign policy, with the Klingons as Russia, the Vulcans as Japan, the Romulans as Red China, and Captain Kirk as a wish-fulfillment fantasy version of General William Westmoreland who always successfully pacified his extraterrestrial Vietnams.) Quite the contrary; my favorite spacecraft model kit, which hung from a length of thread in my bedroom for years, was called the Pilgrim Observer: some bright kit designer’s vision of one of the workhorse craft of solar system exploration in the late twentieth century.

Dilithium crystals, warp drives, and similar improbabilities had no place in the Pilgrim Observer. Instead, it had big tanks for hydrogen fuel, a heavily shielded nuclear engine on a long boom aft, an engagingly clunky command module up front bristling with telescopes and dish antennas – well, here again, you get the picture; if you know your way around 1970s space nonfiction, you know the kit. It came with a little booklet outlining the Pilgrim I’s initial flyby missions to Mars and Venus, all of it entirely plausible by the standards the time. That was what delighted me. Transporter beams and faster-than-light starflight, those were fantasy, but I expected to watch something not too far from Pilgrim I lifting off from Cape Canaveral within my lifetime.

That didn’t happen, and it’s not going to happen. That was a difficult realization for me to reach, back in the day, and it’s one a great many Americans are doing their level best to avoid right now. There are two solid reasons why the future in space so many of us thought we were going to get never arrived, and each one provides its own reasons for evasion. We’ve talked about both of them in this blog at various times, and there’s more than the obvious reason to review them now.

The first, simply put, is that the United States has lost the space race. Now of course it was less a single race than a whole track and field competition, with the first event, the satellite shot-put contest (winner: Russia, with Sputnik I), followed by the single-orbit dash (winner: Russia, with Vostok I) and a variety of longer sprints (winner: much more often than not, Russia). The run to the Moon was the first real US gold medal – we did half a dozen victory laps back out there just to celebrate – and we also scored big in the planetary probe toss competition, with a series of successful Mariner and Voyager missions that mostly showed us just how stunningly inhospitable the rest of the solar system was. The race that ultimately counted, though, was the marathon, and Russia’s won that one hands down; they’re still in space, and we aren’t.

Behind that unwelcome news is the great geopolitical fact of the early 21st century, the decline and imminent fall of the American empire. Like any number of empires before us, we’ve gotten ourselves wedged tightly into the predictable downside of hegemony – the stage at which the costs of maintaining the economic imbalances that channel wealth from empire to imperial state outstrip the flow of wealth those imbalances are meant to produce. Once that stage arrives, the replacement of the failing empire by some new distribution of power is a foregone conclusion; the only question is how long the process will take and how brutal the final cost to the imperial state will turn out to be.

The Cold War competition between the United States and the Soviet Union was a standard contest to see which empire would outlast the other. The irony, and it’s a rich one, is that the loser of that contest was pretty much guaranteed to be the winner in a broader sense. When the Soviet Union collapsed, Russia had an empire wrenched out of its hands, and as a result it was forced to give up the struggle to sustain the unsustainable. The United States kept its empire intact, and as a result it has continued that futile but obsessive fight, stripping its national economy to the bare walls in order to prop up a global military presence that will sooner or later bankrupt it completely. That’s why Russia still has a functioning space program, while the United States may have trouble finding the money to launch cheap fireworks by the time its empire finally slips from its fingers.

It’s our decidedly mixed luck, as discussed here more than once in the past, that America is entering on the downslope of its imperial decline just as a much vaster curve has peaked and begun to arc in the same direction. That’s the second reason that the space age is ending, not just for us but for humanity. In the final analysis, space travel was simply the furthest and most characteristic offshoot of industrial civilization, and depended – as all of industrial civilization depends – on vast quantities of cheap, highly concentrated, readily accessible energy. That basic condition is coming to an end around us right now. Petroleum has already reached its global production peak as depletion rates shoot past the rate at which new fields can be found and brought on line; natural gas and coal are not far behind – the current bubble in shale gas will be over in five or, just possibly, ten years – and despite decades of animated handwaving, no other energy source has proven to yield anything close to the same abundance and concentration of energy at anything like the same cost.

That means, as I’ve shown in detail in past posts here, that industrial civilization will be a short-lived and self-terminating phenomenon. It doesn’t mean, or at least doesn’t have to mean, that future civilizations will have to make do with an equivalent of the much simpler technological suites that civilizations used before the industrial age; I’ve argued at some length here and elsewhere that an ecotechnic society – a civilization that supports a relatively advanced technology on a modest scale using the diffuse and limited energy provided by sustainable sources, without wrecking the planet – is a live option, if not in the immediate future, then after the dark age the misguided choices of the recent past have prepared for us.

Still, of the thousands of potential technological projects that might appeal to the limited ambitions and even more strictly limited resources of some future ecotechnic society, space travel will rank very, very low. It’s possible that the thing will be done, perhaps in the same spirit that motivated China a little while back to carry out a couple of crisp, technically capable manned orbital flights; ten thousand years from now, putting a human being into orbit will still probably be the most unanswerable way for a civilization to announce that it’s arrived. There are also useful things to be gained by lofting satellites for communication and observation purposes, and it’s not at all impossible that now and then, over the centuries and millennia to come, the occasional satellite will pop up into orbit for a while, and more space junk will be added to the collection already in place.

That’s not the vision that fired a generation with enthusiasm for space, though. It’s not the dream that made Konstantin Tsiolkovsky envision Earth as humanity’s cradle, that set Robert Goddard launching rockets in a Massachusetts farmyard and hurled Yuri Gagarin into orbit aboard Vostok I. Of all people, it was historical theorist Oswald Spengler who characterized that dream most precisely, anatomizing the central metaphor of what he called Faustian civilization – yes, that’s us – as an eternal outward surge into an emptiness without limit. That was never a uniquely American vision, of course, though American culture fixated on it in predictable ways; a nation that grew up on the edge of vastness and cherished dreams of heading west and starting life over again was guaranteed to think of space, in the words of the Star Trek cliche, as “the final frontier”. That it did indeed turn out to be our final frontier, the one from which we fell back at last in disarray and frustration, simply adds a mordant note to the tale.

It’s crucial to realize that the fact that a dream is entrancing and appeals to our core cultural prejudices is no guarantee that it will come true, or even that it can. There will no doubt be any number of attempts during the twilight years of American empire to convince Americans to fling some part of the energies and resources that remain to them into a misguided attempt to relive the dream and claim some supposed destiny among the stars. That’s not a useful choice at this stage of the game. Especially but not only in America, any response to the crisis of our time that doesn’t start by using much less in the way of energy and resources simply isn’t serious. The only viable way ahead for now, and for lifetimes to come, involves learning to live well within our ecological limits; it might also help if we were to get it through our heads that the Earth is not humanity’s cradle, or even its home, but rather the whole of which each of us, and our species, is an inextricable part.

That being said, it is far from inappropriate to honor the failed dream that will shortly be gathering dust in museums and rusting in the winds that blow over Cape Canaveral. Every civilization has some sprawling vision of the future that’s destined never to be fulfilled, and the dream of infinite expansion into space was ours. The fact that it didn’t happen, and arguably never could have happened, takes nothing away from the grandeur of its conception, the passion, genius, and hard work that went into its pursuit, or the sacrifices made on its behalf. Some future poet or composer, perhaps, will someday gather it all up in the language of verse or music, and offer a fitting elegy to the age of space.

Meanwhile, some 240,000 miles from the room where I write this, a spidery metallic shape lightly sprinkled with meteoritic dust sits alone in the lunar night on the airless sweep of Mare Tranquillitatis. On it is a plaque which reads WE CAME IN PEACE FOR ALL MANKIND. Even if no other human eyes ever read that plaque again, as seems likely, it’s a proud thing to have been able to say, and a proud thing to have done. I can only hope that the remembrance that our species once managed the thing offers some consolation during the bitter years ahead of us.


John Michael Greer is the Grand Archdruid of the Ancient Order of Druids in America {2} and the author of more than twenty books on a wide range of subjects, including The Long Descent: A User’s Guide to the End of the Industrial Age (2008), The Ecotechnic Future: Exploring a Post-Peak World (2009), and The Wealth of Nature: Economics As If Survival Mattered (2011). He lives in Cumberland, Maryland, an old red brick mill town in the north central Appalachians, with his wife Sara.

If you enjoy reading this blog, you might want to check out Star’s Reach {3}, his blog/novel of the deindustrial future. Set four centuries after the decline and fall of our civilization, it uses the tools of narrative fiction to explore the future our choices today are shaping for our descendants tomorrow.





Gold Faithful

Profiting from Paranoia with Precious Metals

by Thomas Frank

Harper’s Magazine Easy Chair (July 2011)

When my brothers and I were young, we used to play Monopoly on an old set, and if you drew a certain yellow Community Chest card, you got a small lesson in monetary policy. “We’re off the Gold Standard”, the card read – and on some versions, I have since learned, there was an illustration of Uncle Sam crossing out the words GOLD STANDARD on a billboard. This was supposed to be good news, and to celebrate you helped yourself to $50 from the Bank.

When Monopoly was introduced, in the mid-1930s, that’s simply the way it was. For the kind of people who bought board games, Franklin Roosevelt’s 1933 decision to take the country off the gold standard was an unambiguous good, like a bank error in your favor or an income-tax refund.

For some Americans, though, it was a blunder of such magnitude as to be almost unthinkable. The gold standard had been orthodoxy for much of the previous two centuries, and was inextricable from the rise of global capitalism. Britain had followed the yellow brick road since 1717. The United States began traveling right alongside in 1873, tying its currency to closely guarded reserves of the magical metal. The gold standard was always hated by farmers and debtors, who stood to profit from inflation. For bankers, however, it was the linchpin of civilization itself. Departing from the standard “can’t be defended except as mob rule”, moaned the financier Bernard Baruch in 1933. “The crowd has seized the seat of government and is trying to seize the wealth”.

Nor were financiers (known in the parlance of the day as “banksters”, a combination of banker and gangster) the gold standard’s only fans. Herbert Hoover’s administration had defended it even as the trough of the Great Depression grew deeper, and many years after Roosevelt pulled the plug, in 1933, Hoover retroactively scolded him with the old proverb: “We have gold because we cannot trust governments”.

This gets us closer to gold’s mystique. Under the gold standard, so zealously defended by Hoover as well as certain European central bankers, the nation’s economic policies were, by and large, not a matter of our own choosing. Monetary policy as we understand it today hardly existed, since the size of the country’s money supply was limited by how much gold we had in the basement. In addition, the gold standard severely restricted the scope of deficit spending, keeping those DC dreamers in check.

Quite reasonably, countries clung to gold as a protection against inflation. On the other hand, they frequently blundered into deflation instead, since a limited supply of currency tends to drive prices down. And while gold was great if you were lending money, it sucked if you were a borrower. Under gold’s discipline, there were periodic catastrophes in the United States: farmers were wiped out, starving city-dwellers turned to barter, epidemics of bank failure swept the hinterland, and the nation could do very little about it. All that mattered was that the money was sound. Gold was the mystical enforcer of the laissez-faire era.

By 1933, however, the US economy had been a shambles for more than three years. What the economist John Maynard Keynes called the “barbarous relic” of the gold standard had to go. And once that happened, everything changed. American monetary policy was cut loose from our hoard of shining metal, and became, in the words of historian Arthur Schlesinger Jr, “the instrument of conscious national purpose” – which is to say, the instrument of political policy-making.

The public’s preference, back in those innocent days, was overwhelming. “The general idea [was] that starving was too high a price to pay for the privilege of converting paper money into gold”, wrote the cultural critic Gilbert Seldes in 1936, an idea readily endorsed by the Monopoly-playing masses.

And indeed, our departure from the gold standard is one of the few aspects of the Depression on which economists who study the period by and large agree. “To an overwhelming degree, the evidence shows that countries that left the gold standard recovered from the Depression more quickly than countries that remained on gold”, wrote future Federal Reserve chairman Ben Bernanke during his earlier career as an academic economist. “Indeed, no country exhibited significant economic recovery while remaining on the gold standard”.

Today, after the Crash of 2008 and Bernanke’s own bank bailouts, many of us think differently about these matters. Today we know that we must “let the failures fail”, as the Tea Partiers like to say. There is no shortcut to prosperity, and a country that tries to print its way out of the hole is only following the green paper road to disaster.

Stick with this line of reasoning, and you start to think that maybe those countries Bernanke mentions didn’t have any business recovering from the Great Depression. Maybe a little starvation was just what the doctor ordered. Maybe the United States should have taken the advice of conservative hero Andrew Mellon, Herbert Hoover’s treasury secretary, and liquidated the farmers, the shareholders, the workers. That was, after all, the clear demand of the stern golden god who had overseen matters economic throughout the centuries before, and whose cult has enjoyed a spectacular revival over the past few years.

As I write these sentences, an ounce of gold is fetching $1,498 – nearly three times its 2005 value, and five times its value in 2000. And silver, despite some recent fluctuations in price, has had an even more spectacular run-up, from $4.95 an ounce in 2000 to $35 (about five minutes ago).

Investing in precious metals is often thought to be a way of protecting your savings against inflation. But there are lots of inflation hedges in the world: equities, derivatives, real estate, those inflation-indexed bonds the Treasury sells. The appeal of precious metals is different. Their allure as an investment vehicle seems almost always tied to the rise of a particular political viewpoint, which foresees that the world will either return to the hard-money wisdom of the Hoover Administration or (more likely) be punished for its paper- money sins by the mighty hand of history itself.

Howard Ruff, one of the great figures in the history of disaster investing, delineated this school of thought quite succinctly in his 1979 bestseller, How to Prosper During the Coming Bad Years. “It eventually becomes the objective of politicians in all paper money economies to get rid of the gold standard and establish ‘fiat money'”, Ruff wrote. “So that more money can be created and more and more ‘benefits’ can be ‘given’ to its citizens to earn the gratitude of the voters”.

In Ruff’s view, these glad-handing hacks will always take the path of least resistance, doling out benefits to everyone, rescuing the banks, and running their infernal printing presses to pay for it. Eventually the system will collapse, Ruff warns, and there will be emergency power grabs by the executive branch, price controls, rationing, and a black market, which readers are advised to prepare for while the Ponzi scheme called civilization still works and ordinary household goods can still be purchased with fiat paper at any grocery store. Buy freeze-dried peach cobbler and pemmican! Buy gold or silver! And don’t trust anyone: keep the stuff in the safe in your basement.

“This is not an investment position”, wrote Ruff of his prescribed hoarding of precious coins. It was, he ominously declared, a “survival position”, as well as a “chaos-hedge”.

The political beliefs that under-gird this kind of investing are not strictly conservative (although nearly every metalhead I have heard of is to the right of center). Conservatives say they distrust big government – unless they happen to be the ones in power. Metal mania goes one big step further. It is not so much an ideological preference as it is a repudiation of modernity – specifically, the form of modernity that began with Franklin Roosevelt. It is a bet on disaster {1}, on the imminent crashing of an economy guided and structured by human intellect instead of the government-limiting powers of those effulgent, dragon-guarded piles of precious metals. How can a post-Keynesian economy, based on the “full faith and credit” of a bunch of shiftless public officials, deserve to survive?

At the moment, that cosmic negativity is back like a thirty-two-year-old packet of freeze-dried horseradish, restored to its original bitterness with the addition of a little boiling water. That’s because the headlines of the past few years have read like a Seventies disaster thriller. Stock markets plunge. Investment banks fail. Automakers go bankrupt. Oil prices surge. The economy teeters. And government comes to the rescue, riding its magic printing press, leaving in its wake a black hole of public debt.

It is true that inflation has not returned in its 1970s form, let alone the Weimar-style, add-some-zeroes hyperinflation that any metalhead worth his karats believes the politicians will someday unleash upon us. But to the confirmed pessimist, the onrushing disaster is so obvious that all these terrible things might as well have happened already.

And so precious metals hit peak after peak {2}, buoyed by our era’s rising sea of antigovernment sentiment. It is not just small investors doing the lifting, either. Several of the great geniuses of our recent financial meltdown have also piled into gold, no doubt seeing the metal as the next chapter in the triumphant progress of twenty-first- century capital formation. And when we read that the endowment of the University of Texas has not merely bought an enormous position in gold, but has taken physical delivery of the metal – hoarding it like a survivalist – we realize that yet another eccentricity of the right-wing fringe has moved into the mainstream of American life {3}.

I do not mean to scoff at gold bugs – or not much, anyway. Money cranks are part of a long tradition in American life, and just as there was an attractive democratic subtext to the free-silver agitation of the 1890s, so there is an attractive moral idea behind the hard-money mania of the present day. It’s the old story of hubris, of man getting above himself and crashing inevitably back to earth. Even if the central bankers’ intentions are good, reasons the metalhead, they are still bound to screw things up. In this view, our current economic predicament is a judgment on the class of clever people who have ruled us since the days of Roosevelt, in the same way that the failure of the Vietnam War was supposed to be a judgment on the “best and the brightest” of the Kennedy era.

These mandarins fiddle with mortgage incentives, they try to adjust the knobs and get the interest rate exactly right, they use the tax code to encourage this and discourage that, and when all else fails they rescue the big banks with drafts on the public treasury of a size that would be considered insane in any situation other than a world war. Sooner or later, the gold bug feels, this technocrat-made system will come crashing down. The high and mighty are fiddling with the natural order of things, struggling to get out of one predicament but thereby thrusting the nation into another. And each of these erroneous paths leads to but one inevitable conclusion: the debasement of the currency and hyperinflation of Zimbabwean proportions.

And then, says the gold bug, the economists and politicians will get their comeuppance. Then the complacent masses will cry out for the discipline of gold. Then the age-old symbol of greed and privilege will be fully and righteously transformed into an instrument for rebuking the arrogant ruling class.

But wait. Once you tear yourself away from economics-as-fable and think about the particulars, this is all nonsense. “Politicians” aren’t all the same everywhere and in all parties, nor is Zimbabwe’s Robert Mugabe the polestar of modern political economy. Advised though they are by intellectuals, and filled though they are with bureaucrats, governments have done tolerably well managing currencies for decades all over the planet. When they have failed, as in the case of Greece under the euro, it is often because they listened to people who insisted that governments should have less of a role in monetary policy.

Particulars, of course, matter little to the committed metalhead. The allure of precious metals is a primal one; it overwhelms mere reason. I know this not only because I have seen The Treasure of the Sierra Madre (1927), but because I recently visited the gold bug’s holiest of holies: the vault in the sub-basement of the New York Federal Reserve Bank on Liberty Street, which reportedly houses the world’s largest hoard.

My first taste of gold’s brain-fogging power came when I looked up the address on Google and discovered that the New York Fed enjoyed a rating of three-and-a-half stars from various online commenters. As I made my way downtown, I pondered the sort of delusion it required to write a review of the Federal Reserve in the same way one reviewed a Thai restaurant or an action movie.

And then I was in the grip of delusion myself. The Fed’s tour guide temporarily confiscated our cameras, cell phones, and even notebooks, in order to prevent accurate recollection of the inner sanctum, and invited us to gaze upon a gold bar rotating on a display platform. One of my fellow visitors tried to grab it and came up empty; it was a hologram, we discovered, a mere advertisement for wealth.

Down in the vault proper, eighty feet below the sidewalk, we got to see the glittery stuff itself. Yet mystification was still the order of the day. Nobody knows how many employees work in the vault (although the guide allowed that they were all crack marksmen). A gold bar, we were further informed, weighed about twenty-seven pounds, but felt like it weighed forty. Either way, these bars were surely the immovable objects capable of halting the irresistible force of government.

But then again, who was to say if they were real? We weren’t allowed to touch the bars. Each one was stamped with a number attesting to its purity, but as the gold room clouded my mind and nurtured my suspicions, I began to wonder: Who would assay the assayer? After all, the gold doesn’t circulate, or endure the everyday scrutiny of market actors. Instead, it’s locked in what looks like an unrenovated municipal jail. All we know is that when the wealth of the world shifts, the workers in that Manhattan sub-basement move a hand-cart of yellow blocks from one jail cell to another.

After absorbing these reassuring lessons in the solidity of the American financial system, we were repossessed of our cameras, cell phones, and notebooks. And before returning to the sunny streets of New York, we were each given a plastic baggie of shredded fiat currency as a souvenir.

Again: gold is a moral investment, not a technical one. We buy it because of our inner convictions about human behavior, not because it’s really useful or something. Let us recall an article about gold investors that appeared in The New Yorker back in the summer of 2000, which struck me at the time as a witty and definitive put-down of the gold faith.

The essay, by James Collins, began by pointing out that gold was just about the worst investment you could have made between 1980 and 2000, a period when stock prices increased tenfold and holders of everything from real estate to antiques also prospered. But “gold people” hung on anyway. The essay introduced us to a veteran gold speculator whose fortunes had cratered as he bet on a chimerical precious-metal rebound. His last hope, the story told us, was a gold mine he had bought in Canada. But the price of gold was floundering – under $300 an ounce – and the speculator was having trouble “persuading someone to give him a drawing account of two hundred million dollars” to work the mine. Tsk tsk.

Then the author turned to one of those voices of authority that always seemed to get the last word in the year 2000: a commodities analyst. This worthy proceeded to sneer at gold bugs and to tell the author, “Gold has been marginalized because the world has changed. We have the most robust financial system we’ve ever had”. And what if, against the odds, the economy got choppy again? “The best anchor is the discipline of markets”, the analyst said.

Ah, the discipline of markets! And the robustness of the system! Such a beautiful faith they once made together. Remember? That was the dogma that deregulated the banks, that unleashed the boys at Enron, that put the sunny faces of Bob Rubin, Larry Summers, and Alan Greenspan on the cover of Time magazine over the headline THE COMMITTEE TO SAVE THE WORLD. Those were the maxims that gave us NASDAQ 5000, that had made New Yorker readers and their grandmas in Beardstown comfy and prosperous.

Today, of course, the NASDAQ is at 2800, the Dow has increased at a sluggish annualized rate of less than two percent in the intervening years, and real estate turned out to be more of a death trap than an investment. The heroes of 2000 are the laughingstocks of today. And gold? As we already noted, it’s selling for about $1,500 an ounce – and according to recent news stories, that pathetic speculator’s gold mine is now a going concern.

Does this reversal mean that the gold bugs were right all along? Not in the least. People are buying gold today – or they were buying it a few weeks ago, anyway – for a lot of the same bad reasons that people bought dot-com stocks in 1999 and mortgage-backed securities in 2005.

What I mean to highlight here is the shifting climate of orthodoxy, which once worshipped gold and then, by the year 2000, regarded metalheads with such casual contempt. When he talked about the fatuity of gold eleven years ago, that analyst spoke with the imprimatur of economic rectitude; behind him stood the shared market certainty of everyone from pop-investment gurus to the editorial boards of the nation’s major newspapers. The hubris was pure and uncut. The gold investor, meanwhile, was the butt of the joke, serving merely to amuse the cognoscenti. But who’s laughing now?

It is, in a peculiar way, reminiscent of the sort of contemptuous treatment once meted out to the other side – to the Populists and assorted reformers who assailed the gold standard from the left back in the 1890s. Whether they were for “free silver” or a straight-up fiat currency (two different ways of bringing about inflation), they were regarded as cranks by the economic establishment.

In 1895, for example, the Tennessee chapter of a free-silver group issued a policy statement. And here is the levelheaded coverage provided by the New York Times, which would do a contemporary shock jock proud:

The Bimetallic League of Tennessee, a body composed for the most part of inconsequential persons, has issued a pronunciamento in the shape of an address to the people of the United States – a wild, ranting, illogical, and incoherent jumble of words, full of abuse of everybody and everything which stands for national credit and honest money.

No doubt the Tennesseans took this in stride. The full-blown money crank, then as now, relishes the denunciations of conventional wisdom. He imagines that he is at war with central bankers and mysterious but powerful interests. And he dreams that, in taking up the cause of some precious metal or other, he is fomenting an uprising of the oppressed.

Consider the group of present-day speculators who call themselves the Silver Liberation Army, or SLA. Perhaps wishing to reassure anyone who associates those initials with the people who kidnapped Patty Hearst, their official blog tells us that this SLA is

a peaceful organization, that is intent on restoring the rights and liberty’s [sic] of all. Our quest is to take Silver to $500 an ounce. We will do this by purchasing Physical Silver and discarding of any paper contracts. This will restore the power to the people. Where it belongs.

SLA members are planning a “million ounce march” to protest fiat money. They are bravely taking delivery on whatever they buy, the better to drive prices higher. They are leading “a form of proletariat uprising, if you will” that will enable ordinary citizens to “take back the wealth from the criminal banksters”. There is even a guy who has written a version of “The Internationale” in which the ownership of silver is imagined as some kind of syndicalist brotherhood (“Arise ye victims of Banksta plunder!”).

These are obvious echoes of the “free silver” slogans of 1896, but with one huge difference: nineteenth-century silverites used politicized language because they were an actual political movement, not merely a consortium of speculators. What they wanted was inflation, not a cheap way to bet on the apocalypse.

I have no idea how investing in silver is supposed to liberate the proletariat this time around. It is as mysterious to me as the radical “New Economy” logic that was once supposed to carry the Dow to 50,000. In our era, though, people seem to believe that the way to cheer for runaway bull markets is by likening them to leftist political movements. Back in the 1990s, for example, the online brokerage E*TRADE compared its business model to a “revolution”, while a rival, Datek, promoted itself with imagery of a mob attacking the stock exchange.

It makes no sense, but who cares? When the ticker is going your way, you can say whatever you like and the world listens. And so this is a heady time for the doomsday theorist; a brilliant summer for cataclysm fans. The danger, as always, is that modern civilization will turn out not to be such a gigantic fraud after all, in which case the folly of betting large on those gold doubloons in the basement will become quickly and painfully apparent.

This great weakness of conspiracy-theory investing – the chance that reality might rear its head in some unpredictable way and disrupt the collective hallucination – played out to delicious effect in early May. The price of silver had been climbing and climbing toward record highs of almost $50 an ounce. On the Sunday after silver hit its pinnacle, a team of Navy SEALs killed Osama bin Laden; on Monday, silver dropped by 7.6 percent in a single session, and within a couple of weeks it was trading around $35 an ounce. (Gold also took a dip that Monday, albeit a less dramatic one.)

There were all sorts of solid technical reasons for silver’s plunge, of course, but it is the symbolic one that fascinates me most. The killing of bin Laden was the event that put to rest, finally, the tenacious conviction that Barack Obama was some kind of Muslim Manchurian Candidate. Now, Americans suddenly realized, Obama could act as effectively and as ruthlessly as any other president, and with that one gunshot, the vast cloud of suspicion that had surrounded him for the past few years began to evaporate. And as those baseline conspiracy theories crumbled, others fizzled too, including the antigovernmental mystique of precious metals.

Thus the paradox of today. The closest thing we have to a mass national protest movement chants “Gold is money”, a line that might well have been the rallying cry of the robber barons. They imagine that by worshiping the nineteenth-century symbols of monetary orthodoxy, they are somehow revenging themselves on JPMorgan and Goldman Sachs. Instead, the Tea Party, a kind of right-wing inversion of old-school Populism, is merely demanding its turn on the Cross of Gold.


{1} In the week that followed Osama bin Laden’s death in May, I saw a financial commentator on cable TV sing these words: “A play on silver is a play to put the US dollar where Osama is living – at the bottom of the ocean”. Catchy!

{2} Measured in nominal dollars, that is. Gold’s high point, adjusted for inflation, was reached in 1980, at the equivalent of around $2,300 in today’s money.

{3} At first I thought it peculiar that a major research university would lend a large part of its endowment to an investment theory that is inherently anti-intellectual. Upon further consideration, I understand the brilliance of the move: the university’s position in gold is in fact a political hedge on a colossal scale. Should academia’s reputation somehow improve among the professor-hating public, the price of gold will no doubt fall, but the University of Texas will profit anyway, as a well-known seat of learning. And if the right continues to flourish, and ratchets up its war on intellectual life, the price of gold is likely to rise, and the university will prosper that way as well.

Move Your Money

by Thomas H Greco

Beyond Money (August 18 2011)

The movement away from dependence upon mega-banks and political currencies is gaining momentum, not only amongst individuals and companies, but also amongst countries that have lost confidence in the international banking establishment.

The Associated Press reports today that Venezuela is recalling $11 billion in gold reserves {1}. Here are some excerpts:

President Hugo Chavez announced Wednesday he is nationalizing Venezuela’s gold mining industry and intends to bring home $11 billion in gold reserves currently held in US and European banks.

Central Bank president Nelson Merentes said on television that the decision to move the gold reserves was being taken out of “prudence”.

Venezuela has nearly $4.6 billion of its gold reserves in the Bank of England, according to a report by Finance Minister Jorge Giordani that was leaked to the news media Tuesday by an opposition lawmaker.

The report said additional Venezuelan gold reserves are held by the US bank JP Morgan Chase, British banks Barclays, HSBC and Standard Chartered, France’s BNP Paribas and Canada’s Bank of Nova Scotia.

Giordani and Merentes, who appeared together on television Wednesday, said they proposed to Chavez that Venezuela’s nearly $6.3 billion in non-gold international reserves such as bank deposits and bonds should be reviewed and transferred from US and European banks to countries they consider safer, including China, Russia and Brazil, among other countries in Asia and Latin America.

It makes sense for countries like Venezuela to hold their reserves in the currencies of countries that actually produce something and from whom they make substantial purchases. While the US remains one of its main suppliers, Venezuela also imports significant amount from Colombia, China, Brazil and Mexico.

Meanwhile, back in the US, there has been a growing grassroots movement in which savers are taking their money out of the large banking corporations and moving it into credit unions and locally owned banks. One significant development is the Move Your Money Project {2}, “a nonprofit campaign that encourages individuals and institutions to divest from the nation’s largest Wall Street banks and move to local financial institutions”. Go here to find one near you.

In my May presentation to the Financial Planning Association {3}, I provided a resource list {4} that included financing alternatives for enterprises and options for savers and investors.

As a side note, you may be interested in viewing Dylan Ratigan’s recent rant on MSNBC, in which he complained that the “Banking system is corrupt and defrauding us”. You can see it at {5}.







Modern Money Blog Number Twelve – Responses

Modern Money Theory and Commodity Coins

Responses to Comments on MMP Blog Number Twelve

by L Randall Wray

New Economic Perspectives (August 25 2011)

Thanks for all the responses – this might have been a record number for the MMP. Coins are fascinating. I have to admit that even though my approach downplays the role of coins in monetary systems, I always head right to the coin displays in the museums. Indeed, when in Cambridge recently I was treated to a quick tour of the collection of the late Phillip Grierson, who not only was among the greatest numismatists who ever lived but also one of those who recognized that the origins of money are not to be found in markets. Rather, it was his hypothesis that money came out of the penal system (debts again!) – a view that I believe must be correct. But that is a topic for another day.

Today I will address the first set of comments on the MMT approach to “commodity money coins”. In Blog Twelve I began to explain why the MMT view is that gold or silver coins are not examples of commodity money. Rather, they are simply IOUs of the issuer that happen to be stamped on precious metal. On to the comments and questions.

Q1: What is MMT’s view of the reserve currency?

Answer: Well, today it is the Dollar; a century ago it was the Pound. MMT principles apply – it is a sovereign currency issued through keystrokes. The issuer of the reserve currency can either float (in which case the issuer does not promise to convert at a fixed exchange rate) or it can fix. As I have argued, fixing reduces domestic policy space. Reserve status probably increases external demand for the nation’s currency – which is used for international clearing. To satisfy that demand, the reserve currency issuer (the US today) either supplies the currency through the capital account (lending) or the current account (trade deficit, for example).

Many believe this allows the nation that issues the reserve currency to “get something for nothing”, often called “seigniorage”. This is largely false – did American consumers get free goods and services over the past decade as the US ran current account deficits? No, of course not. They are left with a mountain of debt. Did the US government get “something for nothing”? Well, perhaps – but all sovereign governments can be said to get something for nothing, since they purchase by keystrokes.

But that is not seigniorage – it results from the fact that sovereign government imposes liabilities on its population – taxes, fees, and fines. The US does it; but so does Turkey. Sovereign government first puts its population in debt, then it uses keystrokes to move resources to the public sector and its keystrokes create its IOUs that provide the means through which taxpayers can retire their tax debt. The sovereign’s currency can circulate outside the country to varying degrees, but that is ultimately because the sovereign’s citizens need it to pay taxes domestically – since foreigners are not normally subject to the tax.

So in principle the issuer of the reserve currency is not unique – although the external demand for the reserve currency is greater. We’ll study this more later; think of this brief response as an appetizer that is no doubt going to spur some “hegemonic” objections!

Q2: The CPI has increased by a factor of seven since 1966. Is the currency still a store of value?

Answer: Well, sure it is – but as the commentator noted, it is not a good store of value in terms of purchasing power of a basket of consumer goods and services over a period as long as a half century. We can quibble about the use of the CPI as a measure of inflation – it has well known problems we will not pursue in detail here.

As Keynes argued, you need some “stickiness” of wages and prices in the money of account – or you might abandon money. That is what can happen in a hyperinflation. You try to find something else. But clearly except for a few gold bugs, US inflation since 1966 has been sufficiently low that the Dollar remained a useful money of account, and currency has been voluntarily held.

In truth, economists are hard-pressed to find negative economic effects from inflation at rates under, say, forty percent per year. But clearly people do not like inflation when it gets to double digits.

Returning to Keynes, he said that no one would hold money as a store of value in the absence of uncertainty. Holding wealth in a highly liquid form like money makes sense only if you are uncertain, and even scared, about the future. In a financial crisis, everyone runs to cash. It gives a very low return, but that is better than a huge loss!

If you wanted a good store of wealth, and you were making a decision back in 1966 as to the portfolio you would hold until 2011, it is unlikely that you would have held much cash. There would have been many assets that would be better stores of value. However, if we are talking about a desirable portfolio to be held over the next few months, you probably would hold some cash. There is a trade-off between liquidity and return.

I know the gold bugs like gold; but those who bought it in 1980 were kicking themselves for the next thirty years, and still have not recouped their losses. In general, commodity prices fall over time in real terms – they are terrible inflation hedges – plus they have storage costs.

Let me just say I have no knowledge of Dungeons and Dragons – I suppose it is a board game like Monopoly – so I cannot answer Neil’s question about gold, silver, and copper pieces. But I think Monopoly still uses the same paper currency and same prices and rents? Not sure what the question is. Games don’t have to have inflation? Okay – games have rules. I suppose inflation is not built into the rules of those games.

On Karl’s statement that past labor is not equivalent to today’s labor, hence, it is not surprising that wages and prices are higher today, I do believe he is onto a point.

We must adjust the CPI or other measures of price for quality improvements. How much would a modern laptop have cost in 1966? Millions of dollars? Billions? As Warren Mosler always jokes, your IPhone has more electronic wizardry than NASA was able to muster for the trips to the moon. The CPI is more of an art than a science – since we have to put prices on things that did not exist, and make imaginary quality adjustments.

Further there is something called the Baumol disease. A symphony orchestra back in Mozart’s time was as large as one today – give or take a few. And it took about the same time to perform a piece – depending on the conductor. There has been no productivity improvement. Yet, workers in other fields are infinitely more productive than they were in Mozart’s day. There is a similar problem in many other areas, mostly services where you really cannot improve productivity much (think barbers, teachers, doctors). The relative price of these things should have become insanely expensive over the past 200 years relative to, say, manufacturing output with tremendous productivity gains. And if we rewarded workers only for productivity gains, our musicians would still be working for Mozart era wages. It still takes one barber to keep one hundred heads of hair looking good. By contrast, a single farmer feeds as many hungry consumers as 100 farmers used to feed. But the farmer and barber still earn about the same living (give or take). Rather than vastly underpaying the farmer we choose to overpay the barber. At the same time, the Baumol disease thesis is that an ever growing portion of our nation’s output is in those sectors that suffer the disease. So we overpay ever more workers in those sectors. The trend for wages (and, thus, prices) is up.

(Wages grow faster than productivity because we have those low productivity sectors that get the same wage increases. And to carry the analysis a bit further, the thesis is that over time government tends to take over more of these “diseased” sectors – so government tends to grow as a percent of GDP. This is not meant to be a criticism, and of course there are countervailing tendencies. But think of healthcare and projected tens of trillions of dollars of government budget deficits and you’ve got the picture.)

Blame the concert violinist for erosion of the value of the dollar.

In a sense, a part of inflation is to even these things out – otherwise, all our musicians and artists would live like paupers relative to our factory workers. Think of it this way, inflation is the cost of preserving culture. Occasionally we like fine art, too. And we like our Kindergarten teachers to maintain class size of fifteen kids. To keep pace with productivity growth in manufacturing, each Kindergarten teacher today would have to have hundreds of five years olds crowded into every classroom. It didn’t happen. (Well, with state and local government budget cuts, it might.)

To preserve “inefficiency” in the Kindergarten classroom we need inflation.

Sorry, that was rather long-winded, but the comment by Karl was on the right track.

Finally, as Neil hints, some inflation is probably good. Keynes argued it helps to encourage investment, by increasing nominal returns and making it easier to service debt. When I graduated from college with mountains of student loan debt, I really appreciated the Carter years’ inflation! The alternative would be rapidly declining prices in every sector that does not suffer from the Baumol disease – but deflation itself is a dangerous disease. This would be like fighting the common cold with a good dose of terminal cancer.

Q3: What about Chinese holding of Dollars – what is the impact on the US?

Answer: I want to hold off on this a bit, but clearly the Chinese do not really lend Dollars to the US and especially not to the US government. Every dollar they got came from us. Our problem is that we allow imports to displace US workers – we could put them to work in other jobs. But instead we leave a lot of them unemployed. We do not fully enjoy the advantages of running a trade deficit – consuming more than we produce – because we operate our economy below capacity and keep millions unemployed. But clearly the answer is not to go begging to the Chinese to keep those dollars flowing to the US (as Vice President Biden is doing right now)! Rather it is to put the unemployed to work doing useful things to improve our living standards.

Q4: Could use of gold be linked to anti-counterfeiting measures?

Answer: That sounds right to me! Yes, government could attempt to control gold supply making it harder to counterfeit coins.

Q5: What about the state of Utah accepting gold coins?

Answer: Heck, I’ll accept them, too. Send me yours! Worst case scenario is that gold prices will collapse and I’ll have to use the coins at nominal value. More likely, they will remain collector’s items.

I also like platinum: I’d like Treasury to coin ten $1 trillion dollar coins, and give me one. The other nine could buy back Treasuries so that our debt hysterians could worry about something else for a while.

Q6: Today, are there two “commodities” serving as medium of exchange, currency and demand deposits?

Answer: Neither are commodities. Sorry, we are using the word commodities in two senses. One is the Wall Street terminology: “natural resource” inputs to production: oil, soybeans, corn, copper, silver … and, yes, gold. These are now the subject of a speculative boom driven by pension funds buying futures contracts. The other is in the sense of “products of labor, produced for sale in markets”. But on neither definition is currency nor demand deposits an example of a “commodity”. Both are IOUs, either stamped on base metal or paper, or recorded electronically through keystrokes.

Q7: In what sense does the state go into debt to the public when it issues money?

Answer: It must accept back its own IOUs. What it “owes” you is the right to redeem its IOU for the tax debt it imposed on you. Government “redeems” by accepting its own IOU. All debtors must accept back in payment their own IOUs. Even government. Refusal to accept is a default.

Q8: Were clipped coins accepted at original value?

Answer: Yes. And No. More on Gresham’s Law next week. Roman Law was nominalist as I discussed. Deviations from nominalism, however, were common in early modern society. But that does not make metalism correct. Read next week.

To finish up, a few more comments and responses:

Thanks much to Ramanan for providing citations to the Saint Augustine statement on Christ’s coins. I will update the blog: Saint Augustin on Sermon on the Mount, Harmony of the Gospels and Homilies on the Gospels: Nicene and Post-Nicene Fathers of the Christian Church, Part 6″ (Sermon XL) ; Just above Sermon XLI {1}.

Alternatively {2}; toward the end of the page: Christ’s coin is man. In him is Christ’s image, in him Christ’s Name, Christ’s gifts, Christ’s rules of duty

A commentator noted: “People as coins” just might be a rabbinic allusion: “When Caesar puts his image on a thousand coins, they all look alike. But when God puts His image on a thousand people, they all come out different.”

LRW: Thanks, I will look into this.

Dave said: People might find {3} of interest.

LRW: I agree! His view of money is similar to mine, I believe. In a word, debt.

Lewis, you appear to be channeling A Mitchell Innes. Good job.

Darwin: Yes, if you play by the rules on a gold standard, the quantity of gold constrains coin issue. You can call in gold, you can raise the price for gold paid at the mint, you can put less gold in your coins, and you can use hazelwood tally sticks and bar tabs. All of the above.

Anonomous Marx: I agree with you. Some Marxists do want to find commodity money in Marx. I do not. Marx’s whole analysis requires nominalism. I interpret his statements on gold as contingent – special cases having to do with operation of the gold standard.

Oil Drum Anonomous: “I think this particular installment of the MMP is weak … Where is there an axiomatic development of MMT, uncluttered by asides about ancient history?

Answer: Well, Anonymous you’ve found the right site but you started in on Number Twelve. Begin at the Beginning. (Hint: they are numbered consecutively, so the beginning would be Number One.) Further, many or even most people have this belief about commodity coins of the past, and believe that all would be right with the world if we only went back to coining gold. But that is an imaginary past. That is what I am trying to correct, since stories color our understanding. Indeed, our understanding really boils down to stories – it is how we sort things out. Humans are born story tellers. All of them are false, of course.

Okay, done for today. Thanks for comments and questions. Part two next week. That will get more into the nitty and the gritty.





Modern Money Blog – Number Twelve

Commodity Money Coins?

Metalism versus Nominalism, Part One

by L Randall Wray

New Economic Perspectives (August 22 2011)

Last week I asserted that coins have never been a form of commodity money; rather they have always been the IOUs of the issuer. Essentially, a gold coin is just the state’s IOU that happens to have been stamped on gold. It is just a “token” of the state’s indebtedness – nothing but a record of that debt. The state must take back its IOU in payments made to itself. “Taxes drive money” – these “money things” are accepted because there are taxes “backing them up”, not because they have embodied gold. As promised, this week I will begin try to dispel the view that coins used to be commodity monies. Next week, we will finish up the discussion.

In this Primer I do not want to go deeply into economic history – we are more interested here with how money “works” today. However, that does not mean that history does not matter, nor should we ignore how our stories about the past affect how we view money today. For example, a common belief (accepted by most economists) is that money first took a commodity form. Our ancient ancestors had markets, but they relied on inconvenient barter until someone had the bright idea of choosing one commodity to act as a medium of exchange. At first it might have been pretty sea shells, but through some sort of evolutionary process, precious metals were chosen as a more efficient money commodity.

Obviously, metal had an intrinsic value – it was desired for other uses. (And if we take a Marxian labor theory of value, we can say metal had a labor value as it had to be mined and refined.) Whatever the case, that intrinsic value imparted value to coined metal. This helped to prevent inflation – that is, decline in the purchasing power of the metal coin in terms of other commodities – since the coin could always be melted and sold as bullion. There are then all sorts of stories about how government debased the value of the coins (by reducing precious metal content), causing inflation.

Later, government issued paper money (or base metal coins of very little intrinsic value) but promised to redeem this for the metal. Again, there are many stories about government defaulting on that. And then finally we end with today’s “fiat money”, with nothing “real” standing behind it. And that is how we get the Weimar Republics and the Zimbabwes – with nothing really backing the money it now is prone to causing hyperinflation as government prints up too much of it. Which leads us to the gold bug’s lament: if only we could go back to a “real” money standard: gold.

In this discussion, we cannot provide a detailed historical account to debunk the traditional stories about money’s history. Let us instead provide an overview of an alternative.

First we need to note that the money of account is many thousands of years old – at least four millennia old and probably much older. (The “modern” in “modern money theory” comes from Keynes’s claim that money has been state money for the past 4000 years “at least”.) We know this because we have, for example, the clay tablets of Mesopotamia that record values in money terms, along with price lists in that money of account.

We also know that money’s earliest origins are closely linked to debts and record-keeping, and that many of the words associated with money and debt have religious significance: debt, sin, repayment, redemption, “wiping the slate clean”, and Year of Jubilee. In the Aramaic language spoken by Christ, the word for “debt” is the same as the word for “sin”. The “Lord’s Prayer” that is normally interpreted to read “forgive us our trespasses” could be just as well translated as “our debts” or “our sins” – or as Margaret Atwood says, “our sinful debts”. {1}

Records of credits and debits were more akin to modern electronic entries – etched in clay rather than on computer tapes. And all early money units had names derived from measures of the principal grain foodstuff – how many bushels of barley equivalent were owed, owned, and paid. All of this is more consistent with the view of money as a unit of account, a representation of social value, and an IOU rather than as a commodity. Or, as we MMTers say, money is a “token”, like the cloakroom “ticket” that can be redeemed for one’s coat at the end of the operatic performance.

Indeed, the “pawn” in pawnshop comes from the word for “pledge”, as in the collateral left, with a token IOU provided by the shop that is later “redeemed” for the item left. Saint Nick is the patron saint of pawnshops (and, appropriately, for thieves), while “Old Nick” refers to the devil (hence, the red suit and chimney soot) to whom we pawn our souls. The Tenth Commandment’s prohibition on coveting thy neighbor’s wife (which goes on to include male or female slave, or ox, or donkey, or anything that belongs to your neighbor) has nothing to do with sex and adultery but rather with receiving them as pawns for debt. By contrast, Christ is known as “the Redeemer” – the “Sin Eater” who steps forward to pay the debts we cannot redeem, a much older tradition that lay behind the practice of human sacrifice to repay the gods. {2}

We all know Shakespeare’s admonition “neither a borrower nor a lender be”, as religion typically views both the “devil” creditor and the debtor who “sells his soul” by pawning his wife and kids into debt bondage as sinful – if not equally then at least simultaneously tainted, united in the awful bondage. Only “redemption” can free us from humanity’s debts owing to Eve’s original sin.

Of course, for most of humanity today, it is the original sin/debt to the tax collector, rather than to Old Nick, that we cannot escape. The Devil kept the first account book, carefully noting the purchased souls and only death could “wipe the slate clean” as “death pays all debts”. Now we’ve got our tax collector, who like death is the only certain thing in life. In between the two, we had the clay tablets of Mesopotamia recording debits and credits in the Temple’s and then the Palace’s money of account for the first few millennia after money was invented as a universal measure of our multiple and heterogeneous sins.

The first coins were created thousands of years later, in the greater Greek region (so far as we know, in Lydia in the seventh century BC). And in spite of all that has been written about coins, they have rarely been more than a very small proportion of the “money things” involved in finance and debt payment. For most of European history, for example, tally sticks, bills of exchange, and “bar tabs” (again, the reference to “wiping the slate clean” is revealing – something that might not be done for a year or two at the pub, where the alewife kept the accounts) did most of that work.

Indeed, until very recent times, most payments made to the Crown in England were in the form of tally sticks (the King’s own IOU, recorded in the form of notches in hazelwood) – whose use was only discontinued well into the nineteenth century (with a catastrophic result: the Exchequer had them thrown into the stoves with such zest that Parliament was burnt to the ground by those devilish tax collectors!) In most realms, the quantity of coin was so small that it could be (and was) frequently called in to be melted for re-coinage. (If you think about it, calling in all the coins to melt them for re-coinage would be a very strange and pointless activity if coins were already valued by embodied metal!)

So what were coins and why did they contain precious metal? To be sure, we do not know. Money’s history is “lost in the mists of time when the ice was melting … when the weather was delightful and the mind free to be fertile of new ideas – in the islands of the Hesperides or Atlantis or some Eden of Central Asia” as Keynes put it. We have to speculate.

One hypothesis about early Greece (the mother of both democracy and coinage – almost certainly the two are linked in some manner) is that the elites had nearly monopolized precious metal, which was important in their social circles tied together by “hierarchical gift exchange”. They were above the agora (market place) and hostile to the rising polis (democratic city-state government). According to Classical scholar Leslie Kurke, the polis first minted coin to be used in the agora to

represent the state’s assertion of its ultimate authority to constitute and regulate value in all the spheres in which general-purpose money operated … Thus state-issued coinage as a universal equivalent, like the civic agora in which it circulated, symbolized the merger in a single token or site of many different domains of value, all under the final authority of the city. {2}

The use of precious metals was a conscious thumbing-of-the-nose against the elite who placed great ceremonial value on precious metal. By coining their precious metal, for use in the agora’s houses of prostitution by mere common citizens, the polis sullied the elite’s hierarchical gift exchange – appropriating precious metal, and with its stamp asserting its ultimate authority.

As the polis used coins for its own payments and insisted on payment in coin, it inserted its sovereignty into retail trade in the agora. At the same time, the agora and its use of coined money subverted hierarchies of gift exchange, just as a shift to taxes and regular payments to city officials (as well as severe penalties levied on officials who accepted gifts) challenged the “natural” order that relied on gifts and favors. As Kurke argues, since coins are nothing more than tokens of the city’s authority, they could have been produced from any material. However, because the aristocrats measured a man’s worth by the quantity and quality of the precious metal he had accumulated, the polis was required to mint high quality coins, unvarying in fineness. (Note that gold is called the noble metal because it remains the same through time, like the king; coined metal needed to be similarly unvarying.) The citizens of the polis by their association with high quality, uniform, coin (and in the literary texts of the time, the citizen’s “mettle” was tested by the quality of the coin issued by his city) gained equal status; by providing a standard measure of value, coinage rendered labor comparable and in this sense coinage was an egalitarian innovation.

From that time forward, coins commonly contained precious metal. Rome carried on the tradition, and Kurke’s thesis is consistent with the statement of Saint Augustine, who declared that just as people are Christ’s coins, the precious metal coins of Rome represent a visualization of imperial power – inexorably doing the emperor’s bidding just as the reverent do Christ’s {3}. Note, again, the link between money and religion.

Okay that gets us to Roman times. Next week we examine coinage from Rome through to modern times.


{1} Payback: debt and the shadow side of wealth, by Margaret Atwood (Anansi 2008).

{2} Coins, Bodies, Games, and Gold, by Leslie Kurke (Princeton University Press, Princeton, New Jersey, 1999); xxi, 385; paper $29.95 (ISBN 0-691-00736-5), cloth $65.00 (ISBN 0-691-01731-X).

{3} If anyone knows the source for Saint Augustine’s comparison of people to coins, please provide it. I thank Chris Desan, David Fox, and other participants of a recent seminar at Cambridge University for the discussion I draw upon here.