Free Money once again a topic of debate in US politics

by Thomas H Greco

Beyond Money (September 29 2011)

Once more, Congressman and Presidential candidate, Ron Paul has championed the cause of honesty and freedom, this time by introducing a bill (HR 1098) that would promote free competition in currency and end the monopoly control of money and finance by the banking and political elite. Seth Lipsky’s article below tells the story.

I’ve not read the bill, so I don’t know the details, and I don’t expect it to get very far in a Congress that is, by and large, bought and paid for by the same interests that the bill seems to challenge, but its very existence and the fact that is getting some media coverage could go a long way toward educating the public about the vital issues and systemic flaws that are involved in the money system.

The survival of democracy and the future of civilization depend on, one way or another, on liberating the credit commons from monopoly control. Action from the bottom up (the organization of private, free exchange alternatives) combined with action from the top down (popular pressure for legislative action) might eventually be sufficient to crack the nut.           — Thomas H Greco

Ron Paul, Upping the Ante in His Campaign for Liberty, Hoists the Flag of Hayek

Offers a Bill To Allow Free Competition in Currencies

by Seth Lipsky

The Sun, New York  (September 29 2011)

The first time I met Friedrich Hayek was in 1980 at California, where he was staying at the home of another economist. Then a young editor for the Wall Street Journal, I’d asked to call on the Nobel laureate for a book review I was writing. His host invited me for dinner. Before the meal, Hayek and I retreated, alone, to the far end of the host’s living room, for a chat.

We were but a few minutes into our conversation when, suddenly, Hayek clapped a hand over his nose and mouth and started coughing convulsively, before slumping onto the couch. I raced back to the host to exclaim that Professor Hayek seemed to be in trouble, only to be told that it was okay, he was just taking his snuff. A jolt of the divine herb, it seems, and the sage was back on his feet.

Hayek died twelve years later at the age of 93. I never came to know him well. But this week I found myself imagining that were his long-ago collapse-into-a-coughing fit to occur in front of me today, I’d whip out a copy of a new bill in Congress, HR 1098, called the Free Competition in Currency Act of 2011, and wave that under the great economist’s nose. It’s hard to think of anything, even a pinch of the strongest snuff, being a greater pick-me-up for his spirits.

For Hayek was an advocate of, among other things, private money – competing currencies – and HR 1098 would end a ban on them that has obtained here in America since the Civil War. The new bill in Congress, introduced in March by Representative Ron Paul, would repeal the legal tender laws, prohibit taxation of certain coins and bullion, and clean up other sections of our coinage laws.

It is not a measure the Congress is going to pass in a hurry. But it is being nursed by advocates of monetary reform, and it would be unwise to discount it entirely. Few, after all, gave Congressman Paul much of a chance to win passage of a measure to audit the Federal Reserve, but when it eventually passed it was with an overwhelming, bipartisan vote. It may yet be enforced by the courts.

The Free Competition in Currency Act is far more important. It comes amid a historic collapse in the value of the dollar to less than a 1,600th of an ounce of gold. The dollar has gained a bit of value in recent days, but it is still worth less than a sixth of what it was worth as recently as, say, the start of President George W Bush’s first term.

One of the things the government has done in the face of that collapse is seek to enforce a prohibition against private “uttering” – that is, putting into use – of coins of gold, silver, or other metal as current money and making or even possessing likenesses of such coins. HR 1098 would end the ban on private uttering of coins and, presumably, stop any current prosecution of such uttering.

The drive for the bill is animated, if only in part, by the case of Bernard von NotHaus, who was convicted in March of issuing a private medallion called the Liberty Dollar. The government prosecuted von NotHaus even though the coins he issued were made of silver and are today worth much more, in terms of Federal Reserve Notes, than when they were issued.

What the government is doing in the Von NotHaus case is seeking to suppress sound money in order to protect the unsound, fiat money the government has been issuing via the Federal Reserve. A federal judge in North Carolina has agreed to consider post-conviction motions to throw out the von NotHaus verdict, partly on the argument that the Constitution does not enumerate a power of Congress to outlaw privately-minted coins, which were widely produced in America’s early decades.

HR 1098 would go way beyond the Von NotHaus case, by asserting the virtue of the idea of private money as a system. The idea was sprung by Hayek not long after he won his Nobel Prize, in the mid-1970s. He started with a lecture. He later wrote, in a slim volume called “Denationalization of Money”, that he’d been in “despair about the hopelessness of finding a politically feasible solution to what is technically the simplest possible problem, namely to stop inflation”.

“The further pursuit of the suggestion that government should be deprived of its monopoly of the issue of money opened the most fascinating theoretical vistas and showed the possibility of arrangements which have never been considered”, he wrote. He came to the view that a plethora of privately issued money would enable mankind’s millions to find their own mediums of exchange, and good money would end up driving out bad.

Hayek concluded “Denationalization of Money” by calling for what he termed “a Free Money Movement comparable to the Free Trade Movement of the 19th century”. He came to the view that the gold standard was not the solution, though it was “the only tolerably safe system” if the management of money were going to be the preserve of the government.

The Free Competition in Currency Act got an early hearing in Congress this month in the House Subcommittee on Monetary Policy. The hearing wasn’t widely attended, but there was testimony by the president of the Foundation for the Advancement of Monetary Education, Lawrence Parks, and by a professor at George Mason University, Lawrence White, who talked about how FedEx and UPS’s private competition with the Post Office has brought benefits to American consumers. He extended the analogy to money.

It’s too bad Hayek couldn’t have been at the hearings. He viewed the denationalization of money as the “cure” for “recurrent waves of depression and unemployment that have been represented as an inherent and deadly defect of capitalism”. In other words, as a cure for ills like the current crisis. How Hayek, who once called for a global debate on socialism versus capitalism, would have thrilled to the moment, pausing only for the occasional pinch of his favorite snuff.

Euro Toast, Anyone?

The Meltdown Picks Up Speed

by Randy Wray

Naked Capitalism (September 29 2011)

Yves here. Readers may note that Wray cites the cost of the US bailout of the financial crisis as $29 trillion. I’ve never seen a figure like that (the highest estimate I’ve seen was from SIGTARP, which set the “theoretical maximum” at $23 trillion, and that figure was widely criticized. Barry Ritholtz has kept tab over time, and his tally has been in the $10 to $11 trillion range). But this estimate is not core to his argument.

Greece’s Finance Minister reportedly said that his nation cannot continue to service its debt and hinted that a fifty percent write-down is likely. Greece’s sovereign debt is 350 billion euros – so losses to holders would be 175 billion euros. That would just be the beginning, however.

Nouriel Roubini has argued that the crisis will spread from Greece and increase the possibility that both Italy and Spain could be forced out unless European leaders greatly increase the funds available for bail-outs. The Sunday Telegraph has suggested that as much as 1.75 trillion sterling could be required. To put that in perspective, the US bailout of its financial system after 2008 came to $29 trillion. The 1.75 trillion figure will almost certainly prove to be wishful thinking if sovereign debt goes bad because that will make the US subprime crisis look like a nursery school dispute. All the major European banks will go down – and so will the $3 trillion US money market mutual funds. (That probably explains why the US has suddenly taken a keen interest in Euroland, with the Fed ramping up lending to what Americans had formerly seen as “Eurotrash” financial institutions.)

It is becoming increasingly clear that authorities are merely trying to buy time to figure out how they can save the core French and German banks against a cascade of likely sovereign defaults. Meanwhile, they keep a stiff upper lip and demand more blood in the form of periphery austerity. They know this will do no good at all – indeed, it will increase the eventual costs of the bail-out while stoking North-South hostility. Presumably leaders like Chancellor Merkel are throwing red meat to their base for purely domestic political reasons. If the EMU is eventually saved, however, the rancor will make it very difficult to mend fences.

There is no alternative to debt relief for Greek and other periphery nations. But, they are not likely to get it, at least on the scale needed. Certainly not before a lot more pain is inflicted, and a lot more grovelling shown to Europe’s masters.

Indeed, the picture of the debtors that the Germans, especially, want to paint is one of profligate consumption fuelled by runaway government spending by Mediterraneans. The only solution is to tighten the screws. As Finance Minister Wolfgang Schauble put it: “The main reason for the lack of demand is the lack of confidence; the main reason for the lack of confidence is the deficits and public debts which are seen as unsustainable … We won’t come to grips with economies deleveraging by having governments and central banks throwing – literally – even more money at the problem. You simply cannot fight fire with fire.” You’ve got to fight the headwinds with more glacial ice.

While the story of fiscal excess is a stretch even in the case of the Greeks, it certainly cannot apply to Ireland and Iceland – or even to Spain. In the former cases, these nations adopted the neoliberal attitude toward banks that was pushed by policymakers in Europe and America, with disastrous results. The banks blew up in a speculative fever and then expected their governments to absorb all the losses. Further, as Ambrose Evans-Pritchard argues, even Greece’s total outstanding debt (private plus sovereign) is not high: 250% of GDP (versus nearly 500% in the US); Spain’s government debt ratio is just 65% of GDP. And while it is true that Italy’s government debt ratio is high, its household debt ratio is very low by global standards.

But it is not at all clear that the nuclear option – dissolution – will be avoided. Even Very Serious People are providing analyses of a Euroland divorce – with resolution ranging from a complete break-up to a split between a Teutonic Union embracing fiscal rectitude with an overvalued currency and a Latin Union with a greatly devalued currency.

A recent report from Credit Suisse dares to ask “What if?” there is a disorderly break-up of the EMU, with the narrowly defined PIGS (Portugal, Ireland, Greece and Spain) abandoning the euro and each adopting its own currency. The report paints a bleak picture because the currencies on the periphery would depreciate, raising the cost of servicing euro debt and leading to a snowball of sovereign defaults across highly indebted euro nations.

The report assumes Italy does not default – if it did, losses on sovereign debt would be very much higher. With the assumption that Italy remains on the euro and manages to avoid default, total losses to the core European banks would be 300 billion euros and 630 billion euros for the periphery nations’ banks (excluding Italy), while the ECB’s losses would be 150 billion. (Note that gets very close to the rumored bailout costs of 1.75 trillion euros – without including any knock-on costs.)

Looking to previous “orderly” defaults, GDP would fall by nine percent. With the weaker nations gone, the euro used by the stronger nations would appreciate, hurting their export sectors. That would increase the pressures for trade wars – and for a Great Depression 2.0. The report puts this probability at an optimistic ten percent.

In his interesting piece {1}, Ambrose Evans-Pritchard comes very close to getting it right – in my view. The problem, he asserts, is not “sovereign” euro debt, but rather is “the euro itself”, a “machine for perpetual destruction”. He rightly points to a competitive gap between the North and South, and argues that the euro is overvalued in the South and undervalued for Germany. He also points to the German delusion that its trade surpluses are “good” but the South’s trade deficits are “bad” balances. But obviously, they are nothing but the flip side of one another. He also discounts scare talk about the catastrophic costs of a breakup, and argues that the benefits of a North-South split could be significant. If the “Latin tier” could reboot with a significantly devalued (new) currency, it could become competitive. While my take is slightly different, I believe Evans-Pritchard is certainly on the right track, and his criticism of the German center of Europe is on-target.

An entirely different solution is offered by Jacques Delpla and Jakiob von Weizsacker, “The Blue Bond Proposal, published in May by bruegelpolicybrief. This would instead retain the union but pool a portion of each member’s government debt – equal to a Maastricht criteria sixty percent of GDP. This would be allocated to a “blue bond” classification, with any debt above that classified as “red bond”. The idea is that the blue bonds would be low risk, with holders serviced first; holders of red bonds would only be paid once the blue bonds are serviced. About half the current EMU members would have quite small issues of red bonds; about a quarter would not even be close to their limit on blue bond issues at current debt ratios. The proposal draws on the US experiment with “tranching” of mortgages to produce “safe” triple-A mortgage backed securities protected by “overcollateralization” since the lower-grade securities took all the risks. Well, that did not turn out so well! The idea is that markets will discipline debt issues since blue bonds will enjoy low interest rates and red bonds will pay higher rates. Again, the US experience proves that markets are far too clever for that – if anything market discipline did precisely the opposite.

Still, I am not completely against the proposal. If the full faith and credit of the entire EMU (including most importantly that of the ECB) were put behind the blue bonds, and substantial nonmarket discipline were put on the red bonds, the scheme has some potential. More importantly, it directs us toward a real solution.

The problem with the set-up of the EMU was the separation of nations and their currencies – as I have argued since at least 1994. It was a system designed to fail. It would be like a USA with no Washington – with each state fully responsible not only for state spending, but also for social security, health care, natural disasters, and bail-outs of financial institutions within its borders. What a stupid idea. In the US, all of those responsibilities fall under the purview of the issuers of the national currency – the Fed and the Treasury. In truth, the Fed must play a subsidiary role because like the ECB it is prohibited from directly buying Treasury debt. It can only lend to financial institutions, and purchase government debt in the open market. It can help to stabilize the financial system, but can only lend, not spend, dollars into existence. The Treasury spends them into existence. When Congress is not preoccupied with Kindergarten-level spats that works almost tolerably well – a hurricane in the gulf leads to Treasury spending to relieve the pain. A national economic disaster generates a Federal budget deficit of five or ten percent of GDP to relieve pain.

That cannot happen in Euroland, where the Euro Parliament’s budget is less than one percent of GDP. As I argued a decade and a half ago, the first serious Euro-wide financial crisis would expose the flaws. And it did.

And things are made much worse because Euroland can neither turn to its center for help, nor can it any longer rely on the rest of the world. The economies of the West (at least) are stumbling. In addition to the residual (and growing) problems in US real estate, the commodities speculative bubble appears to have been pricked. Since fools rush in on the belief they can take advantage of sales prices, the air will not rush out quickly. But with prices at two, three, and even four standard deviations away from the mean, the general trend will be down. That leads to vicious cycle margin calls, which will have knock-on effects as those with long positions in commodities have to sell out other asset classes. The stock market will be next – and there is plenty of reason to sell bank stocks, anyway.

And US and European banks are already insolvent. When Greece defaults and the crisis spreads to the periphery that will become more obvious. US money market mutual funds will break the buck – again – and this time they will not be rescued (Dodd-Frank makes that difficult). Further, US banks are beginning to lose civil lawsuits on their rampant fraud – securities fraud, mortgage lending fraud, foreclosure fraud, insider trading fraud. Fraud is essentially the only business that big US banks know – the only thing keeping them in business. If that line of business is taken away, they are toast. In GFC 1.0 it took $29 trillion to prop up Wall Street’s banksters. They are not going to get a second chance.

And now even China wants to slow. The Euro toast is cooked. The question now is what Euroland will do about it, and whether the US, UK and other countries with the ability to avoid a toasting will choose a tastier outcome.


L Randall Wray is a Professor of Economics at the University of Missouri-Kansas City and Senior Scholar at the Levy Economics Institute of Bard College. Cross posted from EconoMonitor:



Money and Politics

What’s next?

by Thomas H Greco

Beyond Money (September 20 2011)

This from Dmytri Kleiner is an excellent political analysis.

The vast majority of people in the world today have negative financial net worth, and, as their incomes shrink and their cost of living increases, their debts are becoming ever more unbearable. A debtor’s initiative may be right on target. – Thomas H Greco

Debtors’ of The World Unite!

The Initiative to form an International Debtors’ Party.

Congratulations to the Pirate Party having won an astounding 8.9% in the Berlin elections.

As I wrote two weeks ago, this is their moment of relevance, the emergence of Information politics as a mainstream political topic. Having fifteen Piratenpartei representatives in the local government will certainly be of direct material benefit to activists fighting against software patents, for network neutrality, online security and privacy, et cetera, and that is a development to be celebrated.

Modern politics has become a politics of identities and causes. Major parties construct identities, these identities function as Legitimization Brands, not so much tied to specific social outcomes, but rather to specific personalities, representations, framings and forms of apology.

People vote for a Party because that’s the kind of person they identify as: the kind of person that votes for that party and imagines themselves having the essentialized, yet drifting, characteristics the party markets as their image. Party membership is just another consumer identity.

The interests of the State and it’s ruling class don’t change from election to election, and the elected politicians of the ruling party’s job is to represent the policies demanded by the ruling class to the people that support them. The election is a market survey, designed to identify which Legitimization Brand will most effectively deliver public support.

The political policies of the major parties are formed by way of the campaign contributions and lobbying of the holders of the major economic power, not by the interests of the voters whose support they deliver.

Political resistance is limited to activist movements, which occasionally manifest as minor parties, the Greens and more recently the Pirate Party are such manifestations.

As minor parities, they are not integrated into the ruling class system, but rather represent the social power of movements around specific causes. These parties retain relevance to the degree that they are primarily the representatives of the activist social movements they emerged from, when they grow beyond being minor parties, like the Greens have in Germany, they become integrated into the ruling class, and begin representing ruling class interests.

The reason this happens is that as representatives of causes, they have no mass appeal.

The social power they can mobilize, although often visible and noisy, is not enough to propel them beyond the political fringes, yet maybe enough to attract attention from the same economic powers whose contributions and lobbies animate the major parties, and are thereby transformed into Legitimization Brands, like the other major parties, trading in the support of their now expanded constituencies so long as their legitimacy survives.

The masses are not interested in causes, at least not enough to mobilize around them.

And for very good reason, understanding complex causes like environmentalism and information politics seem complex and abstract to people more concerned with their everyday lives. Activist campaigns often focus on the misdeeds of corporations and States. Most people feel unqualified to comment on it, and are therefore not so compelled to try to unravel the storms of claims and counter claims, accusations and apologies, all the rhetoric that drives such polemics. These are not their concerns, forming an opinion on such issues does not help in the daily challenges they face in their private lives. And the solutions presented are not clearly implied by their own conditions, thus they are happy to have these concerned administered for them, which the Legitimizing Apparatus is happy to do.

What’s missing from modern politics is, well … politics.

The traditional parties formed around the emerging power of different economic classes. Specifically from the interests of those who derived their incomes from the different Factors of Production, namely Land, Capital, and Labour.

Conservatives are called conservatives not because they have delicate sensibilities when it comes to sexuality or have regressive views of gender and racial roles, but because they wanted to “Conserve” the system of Nobility, where elite families retained power and led society. Which, due to their superior genetic heritage, they where, allegedly, uniquely able to do, and as they had done for centuries.

The primary economic power of the Conservative part come from those that controlled the land.

The Liberal are called Liberals, not because they emerged as movement of people who believed in being a little less uptight and a little less xenophobic, but rather because they represented the emerging Capitalist class, they believed that the State, meaning at that time, the Nobility, should let them conduct their businesses as they see fit, and not intervene in the marke.

The primary power of the Liberals came from those that controlled capital.

As Capitalism triumphed, and Feudalism disappeared, Liberals and Conservatives became not so much representatives of different classes in conflict, but rather competing brands to market the interests of Capital to the masses. Both parties represent only slightly differing views on how markets and governments aught to be run, and in whose interest

Labour Parties began as dissenting, activist parties, formed by groups of political intellectuals such as the UK Fabians, and began as minor parties that had grown out of the workers’ movement.

Yet, the workers’ movement was different from the types of causes we have seen emerge more recently.

The workers’ movement was not fuelled by intellectual appeals to abstract technical concepts, and was not focused on the reported conduct of remote corporations or states, but on the direct conditions and interests experienced by workers, and workers where legion.

Their cause was not based on morality or belief, but on the conditions of their daily lives. What’s more, the platforms were directly implied by their conditions, they were not administered beliefs, but known facts. Workplace safety, wages, working hours and other matters of direct interest to workers did not require subscribing to one ideology or another to understand.

The workers movement, because of its class basis, did not need to rely on campaign contributions and lobby to have power, because the workers where the masses.

The power of the worker’s parties came from control of labour.

However, this language of Landlord, Capitalist and Worker emerged in quite a different era. The Power Loom was the driving force of industry, Nobility controlled the land and the State, and being a worker in early industry was torturous, inhumane, and importantly, most workers where direct-producers. The value they created took the form of stocks of goods that where literally taken from their hand and into the possession of the Capitalists, who became their owners and profited from their circulation, while the workers where left with nothing more than that which their subsistence demands so they could toil another day. Workers knew their class interests. The exploitation of labour was not a theory, but a felt, daily experience. Their demands where not opinions, but terms of struggle.

The workers’ movement won many of these struggles. Working conditions and hours where improved as a result of fierce battles between workers and capitalists. This began to make the demands of workers’ parties less pressing, more marginal and abstract, while theories of value and economy developed further, the immediacy of the issues fell away.

More and more workers became non-direct producers, working in administrative or technical fields that did not directly produce stocks of goods; appropriation of the product of the labour became not a felt and observed experience, but yet another theory, something about which one could have an opinion, but not something that was a uniting term of struggle.

All the while the most oppressive and harsh conditions where relegated to the margins of society or even to other ends of the world, with whom the great body of workers in developed society had no relationship at all, or if any, then as yet another cause.

Politics has vanished and in it’s place is a marketplace for legitimization.

The commodity has become the voter themselves, delivered to a consciousness industry made up of parties, public relation firms and other agents of economic power.

Absent from organized opposition, Capital has reshaped society towards it’s own interests. Where the owners of productive assets have increased power and freedom, unchecked by any kind of political contestation, and the masses are subjected, administered, and controlled. Workers are just another economic input, like energy and natural resources, who matter only enough to ensure reliable supply. Capital is spreading poverty, social stratification, environmental degradation and war with impunity, checked only by the economic and natural limits of such outcomes, and able to socialize or transfer the costs even when such limits are exceeded and catastrophe ensues.

To make politics relevant, to challenge and contest the interests of Capital and to represent the interests of the masses we need workers to once again unite in their common interests and make their social power felt.

Yet, workers’ politics is now failing because workers do not identify as workers, and thus any appeal addressed to workers is unlikely to achieve results. As the economy has moved on from the simple model of production that classical language was born in, so must the language of class politics. The workers are no longer direct witnesses to the product of their labour being ripped from their hands and hoarded by the Capitalist. Many people may hate their job, or their boss, but as the production of value is more abstract and remote, they do not feel that their boss is taking anything from them, rather they feel they are being given something, their job and their paycheque, et cetera. It is not in the workplace that the appropriation is felt, but rather after work, when they go home to pay their bills.

We can’t mobilize the masses as workers, but we can mobilize them as Debtors.

Debt is not simply a cause to build awareness and support for, it is the felt condition of the masses, who are struggling to pay their bills, who are frustrated and angry and who demand representation which no mainstream party will give them.

The Time has come for The Debtors’ Party.

Join the initiative to found an International Debtors’ Party. So far, the resources are small, come help us build a movement.

– Facebook group:

– irc channel: #debt on

– wiki:

With your help, much more to  come.

Anybody is Berlin is welcome to come to Stammtisch tonight and say hi, this is in no way an official meeting of the Debtors’ Party, just an informal get together, but no doubt the topic will be present. Stammtisch is at Cafe Buchhandlung, starting at 9 pm.

Debtors’ of The World Unite!

America’s Second Civil War

The War Between the Classes

by Arlen Grossman

OpEdNews (September 02 2011)

There’s class warfare, all right, but it’s my class, the rich class that’s making war, and we’re winning.

– Warren Buffett

It’s hard to pinpoint when the first shot in America’s Second Civil War was fired. People willing to go to battle in order to get ahead of others is a story line that dates back to the dawn of time.

The first American Civil War was a bloody one, with over 600,000 fatalities.   The Second American Civil War is an economic one – The War Between the Classes. But make no mistake about it, people are dying.

Our country seemed to have its economy under reasonable control for several decades (roughly from the 1940s through the mid-1970s). The middle class grew stronger, the disparity between the rich and poor was not extreme, and the economic conditions improved for nearly everyone.

However, the upper classes retained fond memories of those halcyon days prior to The Great Depression and FDR’s detestable social programs. They longed for the opportunity to revisit that golden era.

The War Between the Classes broke out in intensity in the 1970s, and escalated rapidly in the Reagan years.   “Government is the problem”, President Reagan famously said. Translation: deregulate big business, give the rich tax cuts and let social Darwinism run its course. Even Democrats, with their finger in the wind and corporate money in their pockets, stepped deftly aside as the wealthy took an increasingly larger piece of the economic pie.

The gap between the rich and poor widened to historic levels, and by the time George W Bush left office, the disparity between the rich and poor was the widest in our country since the 1920s, and the largest in the developed world.

Corporate America, flushed with cash, figured out the best investment in the world was to donate to political campaigns – tens of thousands of dollars scored millions; millions of dollars reaped billions. Wealthy special interests have ramped up donations to their favorite candidates, with the expectation of favorable laws, tax breaks and subsidies. Republicans and Democrats are dependent on this legalized bribery to win elections.

The last restraints on the wealthy came crashing down with the Citizens United decision by the US Supreme Court in 2010, which blasted open the floodgates of corporate campaign contributions. The Court allowed special interests to give unlimited contributions to political campaigns and influence elections – in effect, shattering the time-honored democratic principle of “one man, one vote”.

The War Between the Classes has pretty much been a one-sided “shock and awe” victory for the rich. Having tasted blood, they will likely never be satisfied. It’s the nature of greed. As to fatalities, think of the thousands who have died from lack of health care, poverty conditions, and fighting wars to protect our business interests overseas.

Here are some of the battlefield numbers:

* The top one percent of taxpayers saw their share of national income rise from ten percent in 1981 to about 24 percent now. The share for the top one-tenth of one percent of households has tripled to over twelve percent during the same period.

* The richest ten percent of Americans received 100 percent of the average income growth in the years 2000 to 2007.

* The richest 400 Americans have more wealth than the nation’s poorest half (150 million Americans).

* The tax rates for top earners ranged between seventy to 91 percent in the years from 1936 to 1980, as the economy hummed along.   From the Reagan years to now, the top tax rate dropped to its present 35 percent and less than half as much after tax breaks and deductions.

* Corporations and the wealthy pay far less taxes than any other developed nation. If you paid even a dollar in US income taxes last year, you paid more than Bank of America, Boeing, General Electric, Exxon-Mobil, Citigroup and many other profitable American corporations.

These numbers clearly point out the winners and losers in the War Between the Classes. Americans don’t like to hear or talk about class warfare. Nonetheless, if one side is on the offense, and the other side doesn’t understand where and from whom the attack is coming, this economic war will remain one-sided.

The 98 or 99 percent of us who are losing America’s Second Civil War will continue to be under assault until we recognize the threat we are facing and figure out how to fight back.

We don’t have the luxury of waiting much longer. It’s the other side that, literally and figuratively, has that luxury.


Arlen Grossman is a writer/blogger in Monterey, California. He blogs politics at, and writes “What’s Your QQ?” (Quotation Quotient), a quotation quiz in the Monterey County Herald and at

Saving the Rich, Losing the Economy

When There’s Nothing Left to Lose

by Paul Craig Roberts

CounterPunch (September 26 2011)

Economic policy in the United States and Europe has failed, and people are suffering.

Economic policy failed for three reasons:  (1) policymakers focused on enabling offshoring corporations to move middle class jobs, and the consumer demand, tax base, GDP, and careers associated with the jobs, to foreign countries, such as China and India, where labor is inexpensive; (2) policymakers permitted financial deregulation that unleashed fraud and debt leverage on a scale previously unimaginable; (3) policymakers responded to the resulting financial crisis by imposing austerity on the population and running the printing press in order to bail out banks and prevent any losses to the banks regardless of the cost to national economies and innocent parties.

Jobs offshoring was made possible because the collapse of the Soviet Union resulted in China and India opening their vast excess supplies of labor to Western exploitation. Pressed by Wall Street for higher profits, US corporations relocated their factories abroad.  Foreign labor working with Western capital, technology, and business know-how is just as productive as US labor. However, the excess supplies of labor (and lower living standards) mean that Indian and Chinese labor can be hired for less than labor’s contribution to the value of output. The difference flows into profits, resulting in capital gains for shareholders and performance bonuses for executives.

As reported by Manufacturing and Technology News (September 20 2011) the Quarterly Census of Employment and Wages reports that in the last ten years, the US lost 54,621 factories, and manufacturing employment fell by five million employees.  Over the decade, the number of larger factories (those employing 1,000 or more employees) declined by forty percent.  US factories employing 500 to 1,000 workers declined by 44 percent;  those employing between 250 and 500 workers declined by 37 percent, and those employing between 100 and 250 workers shrunk by thirty percent.

These losses are net of new start-ups. Not all the losses are due to offshoring. Some are the result of business failures.

US politicians, such as Buddy Roemer, blame the collapse of US manufacturing on Chinese competition and “unfair trade practices”.  However, it is US corporations that move their factories abroad, thus replacing domestic production with imports. Half of US  imports from China consist of the offshored production of US corporations.

The wage differential is substantial. According to the Bureau of Labor Statistics, as of 2009 average hourly take-home pay for US workers was $23.03. Social insurance expenditures add $7.90 to hourly compensation and benefits paid by employers add $2.60 per hour for a total labor compensation cost of $33.53.

In China, as of 2008 total hourly labor cost was $1.36, and India’s is within a few cents of this amount. Thus, a corporation that moves 1,000 jobs to China saves saves $32,000 every hour in labor cost. These savings translate into higher stock prices and executive compensation, not in lower prices for consumers who are left unemployed by the labor arbitrage.

Republican economists blame “high” US wages for  the current high rate of unemployment.  However, US wages are about the lowest in the developed world. They are far below hourly labor cost in Norway ($53.89), Denmark ($49.56), Belgium ($49.40), Austria ($48.04), and Germany ($46.52).  The US might have the world’s largest economy, but its hourly workers rank fourteenth on the list of the best paid. Americans also have a higher unemployment rate. The “headline” rate that the media hypes is 9.1 percent, but this rate does not include any discouraged workers or workers forced into part-time jobs because no full-time jobs are available.

The US government has another unemployment rate (U6) that includes workers who have been too discouraged to seek a job for six months or less.  This unemployment rate is over sixteen percent.  Statistician John Williams ( estimates the unemployment rate when long-term discouraged workers (more than six months) are included. This rate is over 22 percent.

Most emphasis is on the lost manufacturing jobs. However, the high speed Internet has made it possible to offshore many professional service jobs, such as software engineering, Information Technology, research and design. Jobs that comprised ladders of upward mobility for US college graduates have been moved offshore, thus reducing the value to Americans of many university degrees.  Unlike former times, today an increasing number of graduates return home to live with their parents as there are insufficient jobs to support their independent existence.

All the while, the US government allows in each year one million legal immigrants, an unknown number of illegal immigrants, and a large number of foreign workers on H-1B and L-1 work visas. In other words, the policies of the US government maximize the unemployment rate of American citizens.

Republican economists and politicians pretend that this is not the case and that unemployed Americans consist of people too lazy to work who game the welfare system.  Republicans pretend that cutting unemployment benefits and social assistance will force “lazy people who are living off the taxpayers” to go to work.

To deal with the adverse impact on the economy from the loss of jobs and consumer demand from offshoring, Federal Reserve chairman Alan Greenspan lowered interest rates in order to create a real estate boom. Lower interest rates pushed up real estate prices. People refinanced their houses and spent the equity. Construction, furniture and appliance sales boomed.  But unlike previous expansions based on rising real income, this one was based on an increase in consumer indebtedness.

There is a limit to how much debt can increase in relation to income, and when this limit was reached, the bubble popped.

When consumer debt could rise no further, the large fraudulent component in mortgage-backed derivatives and the unreserved swaps (AIG, for example) threatened financial institutions with insolvency and froze the banking system. Banks no longer trusted one another. Cash was hoarded. Treasury Secretary Paulson, browbeat Congress into massive taxpayer loans to financial institutions that functioned as casinos.  The Paulson Bailout (TARP) was large but insignificant compared to the $16.1 trillion (a sum larger than US GDP or national debt) that the Federal Reserve lent to private financial institutions in the US and Europe.

In making these loans, the Federal Reserve violated its own rules. At this point, capitalism ceased to function. The financial institutions were “too big to fail”, and thus taxpayer subsidies took the place of bankruptcy and reorganization.  In a word, the US financial system was socialized as the losses of the American financial institutions were transferred to taxpayers.

European banks were swept up into the financial crisis by their unwitting purchase of the junk financial instruments marketed by Wall Street. The financial junk had been given investment grade rating by the same incompetent agency that recently downgraded US Treasury bonds.

The Europeans had their own bailouts, often with American money (Federal Reserve loans). All the while Europe was brewing an additional crisis of its own. By joining the European Union and (except for the UK) accepting a common European currency, the individual member countries lost the services of their own central banks as creditors.

In the US and UK the two countries’ central banks can print money with which to purchase US and UK debt.  This is not possible for member countries in the EU.

When financial crisis from excessive debt hit the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) their central banks could not print euros in order to buy up their bonds, as the Federal Reserve did with “quantitative easing”. Only the European Central Bank (ECB) can create euros, and it is prevented by charter and treaty from printing euros in order to bail out sovereign debt.

In Europe, as in the US, the driver of economic policy quickly became saving the private banks from losses on their portfolios.  A deal was struck with the socialist government of Greece, which represented the banks and not the Greek people. The ECB would violate its charter and together with the IMF, which would also violate its charter, would lend enough money to the Greek government to avoid default on its sovereign bonds to the private banks that had purchased the bonds.  In return for the ECB and IMF loans and in order to raise the money to repay them, the Greek government had to agree to sell to private investors the national lottery, Greece’s ports and municipal water systems, a string of islands that are a national preserve, and in addition to impose a brutal austerity on the Greek people by lowering wages, cutting social benefits and pensions, raising taxes, and laying off or firing government workers.

In other words, the Greek population is to be sacrificed to a small handful of foreign banks in Germany, France and the Netherlands.

The Greek people, unlike “their” socialist government, did not regard this as a good deal. They have been in the streets ever since.

Jean-Claude Trichet, head of the ECB, said that the austerity imposed on Greece was a first step.  If Greece did not deliver on the deal, the next step was for the EU to take over Greece’s political sovereignty, make its budget, decide its taxation, decide its expenditures and from this process squeeze out enough from Greeks to repay the ECB and IMF for lending Greece the money to pay the private banks.

In other words, Europe under the EU and Jean-Claude Trichet is a return to the most extreme form of feudalism in which a handful of rich are pampered at the expense of everyone else.

This is what economic policy in the West has become – a tool of the wealthy used to enrich themselves by spreading poverty among the rest of the population.

On September 21 the Federal Reserve announced a modified QE 3. The Federal Reserve announced that the bank would purchase $400 billion of long-term Treasury bonds over the next nine months in an effort to drive long-term US interest rates even further below the rate of inflation, thus maximizing the negative rate of return on the purchase of long-term Treasury bonds. The Federal Reserve officials say that this will lower mortgage rates by a few basis points and renew the housing market.

The officials say that QE 3, unlike its predecessors, will not result in the Federal Reserve printing more dollars in order to monetize US debt.  Instead, the central bank will raise money for the bond purchases by selling holdings of short-term debt. Apparently, the Federal Reserve believes it can do this without raising short-term interest rates, because back during the recent debt-ceiling-government-shutdown-crisis, the Federal Reserve promised banks that it would keep the short-term interest rate (essentially zero) constant for two years.

The Fed’s new policy will do far more harm than good.  Interest rates are already negative. To make them more so will have no positive effect. People aren’t buying houses because interest rates are too high, but because they are either unemployed or worried about their jobs and do not see a recovering economy.

Already insurance companies can make no money on their investments. Consequently, they are unable to build their reserves against claims. Their only alternative is to raise their premiums.  The cost of a homeowner’s policy will go up by more than the cost of a mortgage will decline. The cost of health insurance will go up. The cost of car insurance will rise. The Federal Reserve’s newly announced policy will impose more costs on the economy than it will reduce.

In addition, in America today savings earn nothing.  Indeed, they produce an ongoing loss as the interest rate is below the inflation rate. The Federal Reserve has interest rates so low that only professionals who are playing arbitrage with algorithm-programmed computer models can make money. The typical saver and investor can get nothing on bank CDs, money market funds, municipal and government bonds.  Only high risk debt, such as Greek and Spanish bonds, pay an interest rate that is higher than inflation.

For four years interest rates, when properly measured, have been negative. Americans are getting by, maintaining living standards, by consuming their capital. Even those with a cushion are eating their seed corn. The path that the US economy is on means that the number of Americans without resources to sustain them will be rising. Considering the extraordinary political incompetence of the Democratic Party, the right wing of the Republican Party, which is committed to eliminating income support programs, could find itself in power. If the right-wing Republicans implement their program, the US will be beset with political and social instability.  As Gerald Celente says, “when people have  have nothing left to lose, they lose it”.


Paul Craig Roberts was Assistant Secretary of the Treasury for Economic Policy and Associate Editor of the Wall Street Journal. His latest book is How the Economy Was Lost (2010).

Peak Oil: Laherrere responds to Daniel Yergin

by Matthieu Auzanneau, Le Monde {1}

Translated from French by Natasha

Club Orlov (September 24 2011)

Jean Laherrere, co-founder of the Association for the Study of Peak Oil, a retired expert from Total, picks apart the latest analysis from the champion of optimists, the American Daniel Yergin.

Daniel Yergin is back. The author of The Prize (1991), an oft-cited history of oil which glorified the industry, last week has published an editorial in The Wall Street Journal {2}, in advance of the release of his latest work, The Quest (2011) .

Daniel Yergin is the vice-president of IHS, a powerful economic intelligence agency considered to be very close to the major American oil companies. The arguments this first-rank analyst develops in the Wall Street Journal is a long-awaited counterattack on the proliferation of alarming forecasts for the future of global oil production.

Daniel Yergin admits that success in satisfying future demand for petroleum constitutes a “challenge”. But he has severe doubts about the credibility of the members of ASPO, the Association for the Study of Peak Oil {3}, who claim that this battle has already been lost, due to lack of sufficient oil reserves that remain to be exploited.

In his portrayal of the current situation, the vice-president of IHS omits a key fact: conventional oil production (the classical liquid oil which comprises eighty percent of the current crude oil supply) reached its absolute peak in 2006. The date of 2006 was predicted back in 1998 by Colin Campbell {4} and Jean Laherrere {5}, two petroleum geologists who founded ASPO.

And so I have asked Jean Laherrere, the old chief of exploration technology at Total, to react to the key statements contained in the optimistic analysis provied by Daniel Yergin.

Daniel Yergin: “Only from 2007 to 2009, for each barrel of oil produced in the world, 1.6 barrels of new discoveries were added”.

Jean Laherrere: Daniel Yergin cites official, political estimates published in the Oil & Gas Journal and by BP. According to these figures, global reserves were at 1253 billion barrels (Gb) in 2007 and at 1333 Gb in 2009, after the addition of 72 Gb of extra-heavy Orinoco oil discovered in Venezuela … in the late 1930s. What is, let us say, astounding about this, is that Mr Yergin ignores the figures from his own agency, IHS.

These figures, here they are. (They are supposed to be highly confidential, but they have been circulated among us petroleum geologists.) Note that they do not include the extra-heavy oil.

2007 10.0 Gb discovered, 26.0 Gb produced
2008 13.0 Gb discovered, 26.3 Gb produced
2009 12.4 Gb discovered, 25.8 Gb produced

Total 35.4 Gb discovered, 78.1 Gb produced

The reality is that for each barrel produced less than 0.5 barrels have been discovered, and not 1.6! Oil continues to be consumed faster than it is discovered. This situation has lasted for a quarter of a century now.

Daniel Yergin: “Example [of revolutionary technology]: the ‘digital oil field’, which makes use of sensors distributed throughout the oil field, to improve the data and the communications between it and the technology centers of companies. If it came into widespread use, this technology can could help exploit an enormous quantity of additional oil everywhere across the world – according to one estimate, this represents 125 billion barrels of additional reserves, equal to the actual estimated reserves of Iraq.”

Jean Laherrere: It is at present quite fashionable to talk of the “digital oil field” to impress investors. But to this day I have not come across any mature field that has significantly increased its reserves by the use of this technology. To pretend to be able to grow reserves by 125 Mb [sic] thanks to this technology amounts to nothing more than wishful thinking, and does not stand up to any serious study.

How does one increase the size of recoverable reserves of oil fields? Well, first of all, there are secondary recovery techniques: the use of water or gas injection to maintain field pressure. This is a practice that is in actual use from the very beginning on all new oil fields.

Tertiary recovery (in English, EOR, for “enhanced oil recovery”) is used to modify the properties of the liquids: thermal methods (by using steam), chemical, or injection of oil-soluble gases such as carbon dioxide. It’s in the United States that EOR is most developed. And yet the number of EOR projects has gone down from about 500 in 1986 to only 200 in 2010. They yielded 600,000 barrels per day (bpd) in 1986. From 1992 to 2000, they have remained level at around 750,000 bpd. In 2010, they produced no more than 650,000 bpd, and this despite high oil prices and the generous easing of environmental regulations of the Bush era.

Technology can do nothing to modify the geology of an oil reservoir! It just allows it to be produced faster, thereby accelerating the decline of mature fields … Here’s an example: the very pronounced production declines at the giant Mexican Cantarell field, which made use of massive nitrogen injections.

The rate of recovery of a field depends above all on the properties of the field and the liquid it contains. This rate can be as high as eighty percent for sandstone or very porous limestone, and might not exceed one percent for a tight reservoir with isolated pockets.

Daniel Yergin: “A study produced by the US Geological Survey has uncovered evidence that 86% of oil reserves in the United States do not correspond to the what was estimated at the moment of discovery of the fields, but to revisions and additions made after subsequent development”.

Jean Laherrere: Evidence that the proven reserves of the United States do not increase: over the last decade, according to the US Department of Energy, the amount of upward revisions of US reserves is roughly equal to the amount of downward revisions [pdf, see column 2: “net revisions” {6}].

What allows Mr Yergin to believe anything different? In the United States, reserves are reported according to the rules imposed by the SEC, the policeman of Wall Street. From 1977 to 2010, these rules required oil companies to report as “proved” only those reserves that were directly accessible by the wells already in production. The SEC prohibited the reporting of reserves called “probable” and found in the vicinity of these wells, even if the probability was very high.

This misleading rule was designed to protect the bankers who, if a producer went bankrupt, could decide to seize only the producing wells. This very narrow definition was anything but reliable, because it led to an underestimation of the actual reserves of American oil fields at the beginning of production, and their subsequent systematic upward re-evaluation.

Take, for example, the Kern River field, located in California. Since 2000, production from this old field has declined steadily. However, the amount of reserves reported for Kern River rose from 318 million barrels in 2000 to 542 million barrels in 2010. This amazing growth is due to the fact that between 2000 and 2010, 560 new wells were put into production (but failed to halt the decline of Kern River)!

Only the addition of both proven and probable reserves allows a field to be evaluated correctly. This method, called EPS, is now used everywhere the world – I actually participated in its development in 1997. Everywhere … except in the United States. The growth of US reserves which Mr Yergin celebrates owes nothing to the advancement of technology: its cause is the incorrect method advocated by the SEC until 2010.

Moreover, since 2010, the SEC has lurched from one extreme to another. It now allows estimates of proved reserves not only from producing wells, but according to an evaluation model of the entire field that companies can keep secret! This new method supports all kinds of excesses and abuses, which have been denounced in the New York Times {7} in particular.

This new SEC rule bore fruit in the form of the considerable growth of US reserves of shale gas. Again, this has nothing to do with the implementation of technologies that are supposedly “new”, but which in reality have been perfected thirty years ago, such as horizontal drilling and hydraulic fracturing of rocks. [Editor’s note: land speculation fueled by questionable claims for reserves of shale gas is going to feed a large bubble in the US, according to an investigation by Ian Urbina of the New York Times {8}, who is also the author of the article cited above.]

Daniel Yergin lies on reserves, just as Greece has lied about its deficits. Warning: in the world of energy, there are no rules – except to make money, and there are no referees and umpires!

Finally, a little background. In 2005, Daniel Yergin published an editorial in the Washington Post {9} in which he was already mocking the pessimists, and in which he predicted that by 2010 global oil production capacity could increase by sixteen million barrels per day from from 85 to 101 million barrels per day. Since then, global production capacity remained on a plateau of about 86 million barrels per day … You ought to go back and re-read yourself, Mr Yergin.

[Daniel Yergin’s editorial has elicited other strong reactions among those who support the hypothesis of an imminent decline in the global production of liquid fuels. These include, notably, an on-line article by Professor Kjell Aleklett {10}, president of ASPO International.

In 2008, Glenn Morton, an American geophysicist and investor, published what he presented as an inventory {11} of the optimistic but incorrect predictions about the state of the oil market provided over the years by Daniel Yergin and IHS.]













Endgame for the Euro

by Dimitri B Papadimitriou

The Huffington Post (September 18 2011)

The grand experiment of a unified Europe with a shared common currency has entered its endgame. If the current trajectory continues, the disintegration of the euro is inevitable. It’s certainly not too early to ask: What would a post-euro Europe look like … and what are the alternatives?

Athens is, of course, at the center of the vortex. The newest ‘rescue’ plan accepted by Greece certainly won’t save the system, though, and it won’t save Greece from a sovereign default. The bailout conditions demanded by the troika that holds the purse strings – the International Monetary Fund, the European Central Bank, and the European Union – include a review, now delayed, before it will release the next payment. But the late September review will reveal that Greece has no hope of meeting its targets.

EU economy commissioner Olli Rehn has announced that the Greek government’s latest measures “will go a long way in” towards resolution, and the newest European Commission taskforce in Athens, sent to work on another rescue package, is reportedly upbeat and “impressed”. Meanwhile, the ECB is keeping the show on the road by making even more austerity demands.

Despite this climate of denial, the tottering Greek government is going to fall and – Presto! – a complete default will follow. As the results cascade across the continent, credit ratings, interest rates, and political fallout will quickly become unworkable for both stronger nations and weaker ones.

The collapse of the euro project will break in one of two ways. Most likely, and least desirable, is that nations will leave the euro in a coordinated dissolution which might ideally resemble an amicable divorce. As with most divorces, it would leave all the participants financially worse off. Wealthier countries would be back to the kinds of tariffs, transaction costs, and immobile labor and capital that inspired the euro in the first place; poorer nations could kiss their subsidies, explicit and implicit, good-bye.

Less likely, but more desirable, would be a major economic restructuring leading towards increased European consolidation. The EFSF – the European Financial Stability Facility, which is the rescue fund of the European Central Bank – has access to 440 billion euros. Thus far, the real beneficiaries of the EU bailouts have been the banks that hold all the debt (you haven’t seen this movie before, have you?).

But with some restructuring and alteration of regulations, that wouldn’t need to be the case. The doomed rescue plans we’re seeing don’t address the central problem: Countries with very different economies are yoked to the same currency. Nations like Greece aren’t positioned to compete with countries that are more productive, like Germany, or have lower production costs, like Latvia. Any workable plan to save the euro has to address those differences.

The best structural changes would even out trade imbalances by “refluxing” the surpluses of countries such as Germany, France, and the Netherlands in to deficit countries by, for example, investing euros in them. Germany did this with the former East Germany following reunification. This kind of mechanism could be set up very quickly under the EFSF if it had a deeper well to draw from, probably one trillion euros.

The European Parliament, led by its premiere leaders, Angela Merkel and Nicolas Sarkozy, could authorize the EFSF to take over the entire sovereign debt of the expanding periphery, which, in addition to Greece, would include Ireland, Portugal, Spain, and possibly Italy. It’s possible that the EU will eventually take this path, or a similar one, in recognition of the value of maintaining the euro zone.

The current approach is unsustainable, with French and German taxpayers furious about footing the bill, and residents in the peripheral nations angrily resisting cutbacks. And it’s remarkable that Merkel has not already recognized that, as the EU’s largest net exporter, Germany’s insistence on fiscal austerity for its many troubled neighbors is a losing proposition.

Ideally, the EFSF would ultimately be responsible to the elected European Parliament. The arrangement could replicate, in some ways, the US Treasury’s relationship with the states, but with more control by Europe’s nations. Yes, the European Parliament has long engaged in payments to poorer nations, but its total budget has remained below one percent of GDP, which is clearly too small to work.

The founding of the EU was a political venture propelled by the ambitious heads of the two leading continental powers, Germany and France. Their creation grew into a promising economic laboratory. It’s ironic that it is the absence of a true political union – an entity with a unified fiscal policy as well as a unified currency – might be the cause of its death.


Dimitri B Papadimitriou is president of the Levy Economics Institute of Bard College and Executive Vice-President of Bard College.