Bringing It Down To Earth

by John Michael Greer

The Archdruid Report (November 23 2011)

We’ve covered a lot of ground in the last two months or so, and at this point I want to summarize the territory thus explored and link it back into the core of this blog’s project – the search for a realistic understanding of the troubled future ahead of us, and a meaningful way to respond to it. One crucial part of that response, I’ve suggested, relates to that tangled realm where consciousness meets the unconscious drives that shape so much of our experience of the world: a realm that contemporary thought addresses, however incompletely, through the science of psychology, and that the older lore of magic approaches in a much more comprehensive and potent way.

That latter lore is only one part of the toolkit we’re going to need to deal with the storms to come, but it’s an important part, and it’s well suited to deal with issues most of today’s proposals for the future leave unanswered. Much more often than not, peak oil, anthropogenic climate change, and most of the other symptoms of our civilization’s head-on collision with planetary limits to growth are treated as technical problems that can be addressed with technical solutions. Bookshelves around the world have accordingly been piled to the breaking point with proposed technical solutions. Some of them are basically handwaving, others are attempts to shill for one or another industry or political movement, but a fair number are serious proposals that could do at least some good if they were put into effect.

The difficulty, as I’ve discussed in previous posts, is that none of these plans are being put into effect, and there’s no good reason to think that any of them will be. Quite the contrary: by and large, modern industrial civilization is moving the other way, following the same trajectory of overshoot that has terminated the history of so many other civilizations. What’s more, we’re not being dragged down that road, or forced along it by the pressure of circumstances; by and large, we’re going that way with whoops of enthusiasm. When the United States abandoned its last real attempt to head in the other direction, in the early 1980s, the collective sigh of relief must have been audible on the Moon, and anyone who didn’t join in the stampede along the road to overshoot – and I can speak here from three decades of personal experience – came in for a spectrum of nasty responses, ranging from spluttering abuse to scornful pity, from pretty much anyone else who noticed.

That is to say, it’s not the technical dimension of the predicament of industrial society that matters most just now. It’s the inner dimension, the murky realm of nonrational factors that keep our civilization from doing anything that doesn’t make the situation worse, that must be faced if anything constructive is going to happen at all. In a civilization that’s spent the last three and a half centuries trying to pretend that this inner dimension doesn’t matter, it was a foregone conclusion that most people’s inner lives would end up an unholy mess. It doesn’t help matters at all that plenty of political, economic, cultural, and religious interest groups, some of them with prodigious resources at their beck, have put a very large fraction of those resources into schemes to manipulate people’s minds using any number of nonrational hot buttons, in order to maximize their own wealth and power.

An effective response to this predicament, as I’ve proposed here, involves several unfamiliar steps. The first of them is to get out from under the collective thinking of our society and the manufactured popular pseudoculture that holds that collective thinking pinned firmly in place in the minds of most people, so you can make your own decisions about what goes into your mind, instead of letting huge corporations ante up millions of dollars to choose for you. (It still amazes me how many people never wonder why what appears on TV is called “programming”.) This is a challenging task, made even more so by the blank incomprehension and active hostility of those who are still down there in the belly of the beast, but the payoff is worth it. The problem with thinking thoughts that you’re told to think by others, after all, is that the people who tell you what to think are doing it for their own advantage, not for yours; think your own thoughts, and doors open before you that the thoughts you’ve been told to think are meant to keep tightly shut.

The second step is to learn how to get along with the nonrational side of your own inner life. There are any number of ways to do that; various schools of psychology, philosophy, religion and magic all have their own toolkits for this kind of work, and what appeals to one person is certain to repel somebody else. I’ve discussed a handful of useful mental tools, drawn mostly from one tradition in which I’ve had some training, and they may be enough for those readers who don’t feel any attraction to the more intensive work on offer from the schools just mentioned. Those who do feel such an attraction can find more detailed guidance in whatever tradition they choose to study and, more importantly, to practice.

These two steps provide the neglected mental dimension that’s so often missing in attempts to deal with the future bearing down on us. Without them, with weary inevitability, proposals for change end up gathering dust on the overloaded bookshelves already mentioned, if they don’t simply mutate into yet another excuse for business as usual. Einstein’s famous dictum – “We can’t solve problems using the same kind of thinking we used when we created them” – is true, but it’s only part of the whole picture. You can change your thinking all you like, but if you don’t deal with the nonrational factors that drove your previous thinking, your brand new thoughts are going to head in the same old directions. Only if you distance yourself from the thaumaturgy that predetermines so much human thinking, and then come to grips with the mental automatisms and unthinking reactions within yourself, that you can pick the locks on what Blake called “the mind-forg’d manacles” and choose your own path.

Once all this is done, though, there’s a third step, which consists of bringing the work you’ve done down from the realm of mental phenomena into the realm of everyday life. That’s an essential element of magical practice, by the way; it’s a core teaching of the old occult philosophies that your magical work, however deep it may reach into the innermost realms of consciousness, has to be brought all the way down to earth, and anchored right here in the world of matter by an appropriate action on what occultists like to call the material plane. Put more simply, in magic as in anything else, it’s necessary to walk your talk, or the talk dries up into excuses and goes rolling away like tumbleweeds in the wind.

One question that needs careful consideration, though, is how to walk the talk we’ve been discussing over these last few months – or, to put the thing in more explicitly magical terms, how to choose an appropriate anchor for the movement of consciousness I’ve tried to set in motion in the last two months of blog posts. The careful consideration is essential here for several reasons, but the most important of them is that contemporary culture is well stocked with bad advice on this subject.

Thus it’s a very common notion, when the issue of walking your talk comes up, to think that it’s enough to engage in activism – in other words, to walk your talk by insisting that the government, or the big corporations, or other people in general, get out and walk theirs. Activism has its place, to be sure, and potentially an important one, but activism only matters if the people who are doing it have already followed Gandhi’s advice and become the change that they wish to see in the world. When that first necessary step doesn’t happen, activism fails. Those of my readers who have watched the self-destruction of the climate change movement have already seen how far activism gets when the activists show no signs of accepting the limits that they hope to impose on others.

Beyond that, there’s another problem with activism in this context, which is that it amounts to demanding that somebody else do something. There are times when this is an entirely appropriate thing to do – when, for example, it’s precisely the actions or inactions of a government or a corporation that need to be addressed. Not all the difficulties that beset a modern society come from such causes, though, and when a problem is actually being caused by habits of thought and action that are shared by everyone – even when some people engage in them more, or more profitably, than others – trying to make a handful of the worst offenders take the blame for everybody is not an effective strategy. Nor is it any more helpful to insist that a few people, however rich and powerful they may be, are to blame for changes that have their origin in factors entirely outside of human control.

The Occupy Wall Street protests that are still struggling gamely on as I write this, despite a rising tide of police repression, have fallen into both these latter traps. Though the culture of larceny that defines Wall Street these days amply deserves criticism – not to mention the legal charges of racketeering and fraud that the Obama administration has steadfastly refused to file, even in the cases that most stridently call for it – the misbehavior of bankers and stockbrokers doesn’t actually have that much to do with the decline of the American economy that has deprived a great many of the OWS protesters of the chance to earn a living. Central to that decline is, first, the unraveling of the American global hegemony that, until recently, funnelled some 25% of the world’s energy resources and 33% of its raw materials and industrial product to the five percent of humanity that lives in the United States; and second, the ongoing depletion of those same energy resources and raw materials, which is ending the abundance that made the American lifestyle of the twentieth century possible in the first place.

No amount of protesting is going to refill the once vast and now mostly depleted reserves of cheap oil and other resources that gave America its age of extravagance, nor is protest going to do anything to stop the decline of America as a world power or the rise of competing powers. Blaming the results of both these processes on the manifold abuses of Wall Street is not going to help the situation noticeably – though seeing bankers and stockbrokers doing perp walks through the streets of Manhattan might do a little to restore public faith in the rule of law, which has taken quite a beating in recent years. Most Americans, ignoring these realities, still insist they are entitled to a standard of living that neither their country’s faltering position in the world, nor the hard facts of physics and geology, will enable them to have for much longer, or get back if they’ve already lost it. Until that sense of entitlement gives way to a more realistic set of expectations, nothing is going to solve the problem Americans think they have – that of finding a way to hang onto hopelessly unsustainable lifestyles – and nothing is going to be done to deal with the predicament Americans actually face – that of dealing with the end of abundance in a way that doesn’t finish shredding the already frayed fabric of our society.

Any attempt to walk the talk that we’ve been discussing here, in other words, has to begin with the individual, and has to start with the acceptance of a very significantly lowered standard of living. To return to an acronym I’ve proposed here already, any response to the future that doesn’t involve using LESSLess Energy, Stuff, and Stimulation – simply isn’t a serious response to the downside of the industrial age. The toolkit of the Seventies organic gardening and appropriate tech movements, which I’ve discussed here at some length, is among many other things a very effective way of responding to the need to use LESS in a humane and creative manner.

By growing a garden and raising chickens in your backyard instead of buying packaged and processed vegetables and eggs that are shipped halfway across the continent, conserving energy relentlessly and getting as much as you can from local renewable sources, and sharply downscaling the pursuit of material excess in favor of a life that’s rich in experiences, relationships, and meaning, it’s possible to get by very comfortably on a small fraction of the energy, stuff, and stimulation that most Americans think they need. This isn’t simply a good thing on abstract grounds, though it is that. On the individual scale, such steps provide a margin of safety in hard times that the ordinary American lifestyle simply doesn’t have; on the community scale, those who embrace such steps are positioned to act as role models and mentors for those who decide to make the same changes later on, when the advantages of doing so are likely to be much more evident; on the wider scale, even a very modest movement in this direction, amidst the widening failure of the political and economic mainstream to do anything worth noticing in the face of the widening crisis of our time, might just possibly fill the role of a seed crystal around which a much larger movement could take shape.

Seen from another perspective, though, these practical steps also have a magical dimension: they serve to bring the changes in consciousness we’ve been discussing for the last two months all the way down into the world of everyday life. To complete the task of breaking away from the murky thinking and the tangled nonrational drives that dominate contemporary life in today’s America, it’s necessary to break away from the lifestyles and everyday choices that are produced by that thinking and those drives. Mind you, the same equation works the other way around: to make the break away from lifestyles that demand energy and resource flows we can’t count on getting for much longer – and making that break is perhaps the most essential task of the decade or so immediately before us – it’s going to be necessary to turn away from the thinking patterns and the unmentioned and usually unnoticed passions that make those lifestyles seem to make sense.

The recognition that these two transformations, the outer and the inner, work in parallel and have to be carried out together is the missing piece that the sustainability movements of the Seventies never quite caught. Significant steps were taken toward that discovery; books such as Gregory Bateson’s Mind and Nature (1979) and E F Schumacher’s A Guide For The Perplexed (1977) lay out much of the groundwork from which an analysis of the sort I’ve been suggesting in these essays could have been built. Some of the less intellectually vacuous movements in the alternative spirituality scene of the time were moving in the same direction from the other side of the equation. Still, it never quite came together; the engineers were too dismissive of the occultists, the occultists were too suspicious of the engineers, and when the Reagan administration came into power and hit the entire movement at its most vulnerable point – the flows of government and foundation grant money on which nearly all of it, appropriate tech engineers and New Age theorists alike, had become fatally dependent – the chance at that recognition went by the boards.

That could happen again. I’ve suggested more than once that the troubles looming ahead of us in the near term may well open a window of opportunity for the same kinds of effort toward sustainability that we had, and then lost, in the wake of the energy crises of the Seventies. If something of the sort does happen, once the immediate crisis is out of the way, there will inevitably be a backlash, and that backlash will likely wield the same tools of thaumaturgy that were turned on the appropriate tech movement in the early 1980s with devastating effect. Good intentions and idealism, it bears remembering, are not an adequate safeguard against systematic manipulation of the mass mind, especially when that manipulation moves in parallel with the desperate craving of a great many Americans to have the lifestyles they think they deserve and ought to get.

Meeting a challenge on that scale is a tall order. Still, any movement faced with a backlash of that kind can accept its short term losses, renew its commitments to its values and vision, keep on going straight through the initial waves of negative publicity, and carve out a niche from which it can’t be dislodged, and pursue a long-range strategy, knowing that the tide will eventually turn its way. With a few worthy exceptions, that didn’t happen in the twilight years of the early Eighties, but many other movements of many kinds have done it, and a noticeable number of them have passed through that stage and gone on to accomplish their goals. Whether green wizardry or the broader peak oil movement reaches that last milestone is up to the future; for the time being, though, while it’s vital that we be ready to respond if a window of opportunity does open for us, it’s even more vital that when the backlash comes, as the Who put it, we won’t get fooled again.


John Michael Greer is the Grand Archdruid of the Ancient Order of Druids in America {1} 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 {2}, 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.




Is Capitalism in crisis?

by Thomas H Greco, Junior

Beyond Money (November 26 2011)

One of my correspondents recently alerted me to a review of David Harvey’s book, The Enigma of Capital, and the Crises of Capitalism (2010). I’ve not seen the book, but if the review is a faithful description, the book seems to be well worth reading.

I’m not inclined to frame my analyses and prescriptions in terms of competing ideologies because that leads to immediate resistance by the true believers on one side or another. Rather, we need to encourage people to think outside of their comfortable boxes by pointing out implicit assumptions and evident dysfunctions, and suggesting structural as well as policy changes that show promise of providing better outcomes.

Of course, what constitutes a better outcome will always be a point of disagreement based on the fundamental values, attitudes, and beliefs that different segments of society hold dear (for example, the one percent versus the 99% that the Occupy movement has been highlighting). Besides that, our desires and expectations must ultimately adjust to the reality of our planetary limits to physical growth.

Based on the review, the points that I may agree or disagree with Harvey about are inserted in red in the review below.

My comments are enclosed in square brackets, [comment].

The Enigma of Capital, and the Crises of Capitalism (2010) by David Harvey

Review by Andrew Gamble (April 30 2010)

Andrew Mellon, the US Treasury Secretary during the Great Crash of 1929 and one of America’s richest men, observed that in a crisis assets return to their rightful owners. Nothing much has changed. As the present crisis has mutated from a banking crisis to a fiscal crisis and a sovereign debt crisis, bonuses continue to be paid, while the people of Greece and Iceland suffer huge cuts in jobs and services.

As the head of Citibank helpfully pointed out, “Countries cannot disappear. You always know where to find them.” Once the bubbles are burst, expectations about asset values are dashed, optimism gives way to despair, and wealth is ruthlessly redistributed. Capitalism survives by purging itself of debt and loading the costs of adjustment on the weak and the poor.

[I agree, but something needs to be said about HOW it purges itself of debt. We’ve seen very clearly in this latest cycle how the capitalists have come away whole by pushing the debt off onto the public sector by means of government bailouts. That has caused severe fiscal (budgetary) problems for governments, which now are pressured to cut spending. That is where the weak and the poor (including the “middle class”) get fleeced and sacrificed because the cuts are typically made in social spending and programs that promote the common good.]

For David Harvey, this is the latest of the great structural crises which have punctuated the development of capitalism and which signify that major limits have been reached to further growth. Crises on this view are inherent in capitalism itself, and the means by which it renews itself. Only a periodic clear-out of debt and unproductive activities creates the basis for a further leap forward.

Harvey is less interested in the detail of how the 2007 and 2008 crisis unfolded than in understanding it as a manifestation of how capitalism works. Over the last two decades, he has become a leading exponent of classical Marxist political economy, his work known for its exceptional clarity and for integrating spatial categories into the theory of capital accumulation.

Capitalism in the last 200 years has proved itself by far the most dynamic and productive economic system known to history, but the wealth comes at a price, both for human beings and increasingly for the natural environment.

Periodically, capitalism over-expands and overshoots, encountering limits it cannot immediately transcend. This is a system which must keep expanding by at least three per cent a year. What drives it is the hope of profit, and this impulse comes to shape all social relations as well as nature. During booms, capital accumulates very fast, but the amount of surplus generated becomes harder and harder to absorb. The investments that have been made in the boom fix capital in all sorts of ways, in buildings, cities, regions and countries, as well as in labour forces and ways of organising production.

After a time many of these past investments no longer yield a high return and sometimes no return at all. This is what precipitates the crisis. It may take the form of a profits squeeze, caused by militant labour wresting gains from capital, or by factors depressing the rate of profit, or by too little demand. Harvey argues that the present crisis is particularly hard to resolve because it comes after a long period in which real incomes in the US have stagnated, while the wealth of the property-owning elite has soared.

The gap between what labour was earning and what it would spend was covered by credit. The average debt of per household, including mortgage repayments, was $40,000 in 1980. By 2007 it was $130,000. Getting this debt down and restarting the economy is a huge task.

[I too have been preaching that the limits to growth have been reached, and yes, however one might choose to characterize an economic system (capitalist, socialist, or otherwise), there must be a periodic “clear[ing]-out of debt and unproductive activities”, for the system to maintain its vitality, but not necessarily to make way for further growth.]

[I’m wondering if Harvey’s book adequately explains the phenomenon of “expansion and overshoot”, and whether or not that would also occur under his conception of a alternative non-Capitalist system. I’m also wondering about the basis for his statement that, “This is a system which must keep expanding by at least three per cent a year”. I’ve seen estimates that run closer to six per cent. My own belief is that the proximate driver of continual economic growth is the compounding of interest that is a fundamental feature of our global monetary system, and that the surplus that is created by the economy goes largely into capital concentration and profit-seeking reinvestment, rather than to increased and more equitable consumption. Thus, we see starvation and want amidst plenty.]

Harvey is pessimistic that growth can be restarted without the infliction of quite unimaginable hardships on the many of the world’s poorest people. Capitalism survives by socialising losses and distributing gains to private hands. Harvey devotes a large part of his argument to show how this is done through the close ties of the state and finance. He calls it the state-finance nexus.

[Yes, this is an increasingly obvious point. I’m glad to see that Harvey is highlighting the “state-finance nexus”. I trace that back to the founding of the Bank of England in 1694, which established the pattern of central banking and government-banking collusion that has since spread around the world and culminated in a rather monolithic regime. But there are cracks beginning to form.]

This is not a conspiracy: both sides of the relationship need one another and support one another. There are frictions and conflicts, but in the end they work together because this is the only system anyone knows or thinks can be made to work. Michael Bloomberg, as Mayor of New York, commissioned a report which declared that excessive regulation in the US was threatening the future of the financial sector in New York.

The financial crash of 2008 destroyed the credibility of the financial growth model put in place after the last great capitalist crisis in the 1970s. It has also, as Harvey notes, put a question-mark over the continuance of US hegemony, because of the shift in the balance of the global economy towards the rising powers of India and China.

He thinks that the accumulated rigidities over the last cycle have become so great that only a very fundamental restructuring can restore the basis for renewed economic growth. But the pressure for an early return to business as usual are very great, threatening an early return of credit and debt as the only way to fuel the economy, and the eruption of another crisis in a few years.

Harvey argues that each major capitalist crisis has been worse than the last one, and more difficult to surmount. He accepts that capitalism, with all its resilience and inventiveness, is quite capable of overcoming this crisis too; but he is sceptical, and believes that this is the moment that a revived anti-capitalist movement can seize the opportunity to put forward a realistic alternative to capitalism as a way of organising the economy.

[Yes, it is evident that each successive cycle is more extreme than the last. The financial system based on interest-bearing debt is shaking itself apart.]

[It seems odd that he attributes “resilience and inventiveness” to capitalism. These are human qualities that might thrive in a variety of circumstances. The question is how, specifically, to support them. ]

This is perhaps where the argument is least convincing. The anti-capitalist left is fragmented and not particularly numerous. Radical political responses during previous capitalist crises have often favoured the right. The rise of China and India, both of which have continued to grow through the recession, suggests that the fundamental shift in the balance of the global economy is only just beginning, and if it continues is likely to provide huge potential for growth and absorption of surplus, provided certain political conditions are met.

This will not be easy but is certainly possible. Marx thought that no social order ever perishes before all the productive forces for which there is room in it have developed. On the evidence Harvey himself provides, capitalism still has a long way to go before that is the case, and no gravediggers are in sight.

[What are the physical limits to the application of those “productive forces?” It is evident that the masses of India and China cannot possibly achieve the levels of consumption and way of living that have prevailed in the West. The emphasis must shift from capital accumulation and increasing consumption to more equitable distribution and better quality of life for all.]

But this book is a welcome addition to the literature on the crisis. It provides a lucid and penetrating account of how the power of capital shapes our world, and sets out the case for a new radicalism and a vision of alternatives. What we need, he argues, is not just a new world but a new communism, following the failure of the old – although he does accept ruefully that using “communist” as a political label may not bring instant success in the United States.

[I guess we will need to read the book to see what Harvey has to propose in making the “case for a new radicalism and a vision of alternatives”.]


Andrew Gamble is Professor of Politics at the University of Cambridge and author of The Spectre at the Feast (Palgrave Macmillan, 2009)

[Annotated comments by Thomas H Greco, Junior.]

Police State

#OWS, Other Crackdowns Part of National, Coordinated Effort

Bloomberg Defies Court Order to Let Protestors Back into Zuccotti Park

Update: Judge Rules in Favor of City

Naked Capitalism (November 15 2011)

The crackdowns on the Occupations around the US are as ugly as they seem.

The area around Zuccotti Park was subject last night to a 9/11 level lockdown over peaceful, lawful protests by a small number of people. No credible case has been made by the officialdom that the protestors had violated any laws. Martial law level restrictions were in place. Subways were shut down. Local residents were not allowed to leave their buildings. People were allowed into the area only if they showed ID with an address in the neighborhood. Media access was limited to those with official press credentials, which is almost certainly a small minority of those who wanted to cover the crackdown (the Times’ Media Decoder blog says that journalists are describing the tactics, as we did, as a media blackout {1}). Moreover, reading the various news stories, it appears they were kept well away from the actual confrontation (for instance, the reported tear gassing of the Occupiers in what had been the kitchen, as well as separate accounts of the use of pepper spray and batons). News helicopters were forced to land. As of 10 am, reader Wentworth reported that police helicopters were out in force buzzing lower Manhattan.

Gregg Levine tells us {2}, based on a BBC interview of Mayor Quan of Oakland {3}, that as some readers and this blogger speculated last night, the eighteen police action was a national, coordinated effort. This is a more serious development that one might imagine. Reader Richard Kline has pointed out that one of the de facto protections of American freedoms is that policing is local, accountable to elected officials at a level of government where voters matter.

National coordination vitiates the notion that policing is responsive to and accountable to the governed. Even though the blog the Stranger gives a tidbit from the Seattle mayor, who did not participate in the crackdown, that the effort was coordinated through the US Conference of Mayors {4}, it is not hard to imagine that there was more that a little bit of, erm, help from the Feds. Gregg points out that New York city police chief Ray Kelly has a tight relationship with the CIA and the FBI. Homeland Security has also trying to increase its influence over police forces in major cities. It is not hard to imagine it playing a role in this effort as well. And this of course makes a farce of the sympathetic noises from Teleprompter (hat tip reader Bob Falfa for the coinage)

Crains New York reports that Bloomberg is defying a court order {5} to allow protestors back into Zuccotti Park:

Hundreds of officers in riot gear raided Zuccotti Park at one am Tuesday, removing dozens of Occupy Wall Street protesters from the park that protesters had renamed Liberty Square. After the park was cleaned, the mayor said people could return but without tents, tarps or sleeping bags.

Hours later, the National Lawyers Guild obtained a court order allowing Occupy Wall Street protesters to return with tents to the park. The guild said the injunction prevents the city from enforcing park rules on Occupy Wall Street protesters, but the city kept the park sealed off throughout the afternoon, despite the order.

At a morning news conference at City Hall, Mr Bloomberg said the city knew about the court order but had not seen it and would fight it in court. He said the city wants to protect people’s rights, but if it must choose, it will protect public safety.

Ah yes, the old “public safety” argument, the pet excuse of fascists. So what exactly is the worst OWS has done? Drumming at night? Annoying as hell, but a threat to safety? It appears the thing at risk is the one percent’s secure lock on political processes.

Abigail Field describes {6} how the Occupations can turn around this reversal of fortune: have sympathizers put up protestors so they don’t have to live in the public places they decide to hold:

The only way to regain the power of the protest, to eliminate any shred of pretense for police state action, is to sever occupying and camping.

So how do we do that? By enabling the Occupiers to camp with you, and occupy the square in shifts. If sleeping and all the biological needs of the occupiers – can be handled in your space, the Occupiers can stand vigil in our space. Can’t you see it? The afternoon shift giving way to the graveyard shift, sunrise greeting the morning shift as it arrives for its duty. Or maybe there’s just two shifts, day and night. Either way, shift work is very 99%, a tactic that’s on message.

Look, the People are with the Occupiers; the Occupiers are having an impact; we need the Occupation to continue; we need to respond to the police state with jujitsu, with refining the situation so their assaults increasingly miss their mark. If we successfully separate occupation and camping, ALL action against the occupiers will be totally unjustifiable. The police state side loses.

But that can only happen if individual New Yorkers are courageous enough to stand up and invite a stranger into their home; if unions are courageous enough to really provide a platform for the Occupy movement’s fight; if the clergy in their synagogues, churches, mosques and temples spread their teachings by living the example and provide sanctuary.

The support of churches and synagogues is critical. Any readers that are active in their local house of worship in a city that was participated in the crackdowns should press their congregations on this issue. Another route is for some of the weekend protestors to see if they can handle an occasional evening shift (say after work to ten or eleven pm) to increase the numbers holding the spaces.

Some religious leaders are already starting to rally behind the Occupiers. Again from Crains:

At the same time, a separate group of protesters descended on Juan Pablo Duarte Square, located between Canal and Grand streets and Varick and Sixth avenues in lower Manhattan. They were met there by a delegation of about one dozen interfaith leaders, who lead a prayer session.

“What happened last night is a gift – it’s a moment of transition”, said Reverend Michael Ellick, minister of Judson Memorial Church. “It’s not just about Zuccotti Park … It’s about how we function as a society”.

Many believe the crackdown was in advance of a planned two month rally planned for this Thursday to target Wall Street proper. The police action was clearly designed to keep press far enough away to prevent the capture of images and videos of police aggression that have only increased sympathy for and participation in the movement. I hope this ploy backfires, and that the turnout for the Thursday rally is large, and that OWS and its sympathizers develop improved strategies for recording the actions of the police.

Update: As soon as the post went up, this Wall Street Journal report on a ruling against OWS came in {7}. Notice that the ruling is from the New York Supreme Court, which is confusingly the lowest level of court in the state. I assume the ruling will be appealed:

A judge ruled against Occupy Wall Street protesters, upholding a move by New York City and the landlord of the privately owned plaza to clear tents from Zuccotti Park and prevent protesters from bringing equipment back in …

Supreme Court Justice Michael Stallman weighed whether to extend a temporary restraining order that bars the city from enforcing park rules against tents and other camping equipment.

The order is here, hat tip Michael Redman {8}:

New York Supreme Court Ruling v. Occupy Wall Street November 15 2011 {9}

This is the meat of the ruling:

To the extent that City law prohibits the erection of structures, the use of gas or other combustible materials, and the accumulation of garbage and human waste in public places, enforcement of the law and the owner’s rules appears reasonable to permit the owner to maintain its space in a hygienic, safe, and lawful condition, and to prevent it from being liable by the City or others for violations of law, or in tort It also permits public access by those who live and work in the area who are the intended beneficiaries of this zoning bonus.

The movants have not demonstrated that they have a First Amendment right to remain in Zuccotti Park, along with their tents, structures, generators, and other installations to the exclusion of the owner’s reasonable rights and duties to maintain Zuccotti Park, or to the rights to public access of others who might wish to use the space safely. Neither have the applicants shown a right to a temporary restraining order that would restrict the City’s enforcement of law so as to promote public health and safety.

Note that the City was clearly prepared to make an argument in court; the protestors were represented (effectively) by the transit union, the New York Communities Exchange, the Working Families party. I suspect they did not have precedents as well lined up as the city did. The support of the transit union is important, particularly given the role the shutdown of the trains played in keeping observers and supporters away from the site last night. This struggle is not over and future rounds could get interesting.

Update 5:55 pm. Reader Debra C correct me on one point: there is a lower court level than the Supreme Court, but quite honestly, every litigation I’ve ever heard of in New York City (save small claims court) has started in the Supreme Court. It also looks like major judge shopping took place (no surprise here):

Civil court is the actually a lower level. Judge Stallman is actually only a Civil Court Judge who is temporarily assigned to the Supreme Court.

He never made it to Supreme Court in the normal way which is by election. He was originally appointed in 1999 to Civil Court by Mayor Giuliani. It shows.











A Letter to Barack Obama

by George McGovern

Harper’s Magazine Easy Chair (September 2011)

When President Franklin Roosevelt came into office in the depth of the Great Depression, he sought to stabilize and empower American society by introducing bold new initiatives: Social Security, the Public Works Administration, the Federal Deposit Insurance Corporation, the Rural Electrification Administration, the Tennessee Valley Authority, the Civilian Conservation Corps, and the Agricultural Adjustment Administration, among many others. These measures were sufficiently successful, as was his leadership during World War Two, that he secured four terms in the White House. There was some congressional resistance but not enough to block the support of both political parties.

Like Roosevelt, President Barack Obama has inherited a serious economic crisis, but in his first two years in office he has been met with an even worse problem: the rigid opposition of the rival party leaders to national health care and nearly every other proposal he has made. The Republican House Appropriations Committee has even voted to terminate public funding for NPR (National Public Radio) and PBS (Public Broadcasting System). Neither during my four years in the House of Representatives, when Dwight D Eisenhower was in the White House, nor through eighteen years in the US Senate, under John Kennedy, Lyndon Johnson, and Richard Nixon, have I witnessed any president thwarted by the kind of narrow partisanship that has beset Obama. He has tried to avoid such divisions by publicly explaining his willingness to compromise, but these gestures have been spurned. Some of his political critics have gone so far as to express the hope that the Obama Administration will fail, even avowing their determination to hasten that failure. What has happened, one is compelled to ask, to the love of nation?

I have learned that it is not easy to succeed either as a senator or as a president if you are pushing for fundamental change. We tend, as lawmakers and as citizens, to drift along with the familiar ways of thinking: If it is good enough for Grandma and Grandpa, it is good enough for us. If it is good enough for the flag-wavers and the boasters, it is good enough for us. Such resistance to change often is strengthened by powerful interests – nowhere more forcefully than in the National Defense bill that Congress considers and passes each year.

When I entered the US Senate in 1963, the defense budget was $51 billion. This was at a time when our military experts felt it necessary to have the means to win a war against the combined powers of Russia and China. Today we have a military budget of over $700 billion, and yet neither Russia nor China threatens us, if indeed they ever did. Nor does any other nation. Furthermore, the terrorist threat we face is not a military matter. The World Trade Center was brought down not by artillery or bombers or battleships but by nineteen young Arabs equipped only with box cutters. The Department of Homeland Security created by the Bush Administration after this attack is a better instrument against terrorism than our military, even though our armed forces are the best in the world.

In my career both in the House and in the Senate, inspired by the words of Eisenhower, my supreme commander in Europe during World War Two, I tried hard to curb the powers of what Eisenhower, in his farewell address as president, referred to as the “military-industrial complex”. Needless to say, all my efforts to reduce military spending were defeated. With the renaming of the War Department as the Defense Department in 1947, the military part of the government became sacred, virtually untouchable. How could anyone vote to cut defense unless he or she is willing to face political defeat?

We need a new definition of “defense” that takes into account the quality of our education, the health of our people, the preservation of the environment, the strength of our transportation, the development of alternative fuels, the vigor of our democracy. These were the concerns expressed by the people who stood in Cairo’s Tahrir Square holding up their signs for more than two weeks this winter. Without guns, knives, or the use of their fists, they brought down the dictator who had exploited them for nearly thirty years.

All Americans want their country to have an adequate military defense. But under pressure from corporate lobbyists and legislators seeking military contracts or bases for their states, we are spending to excess while other sources of national defense, such as health care and education, are shortchanged and the national debt grows ever larger.

Many patriotic Americans have opposed the two wars our gallant young troops have been asked to fight in Iraq and Afghanistan. Nobel Prize – winning economist Joseph Stiglitz has estimated that the direct and indirect costs of the Iraq war will amount to $3 trillion. This represents nearly a quarter of our national debt. I suspect that the war in Afghanistan will eventually cost another $3 trillion and we still will not have achieved our aim. General David Petraeus, the commander of US forces in Afghanistan, advises that we cannot think of withdrawing our troops before 2014. If we stay on that schedule, our soldiers will have been fighting, bleeding, and dying there for thirteen years – more than three times the length of US involvement in World War Two.

I recently conferred with President Obama in his White House office, urging him to withdraw from Afghanistan. I’m pleased that he has since announced the withdrawal of 10,000 troops in 2011 and 23,000 in 2012. I would have been even more pleased if all our 100,000 troops now in Afghanistan, as well as those in Iraq, were on the way home.

The president may be reluctant to follow the advice of a presidential candidate who in 1972 lost forty-nine states to Richard Nixon. I can appreciate that concern. On the other hand, shortly after the 1972 election, two bipartisan investigations – one by the House and one by the Senate – forced the incumbent who beat me to resign his office in disgrace. A question from the New Testament comes to mind: What doth it profit a man if he gains the whole world or wins a big election and loses his own soul? The late Sargent Shriver, my running mate in 1972, came to me the day after the election and said, “George, we may have lost forty-nine states but we never lost our souls”.

With this sentiment in mind, I would like to suggest a few bold steps President Obama might consider for the good of his soul and that of the nation.


We should bring our troops home from Afghanistan this year. No previous foreign power that has tried to work its will in Afghanistan has succeeded – not Alexander the Great, not the Mongols, not the British, and not the Russians, who, after nine years of fighting, had sent some 25,000 of their soldiers home in coffins. The Soviet treasury was emptied and the Soviet Union collapsed. Even if it were desirable for us to stay a decade more, we simply cannot afford to do so.


We should close all US military bases in the Arab world. American troops in the Middle East incite rather than prevent terrorist attacks against us. We would do well to remember that when Osama bin Laden returned to Saudi Arabia after fighting the Soviets in Afghanistan, he found a large American army in his home country, positioned there to halt a possible Iraqi invasion – a presence that so offended him he denounced the king and his own family for quartering the American “infidels” within the shadow of the holy cities of Mecca and Medina. He then returned to Afghanistan to organize Al Qaeda and, later, launch the World Trade Center and Pentagon attacks.


We should evaluate whether it is necessary to continue other American troop consignments to Europe, South Korea, and elsewhere. When the US Army was sent to Korea in 1950 the deployment was described as a brief police action, but sixty years later our troops are still there. South Korea is now a wealthier, more populous, and more industrialized nation than North Korea, and is fully capable of defending itself. Similarly, US troops in Europe, now numbering 80,000, have been there for half a century. They should be withdrawn, as were the Soviet forces from Eastern Europe under Mikhail Gorbachev.


President Obama should call on the Pentagon to reduce the current military budget of $700 billion – a figure that accounts for almost half of the world’s military expenditures – to $500 billion next year, and then, over the next five years, to $200 billion. In a careful and persuasive study, Lawrence Korb, a senior fellow at the Center for American Progress and an assistant secretary of defense under Ronald Reagan, identifies unneeded and costly programs that could be cut from the Pentagon budget without weakening our security, including the elimination of sophisticated warplanes – all of which, added up, could save a trillion dollars over the next ten years.


The Bush tax cuts for those with higher incomes should be not only repealed but reversed; with an increase in taxes for this bracket, the increased revenues could be used to reduce the national debt. There would, of course, be strong resistance to ending the tax favoritism now enjoyed by the rich, but this bonanza for the few at the top must end.


Savings in military spending could be used to launch valuable public investments, thereby creating jobs and stimulating the entire economy. The administration has expressed support for creating a European-style high-speed rail system in the United States, and indeed we ought to build the fastest, cleanest, and safest passenger- and freight-train system in the world.

The president should also revive the full provisions of the World War Two-era GI bill, which enabled 7.8. million soldiers to secure a college education at government expense while also receiving a cost-of-living stipend. Having been a bomber pilot during World War Two, flying missions over Nazi Germany, I was one of the beneficiaries of the bill, eventually earning a PhD in history at Northwestern University. This program was costly, but the government certainly made its money back, because educated citizens earn more and so pay increased taxes. Now, as we experience a crisis in higher education caused by soaring tuition costs that exclude many working- and middle-class young people, why not offer government-paid higher education and vocational training for all qualified students – both civilian and military?

Another wise public investment would be the expansion of Medicare to all Americans. Some of the recently proposed health-care legislation has been so lengthy and complicated that I am not sure what is contained in it, but we all know what Medicare is. We could reduce the impenetrable legislation to a simple sentence: “Congress hereby extends Medicare to all Americans”. I am at a loss as to why an old codger like me benefits from Medicare while my children and grandchildren do not. To soften the impact of this expansion on the budget, I propose that the program be implemented in steps every two years: the first step including children up to the age of eight; the second, those from nine to eighteen; the third, those from nineteen through thirty; and finally, those from thirty-one through sixty-five. Programs such as Medicare have been in place for years in many advanced countries. My Canadian relatives tell me that any government that tried to do away with their comprehensive medical and hospital care would be promptly expelled from office.

None of this is intended as a criticism of Barack Obama, who had my support when he was a candidate for the United States presidency and who has my support today. I hope that some of the ideas here might help him on the road to greatness. I wish him well on the journey ahead.


George McGovern’s last article for Harper’s Magazine, “The Way Out of War”, written in collaboration with William R Polk, appeared in the October 2006 issue.

Modern Money Blog Number Twenty Five – Responses

Isn’t the Dollar so Special?

Responses to Comments on Blog Number Twenty Five

by L Randall Wray

New Economic Perspectives (November 24 2011)

Thanks, Marty for the vote of confidence. Yes, the accounting is essential; it used to provide the foundation for both macro theory and also for “money and banking” but unfortunately it has nearly disappeared. Today’s macro texts begin with representative agents and silly little growth models. Almost all modern macro violates accounting identities – as Wynne Godley lamented.

On to the Q&A:

Q1: Maybe you could say something about Ireland. It appears to me that, were Ireland not in the Eurozone, it would be in a prime position to have its currency accepted abroad. It has a good export base; it has strong foreign direct investment (“FDI”) and we’re particularly adept at collecting taxes. So, perhaps the best way for developing countries to have their currency accepted abroad (yes, Ireland was basically a developing country up until the 1980s) is to focus policy on these variables. We in Ireland did it through education. We ensured that we had a very well educated workforce that attracted FDI.

A1: Yes, there’s got to be a reason. Typically it is because foreigners want to buy products, visit as tourists, or buy financial assets. The demand for the Oz Dollar expanded when global pension funds and other managed money decided to allocate a portion of their portfolios to Oz Dollars. Of course, the commodities boom also helped – the rest of the world wanted Oz’s commodities. I want to be realistic, however. Many countries in the world do not now produce goods and services the rest of the world wants, and their assets are deemed too risky even if interest rates were to be kept high. Unfortunately many nations then view the way to increase interest in their goods and assets is to “dollarize” (typically, pegging an exchange rate, or better yet adopting a currency board). But that won’t help. At best it adds default risk in place of currency risk (the country might not be able to keep the promise to convert to dollars, so even though the exchange rate is fixed, the country’s assets are risky). There is no easy answer to this. I would suggest that it is far better to look inward: develop one’s own capacity to produce (yes, education) and to consume its own products.

Q2: So developing countries that are using US Dollars – say Timor Leste (East Timor) – the current low, near zero interest rate (federal reserve funds) would be a benefit for them since East Timor interest rate would be “market determined”. Is that correct?

A2: Of course this is related to my previous answer. Default risk. If you look at the experience of Argentina (adopted a currency board), its interest rate remained about the same as its neighbor Brazil’s rate (did not dollarize), and that was much higher than the US Dollar interest rate. Why? Eliminating exchange rate risk was completely offset by adding on default risk as markets worried Argentina could not hold the peg. (I won’t go into it in detail, but the interest rate parity theorem holds reasonably well so that a nation’s interest rate must compensate for expected exchange rate movements. So to the base interest rate we add the risk premium and also expected exchange rate movements.)

Q3: Wray said: “Thus, it is almost always a mistake for government to issue foreign currency bonds”.

Q3: This goes against the original sin hypothesis. Don’t you believe that hypothesis?

A3: I believe in original sin: from birth you owe taxes. I do not know what “free trade” is, nor what a “complete financial market” would be. These are just religious terms that bear no relation to the real world. I repeat: it is almost always a mistake for a government to issue foreign currency debt. Let the private sector indebt itself if it wants, and then let it fail in the normal way if it cannot get foreign currency to service its debts. You do not want to be an Iceland or Ireland, bailing-out banks. Recommendation: read more MMT, less orthodox theoclassical nonsense.

Q4: If a country wants to peg their currency to the US Dollar, then it is true they could use an accumulation of US Dollars to buy their own currency in the foreign exchange (“FX”) market, propping up its value. But they don’t need a unilateral trade surplus with the US to do that. They could have their trade surplus overall with any other countries, and use any foreign currency to buy their own currency in the FX market. They wouldn’t necessarily have to sell anything in the US, and could have a trade deficit with the US, as long as they had a surplus overall. If they needed to depress their currency in the FX markets, they can simply create some and sell it on the FX market, and hold whatever other currency they want. It does not have to be US Dollars. Secondly, how does accumulating dollar claims help them with insufficient domestic demand? A trade surplus helps with that, but it must, again, be a surplus overall and not any particular bilateral surplus.

A4: Of course, it is correct to say that a country could peg its exchange rate, and accumulate euros to do so; thus it can run a trade surplus against Germany rather than the US. Good luck with that! The problem is that Germany is a modern mercantilist state that won’t run a trade deficit so it is hard to get claims on Germany; the European Monetary Union (“EMU”) as a whole runs essentially balanced trade. Much easier to get dollars. And yes of course a nation can run trade surpluses even if it does not trade at all with the US. My answer here is much like my answer about taxes: you do not need to impose a US Dollar tax on every one of the six billion people in the world to ensure a global demand for dollars. The Chinese will export to anyone, and willingly accumulates Dollars even though few Chinese need to pay Dollar taxes. And increasingly there will be net exporters who do almost all their trade with China – accumulating foreign currency reserves. Why run net exports? Because domestic demand is too low to absorb the output. Of course there are additional reasons to export – including “learning by doing”.

Q5: Since oil is essential for the running of a modern economy, how does this petrodollar system effect the fiscal equation for the various governments? What does MMT show us about this relationship, or is it irrelevant?

A5: Certainly it is relevant – oil exporters typically have current account surpluses thus accumulate financial assets denominated in foreign currencies. Much of that is in Dollars. That leads to the incorrect belief that OPEC “finances” US borrowing (budget deficit and trade deficit). Better to look at this as US “financing” OPEC asset accumulation.

Q6: What was the cause of Argentina to default? Was it debt in foreign currency that caused inflation?

A6: See above: Argentina adopted a currency board, that actually reduced inflation (strong dollar). The problem was solvency: yes, essentially the debt was in a foreign currency. Go to to see papers that Pavlina Tcherneva and I wrote on the crisis.

Q7: MMT and post-keynesians in general say always that banks buy treasuries to have an interest, instead of leave reserves earning nothing (without consider interest on reserves paid by the BC).but, why there are primary dealers? I know that they buy the majority of treasuries issued. this affect reserves because primary dealers have the account in depository institutions. But they buy on behalf of banks or investors, or they buy and after they sell? And so, banks buy treasuries because of the following deficit spending (so this is the deficit that is a non earning stock of reserves) or they use excess reserves (eventually having an automatic overdraft if they haven’t excess reserves)?Thanks.

A7: Yes the Fed and Treasury in the US adopted procedures requiring Treasury to sell bonds to private banks before it spends; so special banks buy them, credit Treasury’s deposit account, and then Treasury moves deposits to Federal Reserve to cut a check. If these special banks are short reserves, they can always borrow them. Once Treasury spends, banks have reserve credits they then use to buy the Treasuries from the special banks – or from the Federal Reserve if necessary.

Q8: So if government wants lower rates on its debt, it can always use domestic monetary policy to achieve that goal. Unfortunately, this is not widely understood I don’t think that is true. As far as I know that’s well understood but so are the potential effects of a lower interest rate on the exchange rate.

A8: Well, I’ve run across lots of people including policy makers who think markets set rates!

Q9: It seems to me that the current system is set up so that net exporting nations always ‘win’ the international trade game and they do that by sucking liquidity out of the target nation – depressing the domestic economy because the domestic government is too scared to replace the liquidity with new liabilities.

A9: They “win” the accounting game and “lose” the real game. Exports are a cost! This is a matter of not understanding what an economy is for. But I agree with you.

Q10: why do “developing countries” have less demand for their currencies from foreigners? i feel like that is the central question that’s being avoided. what determines the demand for a currency? is it because expected (risk adjusted) profits are lower there then elsewhere? what could increase expected profits? what effect do local cost structures (of the sort Michael Hudson discusses here:… have on foreigner’s currency demand?

A10: There are lots of risks, most of them probably are not economic. Obviously, political risk matters. In some cases, corruption. But I want to be clear: there is more corruption on Wall Street and in Washington than in the entire developing world taken together!

Modern Money Blog – Number Twenty Five

Currency Solvency and the Special Case of the US Dollar

by L Randall Wray

New Economic Perspectives (November 20 2011)

In recent blogs we’ve been looking at sovereign government issues of bonds. We have argued that this is not really a “borrowing” operation but rather bond issues offer a (higher) interest-earning alternative than do reserve deposits at the central bank. We also have argued that it makes little practical difference whether the government bonds are held domestically or by foreigners. However, it is true that in a floating currency regime, it is conceivable that foreigners who hold reserves or government bonds could decide to “run” out of them, impacting the exchange rate. By the same token, countries that want to run net exports with, say, the US, are interested in accumulating Dollar claims – often because their domestic demand is too low to absorb potential output and often because they want to peg their currencies to the Dollar. For that reason, a “run” is unlikely.

This then leads to the objection that the US is surely a special case. Yes, it can run budget deficits that help to fuel current account deficits without worry about government or national insolvency precisely because the rest of the world wants Dollars. But surely that cannot be true of any other nation. Today, the US Dollar is the international reserve currency – making the US special. Let us examine this argument.

Isn’t the US special?

Yes and no. Accounting identities are identities; they are true for all nations. If a nation runs a current account deficit, by identity there must be a demand for its assets (real or financial) by someone with foreign currency. (A foreigner could either demand the nation’s currency for “direct investment” that includes buying property or plant and equipment, or the foreigner could demand financial assets denominated in that currency.) If that demand for assets declines, then the current account deficit must also decline.

There is little doubt that US dollar-denominated assets are highly desirable around the globe; to a lesser degree, the financial assets denominated in UK Pounds, Japanese Yen, European Euros, and Canadian and Australian dollars are also highly desired. This makes it easier for these nations to run current account deficits by issuing domestic-currency-denominated liabilities. They are thus “special”.

Many developing nations will not find a foreign demand for their domestic currency liabilities. Indeed, some nations could be so constrained that they must issue liabilities denominated in one of these more highly desired currencies in order to import. This can lead to many problems and constraints – for example, once such a nation has issued debt denominated in a foreign currency, it must earn or borrow foreign currency to service that debt. These problems are important and not easily resolved.

If there is no foreign demand for IOUs (government currency or bonds, as well as private financial assets) issued in the currency of a developing nation, then its foreign trade becomes something close to barter: it can obtain foreign produce only to the extent that it can sell something abroad. This could include domestic real assets (real capital or real estate) or, more likely, produced goods and services (perhaps commodities, for example). It could either run a balanced current account (in which case revenues from its exports are available to finance its imports) or its current account deficit could be matched by foreign direct investment.

Alternatively, it can issue foreign currency denominated debt to finance a current account deficit. The problem with that option is that the nation must then generate revenues in the foreign currency in order to service that debt. This is possible if today’s imports allow the country to increase its productive capacity to the point that it can export more in the future – servicing the debt out of foreign currency earned on net exports. However, if such a nation runs a continuous current account deficit without enhancing its ability to export, it will almost certainly run into debt service problems.

The US, of course, does run a persistent trade deficit. This is somewhat offset by a positive flow of net profits and interest (US investments abroad earn more than foreign investments in the US). But the two main reasons why the US can run persistent current account deficits are: a) virtually all its foreign-held debt is in Dollars; and b) external demand for Dollar-denominated assets is high – for a variety of reasons.

The first of these implies that servicing the debt is done in Dollars – easier for indebted American households, firms, and governments to obtain. The second implies that foreigners are willing to export to the US to obtain Dollar-denominated assets, meaning that a trade deficit is sustainable so long as the rest of the world wants Dollar assets.

What about government that “borrows” in foreign currency?

What about nations that issue foreign currency denominated assets? Returning to a nation that does issue debt denominated in a foreign currency, what happens if the debtors cannot obtain the foreign currency they need to service the debt?

We have thus far left to the side questions about who is typically issuing foreign currency denominated debt. If it is a firm or household, then failure to earn the foreign currency needed to service the debt can lead to default and bankruptcy. This would be handled in the courts (typically, when debt is issued it is subject to the jurisdiction of a particular court) and by itself poses no insurmountable problem. If the debt is too large, bankruptcy results and the debt must be written-off.

Sometimes, however, governments intervene to protect domestic debtors by taking over the debts. (Ireland is a good example.) Alternatively, governments sometimes issue foreign currency debt directly. In either case, default by government on foreign currency debt is usually more difficult – both because bankruptcy by sovereign government is a legally problematic issue and because sovereign default is a politically charged issue.

In practice, sovereign default (especially on foreign currency debt) is not uncommon, often chosen as the lower cost alternative to continuing to service debt. Sovereign governments typically choose when to default – they almost always could have continued to service debt (for example, by imposing austerity to increase exports, or by turning to international lenders). Apparently, they decide that the benefits of default outweigh the costs. However, this can lead to political repercussions. Still, history is littered with government defaults on foreign currency debt.

Governments sometimes issue foreign currency debt on the belief that this will lower borrowing costs – since interest rates in, say, the US Dollar, are lower than those in the domestic currency. However, foreign currency debt carries default risk – and if markets price that into interest rates, there may be no advantage. Still, it is not uncommon for governments to try to play the interest differentials, issuing debt in a foreign currency that has a lower interest rate. Unfortunately, this can be a mirage – markets recognise the higher default risk in foreign currency, eliminating any advantage.

Further, as discussed in earlier blogs, for a sovereign government, the domestic interest rate (at least the short term interest rate in the domestic money of account) is a policy variable. If the government is spending domestically in its own currency, it can choose to leave reserves in the banking system or it can offer bonds. In other words, it does not have to pay high domestic interest rates if it does not want to, for it can instead let banks hold low (or zero) interest rate reserves. This option is available to any currency issuing government – so long as its spending is domestic.

As discussed earlier, government will be limited to purchasing what is for sale in its currency – and if it is constrained in its ability to impose and collect taxes then the domestic demand for its currency will be similarly limited. So we do not want to imply that government spending is not constrained – even in a sovereign country that issues its own currency.

But if a national government issues foreign currency denominated IOUs, the interest rate it pays is “market determined” in the sense that markets will take the base interest rate in the foreign currency and add a mark-up to take care of the risk of default on the foreign currency obligations. It is likely that the borrowing costs in foreign currency will turn out to be higher than what government would pay in its own currency to get domestic (and foreign) holders to accept the government’s IOUs.

This is usually not understood because the domestic currency interest rate on government debt is a policy variable – usually set by the central bank – but policy makers believe they must raise domestic rising interest rates when the budget deficit rises. This is done to fight inflation pressures or downward pressure on exchange rates that policy-makers believe to follow on from budget deficits. In truth – as discussed above – if a country tries to peg its exchange rate, then a budget deficit could put pressure on the exchange rate. So there is some justification for attempting to counteract budget deficits with tighter monetary policy (higher domestic interest rates).

But the point is that government sets the domestic interest rate on overnight funds, which then closely governs the interest rate on short-term government bonds. So if government wants lower rates on its debt, it can always use domestic monetary policy to achieve that goal. Unfortunately, this is not widely understood – hence – governments issue foreign currency denominated debt and then take on risk of default because they actually must get hold of foreign currency to service the debt. Thus, it is almost always a mistake for government to issue foreign currency bonds.

Conclusion on US exceptionality

So, yes, the US (and other developed nations to varying degrees) is special, but all is not hopeless for the nations that are “less special”. To the extent that the domestic population must pay taxes in the government’s currency, the government will be able to spend its own currency into circulation. And where the foreign demand for domestic currency assets is limited, there still is the possibility of nongovernment borrowing in foreign currency to promote economic development that will increase the ability to export.

There is also the possibility of international aid in the form of foreign currency. Many developing nations also receive foreign currency through remittances (workers in foreign countries sending foreign currency home). And, finally, foreign direct investment provides an additional source of foreign currency.

Next week we will turn to impacts of government policy in an open economy: trade deficits and exchange rate effects.

Goldman Sachs Has Taken Over

by Paul Craig Roberts (November 25 2011)

Bankers have seized Europe

On November 25, two days after a failed German government bond auction in which Germany was unable to sell 35% of its offerings of ten-year bonds, the German finance minister, Wolfgang Schaeuble said that Germany might retreat from its demands that the private banks that hold the troubled sovereign debt from Greece, Italy, and Spain must accept part of the cost of their bailout by writing off some of the debt. The private banks want to avoid any losses either by forcing the Greek, Italian, and Spanish governments to make good on the bonds by imposing extreme austerity on their citizens, or by having the European Central Bank print euros with which to buy the sovereign debt from the private banks. Printing money to make good on debt is contrary to the ECB’s charter and especially frightens Germans, because of the Weimar experience with hyperinflation.

Obviously, the German government got the message from the orchestrated failed bond auction. As I wrote at the time, there is no reason for Germany, with its relatively low debt to GDP ratio compared to the troubled countries, not to be able to sell its bonds. If Germany’s creditworthiness is in doubt, how can Germany be expected to bail out other countries? Evidence that Germany’s failed bond auction was orchestrated is provided by troubled Italy’s successful bond auction two days later.

Strange, isn’t it. Italy, the largest EU country that requires a bailout of its debt, can still sell its bonds, but Germany, which requires no bailout and which is expected to bear a disproportionate cost of Italy’s, Greece’s and Spain’s bailout, could not sell its bonds.

In my opinion, the failed German bond auction was orchestrated by the US Treasury, by the European Central Bank and EU authorities, and by the private banks that own the troubled sovereign debt.

My opinion is based on the following facts. Goldman Sachs and US banks have guaranteed perhaps one trillion dollars or more of European sovereign debt by selling swaps or insurance against which they have not reserved. The fees the US banks received for guaranteeing the values of European sovereign debt instruments simply went into profits and executive bonuses. This, of course, is what ruined the American insurance giant, AIG, leading to the TARP bailout at US taxpayer expense and Goldman Sachs’ enormous profits.

If any of the European sovereign debt fails, US financial institutions that issued swaps or unfunded guarantees against the debt are on the hook for large sums that they do not have. The reputation of the US financial system probably could not survive its default on the swaps it has issued. Therefore, the failure of European sovereign debt would renew the financial crisis in the US, requiring a new round of bailouts and/or a new round of Federal Reserve “quantitative easing”, that is, the printing of money in order to make good on irresponsible financial instruments, the issue of which enriched a tiny number of executives.

Certainly, President Obama does not want to go into an election year facing this prospect of high-profile US financial failure. So, without any doubt, the US Treasury wants Germany out of the way of a European bailout.

The private French, German, and Dutch banks, which appear to hold most of the troubled sovereign debt, don’t want any losses. Either their balance sheets, already ruined by Wall Street’s fraudulent derivatives, cannot stand further losses or they fear the drop in their share prices from lowered earnings due to write-downs of bad sovereign debts. In other words, for these banks big money is involved, which provides an enormous incentive to get the German government out of the way of their profit statements.

The European Central Bank does not like being a lesser entity than the US Federal Reserve and the UK’s Bank of England. The ECB wants the power to be able to undertake “quantitative easing” on its own. The ECB is frustrated by the restrictions put on its powers by the conditions that Germany required in order to give up its own currency and the German central bank’s control over the country’s money supply. The EU authorities want more “unity”, by which is meant less sovereignty of the member countries of the EU. Germany, being the most powerful member of the EU, is in the way of the power that the EU authorities desire to wield.

Thus, the Germans bond auction failure, an orchestrated event to punish Germany and to warn the German government not to obstruct “unity” or loss of individual country sovereignty.

Germany, which has been browbeaten since its defeat in World War Two, has been made constitutionally incapable of strong leadership. Any sign of German leadership is quickly quelled by dredging up remembrances of the Third Reich. As a consequence, Germany has been pushed into an European Union that intends to destroy the political sovereignty of the member governments, just as Abe Lincoln destroyed the sovereignty of the American states.

Who will rule the New Europe? Obviously, the private European banks and Goldman Sachs.

The new president of the European Central Bank is Mario Draghi. This person was Vice Chairman and Managing Director of Goldman Sachs International and a member of Goldman Sachs’ Management Committee. Draghi was also Italian Executive Director of the World Bank, Governor of the Bank of Italy, a member of the governing council of the European Central Bank, a member of the board of directors of the Bank for International Settlements, and a member of the boards of governors of the International Bank for Reconstruction and Development and the Asian Development Bank, and Chairman of the Financial Stability Board.

Obviously, Draghi is going to protect the power of bankers.

Italy’s new prime minister, who was appointed not elected, was a member of Goldman Sachs Board of International Advisers. Mario Monti was appointed to the European Commission, one of the governing organizations of the EU. Monti is European Chairman of the Trilateral Commission, a US organization that advances American hegemony over the world. Monti is a member of the Bilderberg group and a founding member of the Spinelli group, an organization created in September 2010 to facilitate integration within the EU.

Just as an unelected banker was installed as prime minister of Italy, an unelected banker was installed as prime minister of Greece. Obviously, they are intended to produce the bankers’ solution to the sovereign debt crisis.

Greece’s new appointed prime minister, Lucas Papademos, was Governor of the Bank of Greece. From 2002 to 2010. He was Vice President of the European Central Bank. He, also, is a member of America’s Trilateral Commission.

Jacques Delors, a founder of the European Union, promised the British Trade Union Congress in 1988 that the European Commission would require governments to introduce pro-labor legislation. Instead, we find the banker-controlled European Commission demanding that European labor bail out the private banks by accepting lower pay, fewer social services, and a later retirement.

The European Union, just like everything else, is merely another scheme to concentrate wealth in a few hands at the expense of European citizens, who are destined, like Americans, to be the serfs of the 21st century.


Paul Craig Roberts was an editor of the Wall Street Journal and an Assistant Secretary of the US Treasury. His latest book, How The Economy Was Lost (2010), has just been published by CounterPunch/AK Press.

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